Guest Posts

Betting on a Short Squeeze as Investment Strategy

Short squeezes are often associated with a large positive jump in the price of a stock. Filippou, Garcia-Ares, and Zapatero demonstrated that skewness-seeking investors try to identify securities that could experience a short squeeze in the near future and are willing to pay a premium for them. That results in an overvaluation of the options and, on average, negative returns. Investors are best served to avoid investments with lottery-like distributions. One way to do that is to turn a blind eye to social media sites like Robinhood and Reddit so you don’t get caught up in the hype and excitement. That’s another example of why retail investors are called “dumb money.” Forewarned is forearmed.

Trend to Passive Investing Negatively Affecting Active Funds

While the evidence makes clear that active management is a loser’s game (one that it is possible to win but so unlikely you should not try), we don’t want active managers to disappear. Hope should continue to triumph over evidence, wisdom, and experience because active managers help eliminate market anomalies and inefficiencies created by the misbehavior of investors (such as noise traders). That helps to ensure that capital is allocated efficiently.

Fifty Shades of Grey Swans: Timeless Risks with a Modern Twist

The world is complex and ever-changing; news travels at warp speed, events happen fast, and popular narratives can distract and mislead us. Many risks important for our portfolios are new, hidden, or nuanced in some underappreciated way—and likely to be misunderstood and mispriced in the markets. Other risks can hide in plain sight. Good risk management can be described as a balancing act that employs the first principles of investing, lessons from history, behavioral psychology, a little math, and even our imagination in service of our objective: to detect and defend against the risks we can foresee and fortify our portfolios against those we cannot. In short: we need informed creativity, not calculation.

The Financial Distress Puzzle

The empirical research findings demonstrate that the return premium generated by being long low-distress risk stocks and short high-distress risk stocks is persistent and that the capital asset pricing model (CAPM) and the Fama-French three-factor models cannot explain it. Hence, we have the distress puzzle, or anomaly.

Is now a good time to buy bonds?

As pundits wrestle over the cause, implications, and sustainability of the recent massive moves in interest rates, I’ll instead delve into the two terms most often blamed for these shifts in rates: R-star and the Term Structure Premium. Unfortunately, what most want—a measure of them—is unknowable. But we can benefit from understanding the theories and models behind these terms. We can glean guidance on what we need, namely a better understanding of the risks and rewards of buying longer-maturing bonds at current rate levels. I contend that now is a good time to secure future cash flows by buying bonds, although determining the precise amount to invest remains a challenge.

Technology Spillover Impacts Stock Returns

The timelier adoption of new technology and the higher likelihood of large-scale technology adoption make the risk associated with technological innovation more systematic, which in turn increases returns required by investors for technology spillover recipients.

Trend-Following Filters – Part 7

This article examines four digital filters commonly used for trend-following: moving average linear weighted moving average exponential smoothing time series momentum

How to Crush the CFPⓇ Exam 💪: Part 2

As discussed in Part 1 of this blog series, the Certified Financial Planner (CFPⓇ) exam can be a stressful and intimidating experience. With eight areas of content to cover – both as siloed financial knowledge and also as an integrated approach to building a comprehensive financial plan – it's important to be organized and intentional in your study efforts.

The Research and Development Factor

The higher returns to high R&D stocks represent compensation for heightened systematic risk not captured in standard asset pricing models.

How to Crush the CFPⓇ Exam 💪: Part 1

Let’s talk about the right approach(es) and the proper study techniques you need to pass the CFPⓇ exam with confidence and get the certification you need to advance your career in finance and investing.

Conditioning anomalies using retail attention metrics

By using a novel measure of investor attention, generated from InvestingChannel’s clickstream data on online financial news consumption, we can identify broad groups of stocks which are less efficiently priced and therefore where anomalies such as Value and Momentum are likely to produce greater cross sectional differentiation in returns.  We also apply these groupings to proprietary ExtractAlpha stock selection signals.

Intangible Value: Modernizing the Factor Portfolio

The “Intangible Value Factor” (IHML) can play an additive role in factor portfolios alongside the established market, size, value, quality, and momentum factors. This Six-Factor Model avoids the problematic “anti-innovation” bias of traditional factor portfolios and can be easily implemented using ETFs.

Improving Performance by Avoiding Negatives of Index Replication

There are several significant, well-documented benefits of index funds. In addition to outperforming a large majority of actively managed funds, they tend to have low fees, low turnover (resulting in low trading costs and high tax efficiency), broad diversification, high liquidity, and near-zero tracking error (generally assumed to mean that they incur negligible trading costs).

Gold as a Safe-Haven Asset

I’ve received calls from clients inquiring about moving assets to gold. When I asked them why, three reasons dominated.

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