Excess Returns is an investing podcast hosted by Jack Forehand (@practicalquant) and Justin Carbonneau (@jjcarbonneau), partners at Validea.
Justin and Jack discuss a wide range of investing topics including factor investing, value investing, momentum investing, multi-factor investing, trend following, market valuation and more with the goal of helping those who watch and listen become better long term investors, all in twenty minutes or less per episode. The podcast is available on YouTube and on all the major podcast platforms.
You can click the links next to each episode below to watch or listen to it on your preferred platform.
In this bonus episode, we we discuss a presentation Justin recently gave to Fidelity customers about some of the major narratives shaping the current market. The word "unprecedented" tends to be overused in investing, but 2020 has certainly seen many occurrences that many investors have never seen before, and may not again. We talk about some of these things and what they mean for investors going forward.
We are currently in one of the most difficult economic environments many of us will see if our lifetimes. Even though the unemployment rate has fallen from its high of 15% to a level below 10%, it still exceeds the peak from the 2008 crisis, which itself was one of the deepest recessions ever. Small businesses and entire industries, like air travel, cruise lines and hotels are struggling mightily as the various degrees of lockdowns we have experienced in recent months have taken a huge toll. But despite all of that, the stock market currently sits at all time highs.
In this episode, we look at the reasons for this disconnect.
Technology has allowed all of us to personalize many aspects of our lives. Rather than accept products tailored to a wide range of people, we are now able to customize products we use based on our specific needs and preferences.
But in the world of investing, most investors continue to invest in prepackaged indexes like the S&P 500 that are the same for everyone. That may be about to change, though.
The combination of new technology, the elimination of brokerage commissions, and the ability of investors to purchase partial shares of individual securities have come together to create a product that allows investors to build indexes that meet their individual preferences.
That product is direct indexing.
In this episode we talk about the pros and cons of direct indexing and the details of how it works.
Trading volumes at online brokers have skyrocketed since the Coronavirus crisis began. If there is one lesson these newly minted traders have learned so far, it is that the market does nothing
but go up. But more seasoned investors know that the market, and these traders, will eventually fall upon tough times.
In this episode, we discuss some investing lessons that these new traders could learn from legendary investor Peter Lynch.
We discuss the importance of understanding the businesses behind stocks you invest in, how to distinguish luck from skill,
why investors should avoid "Cutting Their Flowers and Watering Their Weeds", and why making mistakes early in your investing career can be a good thing
In this episode we are joined by Professor Partha Mohanram. Professor Mohanram is the John H. Watson Chair in Value Investing at the Rotman School at the University of Toronto.
His paper "Separating Winners from Losers among Low Book-to-Market Stocks using Financial Statement Analysis" is also the basis for one of the quantitative models we run on Validea.
In this interview, we cover a wide range of topics based on Professor Mohanram's research, including the criteria of his G Score strategy, whether accounting standards should change to account for intangible assets, the balance between quality and value in portfolio construction, separating winners from losers in Financial stocks and whether investors can profit from information on Twitter.
Value investors have fallen on difficult times in the most recent decade. Value's extended underperformance has led many to question whether the strategy still works or if it is broken in some fundamental way. In this episode, we look at these arguments and discuss why we still believe in value.
We discuss whether value is cheap on a relative and absolute basis, if the risk- and behavioral-based arguments for value still hold, why history gives us some reason for optimism, and why underperfomance would not be what we would expect if value is truly dead.
In this episode, we are joined by Lawrence Cunningham. He is a professor at George Washington University and one of the world's leading experts on Warren Buffett. He is also the author of many excellent investing books including "Dear Shareholder", "The Essays of Warren Buffett", "Quality Investing", and the upcoming "Quality Shareholders: How the Best Managers Attract and Keep Them".
We discuss a wide range of topics, including the key traits that have led to Warren Buffett's long-term success, the characteristics of a quality shareholder and what companies can do to attract and keep them, the impact of the rise of passive investing on corporate governance, the most important attributes that can help to identify quality companies and whether they can be quantified.
