A Magical Metric That Isn’t
I was recently asked to comment on an article that appears in the April 2015 issue of the American Association of Individual Investors Journal. The article is based on the paper “Mutual Fund’s R2 as Predictor of Performance,” which was...
Avoid The Recency Pitfall
Last year, U.S. real estate investment trusts (REITs) were the best-performing equity asset class. In addition, U.S. stocks far outperformed international stocks. Unfortunately, historical evidence demonstrates that individual investors tend to be performance chasers. They watch the markets, then buy...
No Refuge In Dividend Stocks
Despite the fact that traditional financial theory has long held that dividend policy should be irrelevant to stock returns, one of the biggest trends to occur in recent years has been a rush to invest in dividend-paying stocks. The heightened...
Anomalies Can Mean Alpha
Since the development of the capital asset pricing model (CAPM) about 50 years ago, academic researchers have documented several hundred “anomalies” that generate a significant positive alpha. There are now so many that professor John Cochrane referred to them as...
Scale Works Against Active Skill
An overwhelming body of evidence clearly demonstrates that past performance isn’t prologue, which presents a problem for investors who believe active management is the winning strategy. Without the ability to rely on past performance as a predictor, there is really...
Diversify Globally To Limit Risk
Diversification is often referred to as the only “free lunch” in investing because, when done properly, it allows investors to improve risk-adjusted returns. This principle applies not just to diversification across U.S. stocks, but to investing globally. The choice to...
Active Arguments Disproved
A reader asked me to comment on a recent Forbes article titled “Active Versus Passive Management: Which Is Better?” The author, contributor Peter Andersen, asks this question while observing that, in 2014, the vast majority of active fund managers underperformed...
Credit Risk Isn’t Worth It
rom 1926 through 2014, the default premium (the annual return on long-term, investment-grade corporate bonds minus the annual return on long-term Treasurys) has been just 0.22 percent. Such a small premium has led many observers, including me, to conclude that...
Value Investing Facts And Fiction
Value is the phenomenon in which securities that sell at low prices relative to fundamental metrics (such as earnings, book value, cash flow, dividends and sales) on average outperform securities that sell at high relative prices. Specifically, the value premium...
More Value Facts And Fiction
Earlier this week, we began discussing some of the more pervasive and enduring facts and fictions surrounding the value premium. But it’s important to understand that the value premium—a phenomenon in which securities that sell at low prices relative to...
