Key Research

An Introduction to Investing and How to Use Our Site

By |2019-04-12T09:59:18-04:00January 3rd, 2015|Research Insights, Introduction Course, Investor Education, Key Research, Business Updates|

What We Do? We are a research-intensive asset management firm with a focus on high-conviction value and momentum factor exposures. More broadly, we seek to deliver "Affordable Alpha," which means highly differentiated investment strategies at lower costs, thereby giving sophisticated [...]

Behavioral Finance and Investing: Are you Trying Too Hard?

By |2018-05-31T09:01:38-04:00May 13th, 2014|Key Research, Behavioral Finance|

Everyone makes mistakes. It’s part of what makes us human. Because humans understand their actions are sometimes flawed, it was perhaps inevitable that the field of psychology would develop a rich body of academic literature to analyze why it is that human beings often make poor decisions. Although insights from academia can be highly theoretical, our everyday life experiences corroborate many of these findings at a basic level: “I know I shouldn’t eat the McDonalds BigMac, but it tastes so good.” Because we recognize our frequent irrational urges, we often seek the judgment of experts, to avoid becoming our own worst enemy. We assume that experts, with years of experience in their particular fields, are better equipped and incentivized to make unbiased decisions. But is this assumption valid? A surprisingly robust, but neglected branch of academic literature, has studied, for more than 60 years, the assumption that experts make unbias decisions. The evidence tells a decidedly one-sided story: systematic decision-making, through the use of simple quantitative models with limited inputs, outperforms discretionary decisions made by experts. This essay summarizes research related to the “models versus experts” debate and highlights its application in the context of investment decision-making. Based on the evidence, investors should de-emphasize their reliance on discretionary experts, and should instead approach investment decisions with systematic models. To quote Paul Meehl, an eminent scholar in the field, “There is no controversy in social science that shows such a large body of qualitatively diverse studies coming out so uniformly in the same direction as this one [models outperform experts].”

Even God Would Get Fired as an Active Investor

By |2018-05-23T10:12:27-04:00February 2nd, 2016|Research Insights, Key Research, Tactical Asset Allocation Research|

Empirical asset pricing research can sometimes get monotonous because you end up circling back relentlessly to the same conclusions: value, momentum, trend-following are all interesting, and yet, markets are remarkably competitive (perhaps not efficient). But, sometimes, research [...]

Our Value Proposition: Affordable Alpha

By |2018-06-06T08:40:38-04:00September 16th, 2014|Key Research|

Our mission is to empower investors through education. This mission is our passion and what drives us to go to work everyday. But this mission is not our product. Our product is Affordable Alpha: We seek to delivers alpha (highly differentiated risk/reward profiles) at low costs, thereby giving sophisticated (taxable) investors a higher chance of winning net of fees and taxes.

Distribution Economics: Understanding Wall Street’s Conflict of Interest Problem

By |2017-08-18T17:06:44-04:00March 11th, 2015|Key Research, $SPY, $wfc, $jpm, $bac, $c, $usb, $gs|

The simple matter is that most clients know how to buy groceries, but few know how to purchase financial products. In the murky world of financial services, clients may be buying products for the first time. More importantly, this purchase is the driver of their long-term financial security. Years of hard work, thrift, and responsible life choices, are baked into each and every retirement portfolio that a banker must now serve. In short, the stakes are too high and the cards are stacked too favorably towards one party. Fiduciary responsibility matters in financial services more than in any other product category outside of urgent medical care. Shouldn't this fiduciary have your best interests at heart? Just as you don't want your doctor to receive kickbacks from Pfizer for overdosing you on Oxycodone, why would you want your financial advisor--or their institution--to receive kickbacks for overdosing you on inefficient, overpriced, investment product that probably won't help you achieve your investment goals?Moral of the story: Ask your banker, or bank-affiliated advisor these questions. If you get answers that sound like the ones above, it might be time to buy a car or an airline ticket, because traveling via railroad is a thing of the past.