Valuing a company (or the market in general) typically involves looking at its price and judging that price relative to its current and projected future fundamentals. But some have argued that this process has become broken in the most recent decade and other factors have become more important than actual results. In this episode, we talk about some of these factors, how they have impacted the market, and what they might mean for the future.
Buying expensive stocks has historically been a terrible investing strategy. On average, expensive stocks significantly underperform the market as a whole over time. But despite the poor performance of the group, the absolute best performing individual stocks typically come from within this universe. The difficult part is trying to identify them in advance. In this episode, we look at a quantitative growth strategy developed by Partha Mohanram, a professor at the University of Toronto, and how it seeks to find diamonds in the rough among growth stocks.
The process of learning from your mistakes is an important part of improving yourself over time both as an investor and as a person. But it requires that you learn the right lessons and don’t draw the wrong conclusions from your failures. And sometimes that is easier said than done. In this episode, we talk about some ways that learning from your mistakes can be counterproductive.
In this episode we are joined by Vitaliy Katsenelson. Vitaliy is the author of the popular Contrarian Edge blog and the CEO of investment firm IMA.
As quantitative investors, we often find we learn the most from investors who use very different approaches than we do. As a discretionary value investor and long-term student of value investing, Vitaliy provides us with an alternate take on value and the advantages a discretionary approach can offer in uncertain times.
The Price/Book ratio has probably been the most important valuation ratio of the past century. If you look at the academic research that supports value investing, you won’t find any other ratio that is referenced more often. There is also no ratio that is used more by systematic value funds. But the rise on intangible assets and other factors have led many to question whether the ratio has value any more. In this episode, we look at the arguments for and against the Price/Book and whether it should still have a place in value portfolios.
In this episode, we are going to try something a little different. Our goal at Validea is to capture quantitative strategies that work over the long-term. To do that, we go through books and academic papers to find factor-based models with results to back them up. We are going to periodically do some episodes for the podcast where we do a deep dive into these strategies and look at the factors behind them. In the first episode, we will take a detailed look at our strategy based on Warren Buffett, which was extracted from the book Buffettology. But before we look at the strategy's criteria in detail, we start with a more basic question: Can Warren Buffett be quantified?
We all have a tendency to believe that the way we invest is the best way. As quantitative investors, we can sometimes feel that there is no reason anyone should ever use a discretionary strategy. But like most issues in investing, there are two sides to this argument. In this episode, we talk about quantitative and discretionary investing and the benefits of each.
In this week's episode we are privileged to be joined by Jim O'Shaughnessy. Jim is a pioneer in quantitative investing and the founder of O'Shaughnessy Asset Management. He is also the author of the best selling book What Works on Wall Street, which is now on its 4th edition and is considered by many to be the definitive guide to factor-based investing.
In this discussion, we get Jim's takes on a wide range of topics both in and outside the investing world, including the recent struggles of value investing, the process of enhancing an investment strategy over time, the role of behavior in constructing factor strategies, and Jim's tips on parenting.
We all have our beliefs about the way that things should work in investing. When the market gets overvalued, we think it should go down. When value stocks struggle for a long period of time, we think they should outperform. When central banks or governments implement policies we don't agree with, we think they will inevitably end in disaster. But that focus on the way we think things should be can sometimes lead us to miss the reality of what is. In this episode, we talk about the balance between having conviction in the way things should work out and recognizing the way they are actually working out.
Investing factors that work over time typically do so for one of two reasons: they either produce an excess return by taking on additional risk or they benefit from the tendency of investors to systematically misprice certain types of securities. Factors like value and momentum are easy to explain using this framework, but the outperformance of quality and low volatility offers more of a challenge.
In this episode, we take an in depth look at these two factors.
Wes Gray is the founder of Alpha Architect, the author of Quantitative Value and Quantitative Momentum, and an expert in systematic investing. In this interview, we discuss the recent struggles of value investing and how the current period fits into a long-term context. We also talk about the nuts and bolts of building a value strategy, including the pros and cons of value composites and the role of quality in a value portfolio. We hope you enjoy the discussion.
