Alpha or Assets

More and more investors are buying “factor” based strategies which invest using measures like valuation and low volatility, but the most popular strategies are applying factors in the wrong way. Strategies should be built for alpha, not scale—but the asset management industry has gone in the opposite direction. Most factor-based strategies—commonly called Smart Beta—have hundreds…

The More Unique Your Portfolio, The Greater Its Potential

If there is a lot of overlap between your portfolio and the market, there is only so much alpha you can earn. This is obvious. Still, when you visualize this potential it sends a powerful message. Active share—the preferred measure of how different a portfolio is from its benchmark—is not a predictor of future performance, but…

When Measures Become Targets: How Index Investing Changes Indexes

in·dex noun : an indicator, sign, or measure of something. In Vietnam, under French colonial rule, there was a rat problem. To solve the rat infestation, the French offered a bounty on rats, which could be collected by delivering a rat’s tail as proof of murder. Many bounties were paid out, but the rat problem…

Will You Be a Gambler or the House In the Stock Market?

Blackjack odds are as good as you’ll get at most casinos. In most cases, the casino has just a 1% edge versus the gambler. So in a given night, you can go on a great run and win a lot of money playing blackjack. But of course if you played every day, all day, your…

Stocks That Triple In One Year

There have been 1,700 individual U.S. stocks (with starting market caps of at least $200MM, inflation adjusted) which have tripled in a 12-month period since 1962. Many of these individual stocks tripled in more than one 12-month period, so we have 7,500 or so separate observations of a stock tripling in a 12-month period. Tripling your money quickly…

The Few Rule the Many — Power Laws in Market Returns (2015 Case Study)

As index investing has grown in popularity, investors focus more and more on the market’s overall return and less on the return of its component parts (individual stocks). But underneath the hood of each market index we find many inequalities. The top 20% of stocks represent 85% of the overall market’s size in 2015. Similarly,…

Three Value Investors Meet in a Bar

Bill, Ernie and Sam—three lifelong value investors—met in a bar on November 30th, 2015. Bill was despondent. He’d underperformed the market by -47% over the past 10-years and was questioning his very belief in value. Ernie was happier. He’d done poorly in 2015, but over the last ten years he’d outperformed the market by +19%….

ZIRP, And The Factors That Launched 1,000 ETFs

The rise of smart beta–or more broadly, factor investing–has coincided with a 6 year period of zero interest rates. During this period, factors have been particularly ineffective relative to longer term results. Using publicly-available data (Ken French) we can explore the recent results for the most popular stock selection factors and compare them to longer-term periods of…

Philosophy Books

Here’s a list of my favorites, hope you find something interesting! ************** Freedom From the Known by J. Krishnamurti (http://amzn.to/1IYPQta) The Essays of Arthur Schopenhauer; (http://amzn.to/1OcjKpU) Michel de Montaigne – The Complete Essays (Penguin Classics) (http://amzn.to/1OcCtS0) The Upanishads (Classic of Indian Spirituality)  by Eknath Easwaran (http://amzn.to/1NXMXZS) The Wisdom of Life by Arthur Schopenhauer (http://amzn.to/1OcjRBF) Essays…

Momentum Deterioration, Crashes, and Prospects

In this piece, I’ll explore the momentum factor in some detail, mainly because of the excellent article by @jesse_livermore on the dangers of back-testing and the recent deterioration in the momentum factor. As Jesse did, I’ll use Fama French data because its publicly available, even though I think that their definition of momentum (total return…