Alpha Architect

Are Stock Market Bubbles Identifiable?

Robin Greenwood, Andrei Shleifer, and Yang You authors of the study “Bubbles for Fama”, published in the January 2019 issue of the Journal of Financial Economics evaluated Fama's claim that stock prices do not exhibit price bubbles. Based on a fixed threshold for the industry price increases (e.g., a 100 percent price run-up during two consecutive years) to filter their events and to analyze what happens afterward, they examined U.S. industry returns over the period 1926‒2014 (covering 40 episodes) and international sector returns (1985‒2014).

Employee Satisfaction and Stock Returns

“Employees are our greatest asset” is a phrase often heard from companies. However, due to accounting rules requiring that most expenditures related to employees be treated as costs and expensed as incurred, the value of employees is an intangible asset that does not appear on any balance sheet. That leaves the interesting question of whether employee satisfaction provides information on future returns.

A Deep Dive into the Low Beta Premium

The superior performance of low-volatility 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.” 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...but

Factor Investing: Are Internally Generated Intangibles Worthless?

As mind-bending as it sounds, although a company’s internally generated intangible investments generate future value, they are currently not accepted as assets under US GAAP. Omission of this increasingly important class of assets reduces the usefulness and relevance of financial statement analysis that uses book value. In fact, Amitabh Dugar and Jacob Pozharny, authors of the December 2020 study “Equity Investing in the Age of Intangibles,” concluded that the relationship between financial variables and contemporaneous stock prices has weakened so much for high intangible intensity companies in both the U.S. and abroad that investors can no longer afford to ignore the changes in the economic environment created by intangibles.

Factor Investing: Is a Human Capital Factor on the Horizon?

Taken together, our results suggest that firms’ personnel expenditures reflect not just the cost of labor in the current period but also the investment in human capital contained within that cost, and that market participants fail to fully understand the opportunity and efficacy of human capital development embedded in the disclosure of the expense.

Is The Value Premium Smaller Than We Thought?

From 2017 through March 2020, the relative performance of value stocks in the U.S. was so poor, experiencing its largest drawdown in history, that many investors jumped to the conclusion that the value premium was dead. It is certainly possible that what economists call a “regime change” could have caused assumptions to change about why the premium should exist/persist.

Factor Investing in Sovereign Bond Markets

The reported results we covered have important implications for investors in terms of portfolio construction, risk monitoring, and manager selection. Because these common factors explain almost all the returns of bond portfolios, investors should construct their bond portfolios using low-cost, passively (systematically) managed funds with these factors in mind and then carefully monitor their exposure to these systematic risks.

What Do Mutual Fund Investors Really Care About?

Are individuals just naïve performance chasers, unaware of the financial literature, or are they sophisticated investors? Pretty much.

Understanding Momentum Investing

The main takeaway for investors is that Kelly, Moskowitz, and Pruitt demonstrated that past return characteristics are strongly predictive of a stock’s realized exposures to common risk factors, providing direct evidence that price trend strategies are in part explainable as compensation for common factor exposures—past returns predict betas on factors and those factors have high average returns.

The Relationship Between the Value Premium and Interest Rates

We've been suffering through the deepest and longest drawdown in values history. Looking for a scapegoat to explain the lackluster performance many have pointed to low interest rates as the root cause of the underperformance. The question is have interest rates impacted value in the past?

Does the Market Efficiently Price the Value of Brands?

Despite the fact that a company’s internally generated intangible investments create future value, under current U.S. generally accepted accounting principles, internally developed intangibles are not included in reported assets. While research and development is an important intangible asset, so too is branding. Omission of an increasingly important class of assets reduces the usefulness and relevance of financial statement analysis that uses book value.

Size, Value, Profitability, and Investment Factors in International Stocks

Using data on 65,000 stocks from 23 countries, they evaluated the performance of the Fama-French factors, examining the factor premia in global markets to verify their robustness across different company size categories and geographical regions. Their data sample covered the period 1987-2019.

Chasing Low Beta Loses Alpha

One of the big problems for the first formal asset pricing model developed by financial economists, the CAPM, was that it predicts a positive relationship between risk and return. However, empirical studies have found the actual relationship to be basically flat, or even negative. Over the last 50 years, the most “defensive” (low-volatility or low-beta, low-risk) stocks have delivered both higher returns and higher risk-adjusted returns than the most “aggressive” (high-volatility, high-risk) stocks.

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Larry Swedroe

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