Momentum investing is difficult to understand for many investors. While a concept like value that involves trying to buy stocks at a discount to what they are worth resonates with many, the idea of betting that stocks that have already gone up will go up more can be much more difficult to understand. In this episode, we take an in depth look at momentum investing. We discuss why momentum works, the different types of momentum, and some of the drawbacks of a momentum based approach. We also talk about some additional variables that can potentially enhance a momentum approach like fundamental momentum and momentum consistency.
We are all trained to buy low and sell high, and it is tempting to conclude that we can do the same thing with factors. But the research suggests that factor timing strategies are extremely difficult to implement in practice. In this episode, we discuss the pros and cons of factor timing and look at some of the approaches that investors can use to time factors.
The basic theory of multi-factor investing is pretty simple. It has been widely proven that factors like value and momentum can outperform the market over long periods of time. But no reward comes without risk. In this case, the risk is the significant periods of underperformance that the factors can endure. That is where multi-factor investing comes in. It offers investors an opportunity to blend factors together to reduce risk and smooth out those bad periods.
But building a multi-factor investment strategy can be much more difficult than it seems and requires a series of decisions that can have a significant impact on the end result. In this episode, we look at multi-factor investing and the important factors to keep in mind when building a multi-factor portfolio.
The process of using past fundamentals to try to predict future prices has been in place for a very long time, and there is substantial academic evidence to support it. One of the major challenges of it; however, is what happens when we are confronted with breaking points that are so large that a company’s past results prior to it occurring might tell us very little about what it will look like after. The current situation with COVID-19 might be the most significant situation of this type that any of us will experience in our investing lifetimes.
In this episode, we look at the impact of COVID-19 on value investing and offer some practical tips for building a value portfolio during a time like this.
In this week's episode we shift gears a little from our usual investing focus. We wanted to spend some time talking about the current COVID-19 crisis and its impact on all of us as people. To do that, we brought in an expert of human psychology and behavioral finance, Dr. Daniel Crosby. Daniel is the author of the Behavioral Investor and the Chief Behavioral Officer at Brinker Capital.
In the interview, we discuss what we are going through as a society with the COVID-19 crisis, how we can all learn to better cope with the stress it brings, and the impact it will have on our behavior in the future. We also talk about its impact on us as investors and discuss Daniel's process to help investors avoid making bad decisions during times like these. We hope you enjoy the discussion.
Whenever we are confronted with a bear market, we all want to figure out how it will play out. We want to know how big the decline will be. We want to know when it will end. We want to know what stocks we should buy to limit losses during it and to outperform the market after it. To answer these questions, our minds tend to point us to the simplest solution we can find. That solution is often to find the bear market in history that was most comparable to this one, and to assume that what happened then will also happen now. But there is a major flaw in that argument: no two bear markets are alike.
In this week's episode, we discuss the dangers of trying to compare the current bear market to past declines, and compare and contrast some historical bear markets with what is going on now.
Whenever any of us analyze the decisions we make in investing, there is always a tendency to think that what we end up knowing in retrospect was obvious at the time. There is a tendency to believe that decisions that we could have made were easier than they actually were. But that’s just not the way things work, especially when we are faced with high stress situations and very uncertain outcomes, which is the situation we all face today.
In this episode, we discuss the challenge of analyzing the current market environment and how what might seem obvious in retrospect is far from it today.
In this week’s Excess Returns, we are trying something new. In addition to our regular episodes, we have decided to periodically talk to some of the people we respect most in the investment community to get their insights on the issues facing investors today. For our first conversation, we talk to our friend Tobias Carlisle about value investing. Toby is probably the smartest value investor we know. He is the author of four books on value, including the Acquirer’s Multiple. He is also the founder of Acquirer’s Funds. In the conversation, we talk about the things that led to his interest in value investing and try to put the current struggles of value into context. We hope you enjoy the conversation.
