Increases CAPE Ratio Predictability with a Simple Adjustment
CAPE has long been a cornerstone of long-horizon return forecasting. Critics argue that its predictive power has faded in recent decades. This paper pushes back.
Revaluation Alpha: Why Past Factor Returns May Be Misleading
Past returns often include non-repeatable revaluation alpha. Since structural alpha is the only component likely to persist, it’s essential for investors to distinguish this from one-off valuation windfalls before placing trust—or capital—in any factor or fund.
Is Value Investing Dead?
After years in what can be now called one of the worst (if not the worst) period for value investing, many investors have packed their bags and called it quits. We’ve heard this be said over and over again; and yet, many of their arguments look extremely compelling. So are they in the right? Let's examine.
Intelligent Concentration: A Synopsis of Warren Buffett and Diversification
A historical review of Buffett’s implementation of diversification and concentration in practice, as well as his perspective on these concepts, documents a long tradition of heterodox thinking and application.
Equity duration and predictability
Equity duration has increased dramatically. As firms reinvest more and delay payouts to the future, asset prices become more sensitive to changes in expected returns rather than fundamentals.
How Many Stocks Should Be In Your Portfolio? A Practical Guide to Portfolio Construction
Diversification is the only free lunch in investing. If you’ve spent even a day exploring the world of finance, you’ve likely encountered this common truism. But chances are, you’ve also heard stories of someone turning a small stake into millions by going all-in on just one or two stocks. That contrast raises a natural question for many investors: how many stocks should I actually own in my portfolio? Too many stocks, and you might be leaving opportunities on the table. Too few and you risk losing your shirt! So how do we strike a balance?
Should Investors Combine or Separate Their Factor Exposures?
If you’re a factor investor, there will come a time where you will have to choose between mom and dad: Should you combine or separate your factor exposures? And make no mistake: You will have to make a decision! While there’s no right answer, the way you structure your portfolio can have significant implications for returns, costs, and even your own behavior as an investor. Let’s walk through the logic behind both approaches.
Cut Through the Noise! These Two Factors Tend to Drive Portfolio Success
Let’s break down how to build a robust factor portfolio—without getting lost in the weeds. We investigate which equity factors have the strongest historical returns and diversification benefits from a long-only perspective.
US Value Stocks Trading at Historically High Discounts
For equity investors there have been two major narratives over the last 17 calendar year period 2008-2024. The first is that US stocks have far outperformed international stocks. The other narrative has been the outperformance of growth stocks relative to value stocks.
Valuations Reflect U.S. Exceptionalism
US exceptionalism provided the same explanation for the outperformance of US stocks in the 1990s. However, that regime changed. From 2000-2007, while the S&P 500 Index returned just 1.9% per annum (underperforming riskless one-month Treasury bills by 1.3% per annum), the MSCI EAFE Index returned 5.6% per annum, and the MSCI Emerging Markets Index returned 15.3% per annum.
Analysts set price targets using trailing P/E ratios
Trailing twelve-month P/E ratios account for 91% of the variation in analysts’ price targets. We construct a new kind of asset-pricing model around this fact and show that it explains the market response to earnings surprises.
Can smart rebalancing improve factor portfolios?
This paper provides new evidence on the efficacy of prioritizing transactions so as to focus portfolio turnover on the trades that offer the strongest signals and hence the highest potential performance impact.
Fixing the poor performance of the book-to-market ratio
The authors effectively argue the case for intrinsic value and DCF based approaches to building Value factor strategies. The traditional value measures, especially the book-to-market ratio, are described as ineffective in today's market environment.
U.S. Companies Have Outperformed Japanese Companies, or Have They?
While both the S&P 500 and the Nikkei indices have recently hit all-time highs, the valuation and balance sheet data we have reviewed indicate that the downside risks in Japanese stocks appear to be far less than the risks in U.S. stocks. Evidence such as this helps explain why legendary investor Warren Buffett has been buying Japanese stocks.
On the Persistence of Growth and Value Stocks
While analysts underwrite high growth for companies that have grown quickly and slow growth for companies that have grown slowly in the past, a large body of evidence demonstrates that reversion to the mean of both positive and negative abnormal earnings growth is the norm.
The Magnificent Seven
When a small subset of companies makes up a large portion of a portfolio, for better or worse their returns will have a greater impact on overall portfolio results.
International Value Stocks Offering “More Bang for the Buck”
Over the very long term, while value stocks have been less profitable and have had slower growth in earnings than growth stocks, they have provided higher returns.
Value and Profitability/Quality: Complementary Factors
There are various measures of value and quality, with one being Marx’s gross profits-to-assets.
Regression is a tool that can turn you into a fool
Running regressions on past returns is a great tool for academic researchers who understand this approach's nuance, assumptions, pitfalls, and limitations. However, when factor regressions become part of a sales effort and/or are put in the hands of investors/advisors/DIYers, "the tool can quickly turn you into a fool."
And the Winner Is: Examining Alternative Value Metrics
Although the most efficient way to implement a value strategy may need to be clarified, it is clear that value has withstood the test of time and that some implementations are superior to others. The evidence suggests that P/B is not an efficient metric as a standalone criteria. Instead, value strategies that use P/B should include at least a measure of profitability while managing sector - and security-level diversification.