Investors often overlook the importance of the sector in the outcome.
For value investors, being underweight technology and overweight
financials during a period when growth-oriented tech stocks were
booming and financials were lagging explains a large amount of their struggles. In this issue, we look at the importance of looking at the sector story when analyzing the market.
The typical investor faces two major sources of risk: Either their
expected returns fail to materialize or they change their strategy
during a time of stress. Often these two risks coincide. In this week's issue we look at the challenge of defining risk and some ways to do it.
If it's the new year, that means it's time for analysts to publish
their outlooks. That means there's a whole lot of predicting going on,
but that is fraught with danger for investors. Analysts have to make a
name for themselves somehow, and predicting stock movements and setting
price targets for the indexes and individual stocks is one way they do
that. In our latest issue, we look at why following these forecasts is usually a bad idea.
The classic value measure price-to-book has long fallen out of favor
with investors largely because companies are very different now than
they were in the past. Companies have intangible assets, for example,
which are not reflected in the ratio. This has been much-discussed in
investing circles. But Validea's Jack Forehand warns that we may be
spending too much time focused on P/B and not enough time looking at
other popular measures and their possible weaknesses.
Companies have been buying back their own shares in record volumes in
the last couple of years, and that has attracted a fair amount of
(negative) scrutiny about the practice. But are buybacks
really as bad as everyone says? Check out our latest issue to find out.
It's not that active management is dead, it's just getting a lot harder to beat the market. Read our latest issue to see why the
proliferation of low-cost exchange traded funds focused on these same
factors has raised the competitive bar for active managers.
Everyone knows value investing as a strategy has struggled during the
last few years of this decade-old bull market. Growth-oriented
technology stocks have played center-stage. But there are reasons for hope.
Judging the quality of your decisions can be one of the most challenging
aspects of investing. The process can seem simple on the surface because
every investing decision you make produces a measurable result in the
performance that it generates, but performance is not the obvious yardstick
that many investors think it is.
In this week's issue, we take a look at momentum as a style and some of the strategies on Validea that utilize momentum like investment criteria. The number of models that incorporate momentum may be a surprise to you.
Investing gurus like Warren Buffett and Peter Lynch make beating the
market look easy, but they each use well-thought-out processes for
selecting their portfolios, and they were able to stick with their
processes over the long term. That is the key to achieving investing
As value investors are acutely aware, the strategy has struggled, and there's an ongoing debate about whether it will ever get
fixed. It's not that value hasn't fallen out of favor before, but over
the long-long-term, it has proven to be a winning bet. So, is something
different about now? We take a look in our latest newsletter.
Value investing was popularized by Benjamin Graham and, later, Warren
Buffett, but it isn't always clear the best way to go about it. Different
views on what value investing means have sprouted up over the years, and following any one path can lead to different outcomes than another one.
Exchange traded funds are a hit with investors, who have put billions of
dollars into them over the years creating a fast-growing corner of the
investment product market. But investors may not understand exactly how
ETFs work, and that makes the ETF industry ripe for conspiracy theories. In this week's issue, we dispel some of the myths.
It's a particular talent to be able to take a complex thing and simplify it
so anyone can understand it. But it's very human to associate complexity with intelligence. If something takes a lot of steps and requires complicated analysis and
strategic planning, it must somehow be better. Sometimes that is true, but
a lot of other times we run the risk of overthinking it. Simple can be the
best approach, even when it comes to investing.
From 1965 through the end of 2018, Berkshire's A shares have a compounded
return of 20.6% versus 9.7% for the S&P 500. It also has the highest Sharpe ratio (a measure of risk adjusted
performance) out of any stock that has traded for 40 years. In our latest newsletter, we look at the key drivers of that performance.
It isn't easy to beat the market. Over the long term only a few investors
have been able to outpace it, consistently producing market-beating gains.
But that hasn't deterred stock pickers from trying to generate alpha. They
arm themselves with sophisticated models, hunting for overlooked
opportunities and hoping the crowd doesn't catch on. But this becomes a
self-fulfilling cycle. As the skill of managers rise and the tools improve,
it becomes harder and harder to distinguish the talented from the rest of
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. But it is important to understand the other side. In this issue, we take a look at the argument against value investing.
An investment strategy based on well-tested factors like value, momentum
and quality has worked for some of Wall Street's most famous investors, but
history also shows taken one at a time each can seriously underperform the
market for an extended time. There is a way to smooth out the returns of any individual factor by
combining them into a multi-factor portfolio, which reduces risk and
can produce comparable returns. But it can be a complicated process. In this issue, we look at the challenges of building multi-factor portfolios.
One of the first things investors learn is to buy low and sell high. It
applies to simple stock investing and it's tempting to think it can be
applied to factor investing, too. Cheap value stocks should, in theory,
eventually rebound. So it makes sense to buy them up and wait it out. It
equally makes sense to pare back exposure to factors that have had a long
period of significant outperformance, like growth and momentum stocks. But
this simple idea is easier said than done.
Humans approach investing with their own biases and behaviors than can
hinder their success. The study of behavioral finance has blossomed in
recent years as experts try to find ways to help investors overcome this
natural tendency. What the discipline has discovered is that human behavior
hurts investor returns more than other outside factors.
With investing, certain skills have to be mastered first. They become the foundation for other skills that, taken as
a whole, become the guidepost for investors to understand what is important
and where they should be spending their time and energy. This hierarchy of investor interests puts investor
behavior at the bottom of a pyramid.
Do you have what it takes to become a long-term factor-based investor? There are a few things you may not have considered. It's a lot tougher than it looks on paper, for starters. Deciding to dive
in is not a quick process, of course. It takes research and an examination
of long-term historical results.
Investing success is largely a function of skill and discipline. But luck also plays a role in investing. This role is often misunderstood and
underappreciated. Luck is something even Warren Buffett has talked about, though most of his
life has been spent carefully evaluating company fundamentals and sticking
to a disciplined, unemotional approach to investing.
Investors like simple indicators. They like things that tell them exactly when to sell, and when to buy. They want a magic bullet that can keep them out of market declines. The problem, of course, is it doesn't exist.
The recent market upheaval has many people turning to market legends for
advice, and it's easy to see why. These famous investors have made their
names successfully navigating the markets over the long-term, and have
survived many declines over that time. But that approach can be dangerous.
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.