Confirmation bias is one of the most damaging biases in investing. All of us want to be right. We all want to think that opinions that disagree with ours don’t have sensible arguments to support them. So we gravitate toward people who agree with ours. Whether it be in our personal relationships, or our virtual ones through things like social media, we all unconsciously want to seek out validation that proves that what we thought all along is correct. But during times like these that can be a major problem. In this episode, we discuss some of our current beliefs, and why they might be wrong.
There are many ways to manage risk in a portfolio. Traditional methods like blending stocks with bonds will work for most investors, but more creative methods can also make sense in some cases. One thing all risk management techniques have in common though, is that they come with trade offs. In this episode we look at some popular risk management approaches, and some lesser known ones, and examine the pros and cons of each. In addition to a traditional blended stock and bond approach, we also discuss the Permanent Portfolio, and more advanced quantitative approaches like Trend Following, Protective Asset Allocation and Generalized Protective Momentum.
With the market in the midst of a significant decline and uncertainty reaching levels we haven't seen in many years, we have received many questions about what is going on, and where we go from here. So we decided to do a Q&A episode to do our best to answer some of these questions. In this bonus episode, we talk about why the market has fallen so quickly, whether stocks are cheap after the recent decline, and whether can can rely on past fundamental data to pick stocks in a time like this. We hope you enjoy this bonus episode. If you have any questions you would like answered in future episodes, please email them to email@example.com.
The argument that investors should stay the course during market declines is an easy one to make. It also in most cases is the correct one, since figuring out when to get out of the market, and when to get back in, is very difficult for most investors to do. Despite the strength of the stay the course argument, those of us who make it can sometimes fail to deliver it with the proper recognition of the pain that most investors feel during market declines. In this episode, we talk about some important lessons to keep in mind during market panics and some strategies investors can use to manage them.
The long-term evidence to support factor investing is compelling. Academic work has shown that factors like value and momentum have produced an excess return relative to the market over time. But what occurred in the most recent decade was in many ways the opposite of what has happened over the long-term. Almost anything an investor did to get away from buying large growth companies over that period was a detraction from returns. In this episode, we try to put the struggles of factor investing in context and talk about some lessons we can learn from this difficult decade.
The recent market sell off related to the Coronavirus has many investors worried. And with good reason. When panics like this set in, we all tend to focus on worst case scenarios and want to take action in response. But the process of analyzing headlines and figuring out how they will impact the market is challenging for even the most sophisticated investors. In this week's episode, we look at the dangers of investing based on headlines and why most investors are probably better off avoiding it.
To say that the track record of market timers in general is dismal would be an understatement. There are so many factors that impact market returns that getting them all right is next to impossible. And even if you do, figuring out what is and is not already priced in can be an equally fruitless exercise. Despite the fact that forecasters have consistently failed to predict market turns, there is an option that can help to limit losses in major downturns and can be beneficial for some investors. Trend following has a long-term track record of both limiting major losses and reducing volatility. But like anything in investing, it comes with some trade offs. In this episode, we discuss why market timing is so difficult and take a detailed look at the pros and cons of trend following.
Back testing is one of the most misused tools in investment management. Almost every back test outperforms the market, but those same strategies often struggle when run with actual money. In this episode, we discuss the reasons why back tested results often don't translate into the real world and talk about some things to look out for when evaluating back tests.
In this week's episode, we talk about the biggest lessons from the first year of our Five Questions interview series. Our Five Questions series features in depth interviews with leaders in the investing industry. We discuss the five most important lessons we learned from our interviews with Jim O'Shaughnessy, Corey Hoffstein, Michael Mauboussin, Ben Hunt and Wes Gray.
Picking the right value metric can be one of the biggest challenges of quantitative value investing. Although the Price/Book is the most widely used value metric, its struggles in recent years and valid concerns that have been raised about its viability in a world dominated by intangible assets have led many to question whether it still works. But the other widely used value metrics also have their own problems. In this week's episode, we discuss the benefits of using a value composite and how it can enhance the risk/return profile of a value strategy.
