Notes on Scary Markets From Your Sketch-Wielding Drill Sergeant
I want to talk to you about scary markets. For the sake of this particular subject, I want to be blunt and a little bit in your face. So for the next few minutes, please, just think of me less...
IPO Prices Boosted By Hype
Initial public offerings (IPOs) involve a great deal of uncertainty, which makes them a relatively risky investment. Thus, investors should receive higher expected returns as compensation for the greater amount of risk that’s associated with them. However, the evidence shows...
A New 4 Factor Investing Model
For about three decades, the working asset pricing model was the capital asset pricing model (CAPM), with beta—specifically market beta—being its sole factor. Then, in 1993, the Fama-French three-factor model—which added size and value—replaced the CAPM as the workhorse model....
Complexity Is the Investing Devil
What do the following investments have in common? Options Covered calls Collateralized mortgage obligations Non-traded REITs Master limited partnerships Variable annuities Equity-indexed annuities Hedge funds Principal protected notes Private equity Here’s the answer: They are all complex investments. As a...
Solving The Volatility Puzzle
One of the interesting puzzles in finance is that stocks with greater idiosyncratic volatility (IVOL) have produced lower returns. This is an anomaly, because idiosyncratic volatility is viewed as a risk factor—greater volatility should be rewarded with higher, not lower,...
Honing In On Value
Haim Mozes and John Launny Steffens, authors of the study “Getting More Value Out of the Value Factor,” which was published in The Journal of Investing’s Winter 2015 issue, have attempted to create a model that can accurately predict the...
Overconfident Enemy In Mirror
One of the questions I’m most often asked by reporters covering finance is: “What are the biggest risks facing investors?” My usual response is that the biggest risk confronting most investors is staring right back at them when they look...
Three Ways to Think About ‘Is It Worth It?’
In life, there are certain nonnegotiables we simply must have. Think food, water and shelter for starters. Nobody will ask, “Is it worth it to eat?” It’s just something you do to stay alive. But deciding what to eat? That’s...
CAPE 10 Ratio In Need Of Context
The Shiller cyclically adjusted (for inflation) price-to-earnings ratio—referred to as the CAPE 10 because it averages the last 10 years’ earnings and adjusts them for inflation—is a metric used by many to determine whether the market is undervalued, fairly valued...
The Three Biggest Investing Anomalies
There are many anomalies in investing. It wasn’t easy to isolate the three biggest ones, but here are my choices: 1. You love Warren Buffett, but ignore his advice. Warren Buffett has rightfully been called “the greatest investor of his...