From the Frontlines to Finance: How the Marines Shaped Our Investment Philosophy

By |2017-09-28T12:22:13-04:00May 25th, 2015|Research Insights, Key Research, $SPY|

Serving in the Marine Corps was an unforgettable experience. Civilians often tell us “thank you for your service”; however, the real “thanks” is due to the Corps for giving us valuable life lessons. The not-so subtle teachings bestowed upon us by heavily muscled, insanely aggressive Marine Corps Drill Sergeants are still, literally, ringing in our ears: “Listen here, pond scum, you better run faster, shoot straighter, and decide quicker if you are going to win in battle!” Years later, we would test that theory in real-time, battling insurgents in Iraq. As we trade in our flak jackets for laptops and neckties, the lessons learned in combat and are not only relevant, but vital on the battlefield of high finance. Four core lessons apply to frontlines and finance: Humans Are Emotional: Systematic processes beat behavioral bias; Rambo isn't Realistic: Act based on evidence, not on stories; Complacency Kills: Focus on fundamentals and never stop learning; Integrity is Everything: Do things right and do the right thing.

The Sustainable Active Investing Framework: Simple, But Not Easy

By |2019-05-13T16:05:30-04:00August 17th, 2015|Key Research, Behavioral Finance|

We cannot overemphasize that identifying sustainable alpha in the market is no cakewalk. More importantly, being smart, having superior stock-picking skills, or amassing an army of PhDs to crunch data is only half of the equation. Even with those tools, you are still only one shark in a tank filled with other sharks. All sharks are smart, all sharks have a MBA or PhD from a fancy school, and all the sharks know how to analyze a company. Maintaining an edge in these shark infested waters is no small feat, and one that only a handful of investors has accomplished.In order to achieve sustainable success as an active investor, one needs not only skill, but also an understanding of human psychology, and an appreciation of market incentives (behavioral finance). We start our journey where mine began: as an aspiring PhD student studying at the University of Chicago. Let the adventure begin...This post is not meant to convert a passive investor into an active investor; however, we do explain why we believe active investing can sustainably beat passive strategies in the long run. Plus, we bring to bear many years of cumulative research and experience to support our arguments.We cannot overemphasize that alpha in the market is no cakewalk. More importantly, being smart, having superior stockpicking skills, or amassing an army of PhDs to crunch data is only half of the equation. Even with those tools, you are still only one shark in a tank filled with other sharks. All sharks are smart, all sharks have a MBA or PhD from a fancy school, and all the sharks know how to analyze a company. Maintaining an edge in these shark infested waters is no small feat, and one that only a handful (e.g., we can count them in one hand) of investors has successfully accomplished.In order too achieve sustainable success as an active investing, one needs both skill and an understanding of human psychology and market incentives (behavioral finance). We start our journey where mine began: as an aspiring PhD student studying under Eugene Fama at the University of Chicago. Let the adventure begin...

Trust the Process

By |2018-08-16T08:10:20-04:00June 21st, 2018|Research Insights, Factor Investing, Trend Following, Key Research, Value Investing Research, Momentum Investing Research|

As a native Philadelphian and huge basketball fan, I fully agree with the 76ers fan's rally cry -- Trust the Process. Even the players, such as Joel Embiid, have echoed the sentiment of the fans: [...]

The Global Value Momentum Trend Philosophy

By |2018-11-06T08:08:20-04:00June 6th, 2017|Research Insights, Factor Investing, Trend Following, Key Research, Value Investing Research, Momentum Investing Research|

Our Global Value Momentum Trend Index ("GVMT" or "GVMT Index") can be summarized as follows:   Turns out that this simple statement summarizes over a decade of research efforts on our end. We've [...]

How to Combine Value and Momentum Investing Strategies

By |2017-08-18T17:03:25-04:00March 26th, 2015|Key Research, Value Investing Research, Momentum Investing Research, $SPY, $mtum, $vlue, $voo|

The evidence suggests that we keep highly active exposures to value and momentum in their purest forms (assuming we are doing high-conviction non-watered down versions of the anomalies). Blending the strategy dilutes the benefit of value and momentum portfolios. The summary of the benefits of a pure value and a pure momentum approach can be summarized as follows: Easier ex-post assessment, stronger portfolio diversification benefits, and stronger expected performance.