We have just completed market prediction season. Its the time of year where there are countless forecasts about what the economy will do in the new year. Its when experts tell you what interest rates will do for the year. And most of all, its when you see a variety of predictions for where the S&P 500 is heading this year. The experts making these predictions even do you the favor of giving you exact price targets so you know exactly what will happen. But there will be one major problem with almost all of these predictions: they will be wrong. In this week's episode, we discuss why market forecasting is so difficult and highlight some of the tricks that market forecasters use to make their predictions seem better in retrospect than they actually were.
As difficult as it is to figure out the right stocks to buy, determining when to sell can be even more challenging. In this episode, we look at the important factors to consider when deciding when to sell and develop a systematic sell framework that can be used for both quantitative and traditional investors.
Confirmation bias is one of the biggest problems in investing. We all have a set of core beliefs, and we tend to surround ourselves with people who also believe them and focus on information that validates them. That can be dangerous, though, because it can blind you to valid arguments that contradict your own. In this episode, we challenge our belief in value investing and discuss some of the reasons why we could be wrong.
Many value stocks are cheap because they deserve to be. Some of them no longer have sustainable businesses, and as a result their current discounted multiple will look really expensive relative to where their business is headed. These types of stocks are often referred to as 'value traps" and value investors do everything they can to avoid them. In this episode, we talk about value traps, why they are impossible to avoid completely, and some rules that can help minimize them.
In this episode, we discuss Justin's experience participating on the Alpha Architect team in last year's March for the Fallen and how some of the lessons he learned from it can be applied to investing. The March for the Fallen is an event hosted by the Pennsylvania Army National Guard Training Center at Fort Indiantown Gap to honor the memory of all that have fallen in the defense of our nation.
Factor strategies have grown exponentially in the past decade. Almost every major asset manager now offers their variation of things like value, momentum, quality, and low volatility. But to use them properly, it is important to understand what they can and can't do. In this week's episode, we discuss the common misconceptions about factor strategies and what they can deliver for investors.
The market has always been tough to beat, but the ability to investors to gain inexpensive exposure to factors like value and momentum has made the job of active managers even harder.
In this week's episode, we talk about why the pursuit of alpha has become more difficult over time.
There is a tendency to believe that all value investing strategies are similar. But beneath the surface, many value approaches couldn't be any more different.
These differences can lead to substantially different outcomes in both the long- and short-term. In this episode, we discuss the many decisions that go into building a
value portfolio and how they impact the results it delivers.
Performance Disclaimer: Returns presented on Validea.com are model returns and do not represent actual trading. As a result, they do not incorporate any commissions or other trading costs or fees. Model portfolios with inception dates on or after 12/30/2005 include a combination of back tested and live model returns. The back-tested performance results shown are hypothetical and are not the result of real-time management of actual accounts. The back-testing of performance differs from actual account performance because the investment strategy may be adjusted at any time, for any reason and can continue to be changed until desired or better performance results are achieved. Back-tested returns are presented to provide general information regarding how the underlying strategy behind the portfolio performed in our historical testing. A back-tested strategy has the benefit of hindsight and the results do not reflect the impact that material economic or market factors may have had on advisor's decision-making if actual client assets were being managed using this approach.
Optimal portfolios presented on Validea.com represent the rebalancing period that has led to the best historical performance for each of our equity models. Each optimal portfolio was determined after the fact with performance information that was not available at portfolio inception. As a result, an investor could not have invested in the
optimal portfolio since its inception. Optimal portfolios are presented to allow investors to quickly determine the portfolio size and rebalancing period that has performed best for each of our models in our historical testing.
Both the model portfolio and benchmark returns presented for all equity portfolios on Validea.com are not inclusive of dividends. Returns for our ETF portfolios and trend following system, and the benchmarks they are compared to, are inclusive of dividends. The S&P 500 is presented as a benchmark because it is the most widely followed benchmark of the overall US market and is most often used by investors for return comparison purposes. As with any investment strategy, there is potential for profit as well as the possibility of loss and investors may incur a loss despite a past history of gains. Past performance does not guarantee future results. Results will vary with economic and market conditions.