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 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.
We have a simple mantra that summarizes over a decade of research: If you've been reading our blog for a number of years you're 1) probably a finance geek, and you're 2) probably [...]
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.
Eugene Fama, the 2014 co-recipient of the Nobel Prize in Economics and father of the efficient market hypothesis, and his equally well-credentialed co-author, Ken French, have summarized the academic research on momentum as follows:[ref]Fama, E. [...]
Factor investing, and the associated intellectual battles, have raged for decades in academic finance journals. However, now that factor investing has gone mainstream via ETFs, the debate has broader interest among the investing public. Some investors [...]
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 [...]
Executive Summary Employee Stock Ownership Plans (“ESOP”) offer a variety of liquidity, tax and operating benefits to business owners who are contemplating a sale or partial sale of their business. This article is intended to [...]
Used car salesmen types are everywhere, especially in the asset management business. What defines the used car salesman? Used car salesmen are often focused on selling something—anything on their lots that has four wheels—rather than identifying the right vehicle for the client. The same holds true with the asset management business. Some asset management salesmen just want to sell something—anything, regardless of its suitability.Alpha Architect’s experience working with family offices in the dual role of consultant and investment manager has given us the opportunity to see a lot of indecipherable marketing materials and esoteric investment strategies over the years, neither of which appear to be in the best interest of the investor. We’ve always sought a simple framework that would facilitate a quick evaluation of any strategy that came through the door, but nothing really existed.Necessity is indeed the mother of invention: We developed our own framework for determining strategy selection and assessment. Our method is based on a few simple concepts, which should be clearly understood within the context of any investing approach, regardless of objective. In the end, choosing investment opportunities simply comes down to the FACTS.
The mention of technical analysis in the halls of academia can cause serious angst. The disdain for technical analysis likely stems from a firm belief that markets can't possibly be weak-form inefficient. The other reason researchers [...]
Tomorrow I'll be sitting with Pat O'Shaughnessy and Ben Johnson to discuss "Straight Talk About Smart Beta." Here is a link to the big Morningstar event. In preparation for our discussion we were spitballing ideas [...]
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 [...]
Simple timing rules, focused on absolute and trending asset class performance, seem to be useful in a downside protection context. Our analysis of the downside protection model (DPM), applied on various market indices, indicates there is a possibility of lowering maximum drawdown risk, while also offering a chance to participate in the upside associated with a given asset class. Important to note, applying the DPM to a portfolio will not eliminate volatility and the portfolio will deviate (perhaps wildly) from standard benchmarks. For many investors, these are risky propositions and should be considered when using a DPM construct.
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].”
We know that valuation metrics such as the CAPE, or Shiller P/E, ratio are correlated with long-term returns (notice we didn't say "predict" long-term returns--that is debatable). Here is a brief background on the measure: http://alphaarchitect.com/blog/2011/10/06/the-shiller-pe-ratio/ [...]
Commodity futures investing is arguably the most misunderstood asset class in the financial marketplace. We want to change that state of affairs. Commodity futures strategies are fascinating and can be beneficial to investors. However, commodity futures [...]
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 [...]
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.
The traditional small-minus-big value-adjusted long/short factor (SMB) developed by Gene Fama and Ken French has arguably added NO value over time. Performance over the past 30 years has been flat and highly volatile (1983-2013). The results [...]
Albert Einstein is reported to have said the following: The more I learn, the more I realize how much I don’t know. I can relate. Having studied finance for a long time (PhD, professor, books, [...]