Creating an Alternative Investment Strategy with Value and Momentum

By |2017-08-18T17:07:49-04:00July 7th, 2016|Key Research, Value Investing Research, Momentum Investing Research, Tactical Asset Allocation Research|

Anyone who follows our website should be familiar with the extensive evidence behind our favorite stock selection strategies: Value Investing Momentum Investing The evidence suggests that high-conviction (<50 stock) value and momentum portfolios, deployed as a system, seems like [...]

How to Use Active Funds in a Diversified Portfolio

By |2017-08-18T17:03:16-04:00September 30th, 2015|Introduction Course, Investor Education, Key Research, Tactical Asset Allocation Research|

Active management has been out of favor for a while--high fees, high tax burdens, and poor long-term performance. But with the slow rise of actively managed ETFs, which have lower costs and more tax efficiency [...]

The Robust Asset Allocation (RAA) Index

By |2019-10-22T14:08:26-04:00December 2nd, 2014|Research Insights, Introduction Course, Key Research, Tactical Asset Allocation Research|

Robust asset allocation solutions should be relatively simple, minimize complexity, and be robust across different market regimes. Simultaneous to these requirements, the solution must be affordable, liquid, simple, tax-efficient, and transparent, otherwise, many of the benefits of the solution will flow to the croupiers and Uncle Sam. We recommend that investors explore our robust asset allocation framework and go for the do-it-yourself solution. You'll be paying yourself 1%+ a year via saved RIA fees. Is this the only solution? No. But any solution must be robust, simple, tax-manageable, and low-cost. This is our best effort to develop a simple model. Developing a complicated model is easy; simple is difficult.

Tactical Asset Allocation: Beware of Geeks Bearing Formulas

By |2017-08-18T16:56:15-04:00May 19th, 2015|Research Insights, Key Research, Tactical Asset Allocation Research, $GMOM|

How Should I Tactically Allocate my Assets? A lot of investors ask this question as their wealth grows and the number of financial products grows exponentially. In order to generate a response, investors pay money to [...]

The Quantitative Value Investing Philosophy

By |2019-07-09T17:57:34-04:00October 7th, 2014|Research Insights, Introduction Course, Key Research, Value Investing Research|

Benjamin Graham, who first established the idea of purchasing stocks at a discount to their intrinsic value more than 80 years ago, is known today as the father of value investing. Since Graham’s time, academic research has shown that low price to fundamentals stocks have historically outperformed the market. In the investing world, Graham’s most famous student, Warren Buffett, has inspired legions of investors to adopt the value philosophy. Despite the widespread knowledge that value investing generates higher returns over the long-haul, value-based strategies continue to outperform the market. How is this possible? The answer relates to a fundamental truth: human beings behave irrationally. We are influenced by an evolutionary history that preserved traits fitted for keeping us alive in the jungle, not for optimizing our portfolio decision-making ability. While we will never eliminate our subconscious biases, we can minimize their effects by employing quantitative tools.

Value Investing: Never Buy Expensive Stocks. Period.

By |2017-08-18T16:53:45-04:00July 1st, 2014|Research Insights, Key Research, Value Investing Research|

We did a recent internal simulation study on the performance of cheap and expensive stocks based on a variety of valuation metrics. We looked at all our favorites from our Journal of Portfolio Management paper, [...]

“Alternative” Facts about Formulaic Value Investing

By |2017-08-18T17:12:00-04:00April 22nd, 2017|Research Insights, Key Research, Behavioral Finance, Value Investing Research, $vlue, $brk-a|

A new paper, "Facts about Formulaic Value Investing," is making the rounds and professes to plunge a dagger directly into the heart of systematic value investors. Half of my inbox is filled with questions regarding this [...]

Momentum Investing: Ride Winners and Cut Losers. Period.

By |2017-08-18T17:00:14-04:00July 16th, 2014|Research Insights, Key Research, Momentum Investing Research|

Momentum has historically been a great strategy. Although counter-intuitive to many value investors, buying stocks with rising prices has been a great investment approach--arguably better than value investing. Moreover, the approach is robust between the 2 samples analyzed. The lesson is clear: Let your winners ride and cut your losers short.