Value and Momentum Investing in Frontier Stock Markets
Value and Momentum investing have been studied across many different markets and asset classes (Asness et al 2013) and have shown to be effective factors. [...]
Swedroe Spotlight: Does Market Sentiment Help Explain Momentum?
David Smith, Na Wang, Ying Wang and Edward Zychowicz contribute to the literature on momentum with their paper, “Sentiment and the Effectiveness of Technical Analysis: Evidence from the Hedge Fund Industry,” which was published in the December 2016 issue of the Journal of Financial and Quantitative Analysis. Their work examines how investor sentiment affects the effectiveness of technical analysis strategies (which include the use of moving averages as well as momentum) used by hedge funds (which are considered sophisticated investors). The study was motivated by prior research that has focused on “investor sentiment,” which is the propensity of individuals to trade on noise and emotions rather than facts. Sentiment causes investors to have beliefs about future cash flows and investment risks that aren’t justified. Two researchers, Malcolm Baker and Jeffrey Wurgler, constructed an investor sentiment index based on six measures: trading volume as measured by NYSE turnover; the dividend premium (the difference between the average market-to-book ratio of dividend-payers and non-payers); the closed-end fund discount; the number and first-day returns of IPOs; and the equity share in new issues. Data is available at through Wurgler and New York University.
Visual Active Share: A Tool to Help Investors Make Better Decisions
We've talked extensively about the concepts of active share and active fee, which aren't flawless metrics, but they have elevated the discussion around identifying and [...]
Looking to Improve your Factor Investing? Examine the Trend of Profits
A few years ago, the profitability "quality" factor was originally proposed by Robert Novy-Marx. Here is a snippet from the abstract of the paper: Profitability, [...]
Factor Investing: The Fama French 5-Factor Model on Chinese A-Shares
Each year I teach my "seminar in investments" course at Drexel, which consists of the Masters in Finance students and a handful of geeky MBA [...]
Dual Momentum with Stock Selection
Jack did a nice recap on a momentum paper last week that looks at using fundamentals (revenue volatility, low cost of goods, and B/M) to help identify the best price momentum stocks. This paper sounds similar to the paper Jack reviewed, but there is a key difference: the researchers are looking at the momentum of the fundamentals, not the absolute value of the fundamentals. The authors compile a fundamental momentum variable by calculating the moving averages of 7 elements: return on equity return on assets earnings per share accrual-based operating profitability cash-based operating profitability gross profitability net payout ratio
Firm-Specific Information and Momentum Investing
When it comes to momentum investing, everyone is always looking for a better way to implement a momentum-based stock selection strategy (the same goes for a [...]
Evidence-Based Investing? Take that Alpha and Shove It.
Johnny Paycheck has a great country song centered around the following lyric: Take this job and shove it...I ain't working here no more... Campbell Harvey, [...]
Swedroe Spotlight: Explaining the Low Risk Effect
Before proceeding, it’s important to note that beta and volatility are related, though not the same. Beta depends on volatility and correlation to the market, whereas volatility is related to idiosyncratic risk (see here for an explanation of how to calculate the different measures). The superior performance of low-volatility and low-beta stocks was first documented in the literature in the 1970s — by Fischer Black (in 1972) among others — even before the size and value premiums were “discovered.” And the low-volatility anomaly has been shown to exist in equity markets around the world. Interestingly, this finding is true not only for stocks, but for bonds as well. In other words, it has been pervasive.
President’s Day Factor Investing Geekout
Our epic piece on factors from a few weeks ago is still ringing in our own ears: Are factors even real? Or just data-mining? The [...]
Will ETFs Destroy Factor Investing? Nope.
One of the popular investing truisms is the following (inspired by Bill Sharpe): For somebody to beat the market (win) someone else has to lag [...]
How to Explain Momentum with Rational Investors — It’s complicated.
A recent theory paper from researchers at NYU and Rutgers attempts to explain the empirical evidence on stock serial correlation (e.g., short-term reversal, long-term stock reversal, and classic [...]
Greatest Stock Picker of All Time: Buffett or Lynch?
Who is the greatest stock picker of all time? Many investors' knee-jerk reaction is Warren Buffett. Understandable response, but is that the answer? Maybe not... So who [...]
Factor Investing is More Art, and Less Science
Albert Einstein is reported to have said the following: The more I learn, the more I realize how much I don’t know. We can relate. [...]
Berkin and Swedroe’s Factor Investing Book
Well, I was midway through a formal book review on Larry and Andrew's new book, "Your Complete Guide to Factor-Based Investing," when I noticed that [...]
The January Effect: An Evidence-Based Perspective
January is here again and market commentators are already telling stories about the so-called January Effect. Some articles (examples here and here) are saying the [...]
Factor ETF Due Diligence: A New Challenge for Some Investors
Factor investing seems to be everywhere, but the topic is still misunderstood by large swaths of the investing public. Tommi Johnsen and I would like [...]
Using Trend-Following Rules to Enhance Factor Performance
After reviewing the 2016 performance of trend-following (-18.15%), its unclear why anyone would mention the word "trend following" in a public forum. But we'll give it [...]
Is the Low Volatility Anomaly driven by Lottery Demand?
A few years ago I wrote a summary on a working paper titled "A Lottery Demand-Based Explanation of the Beta Anomaly." The paper is still [...]
Great Minds Agree to Disagree on the Source of the Value Investing Premium
Active investing sounds so easy. But we all know it is extremely difficult. Ask any deep value investor how they have felt over the past [...]