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Complexity Is the Investing Devil

Date30 May 2016

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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 result, assessing the risks involved with owning these investments can be challenging. They also generate...

Solving The Volatility Puzzle

Date30 May 2016

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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, returns. Robert Stambaugh, Jianfeng Yu and Yu Yuan, authors of the study “Arbitrage Asymmetry and...

Honing In On Value

Date30 May 2016

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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 performance of the value premium. The factors in their model include analysts’ long-term earnings growth...

Overconfident Enemy In Mirror

Date30 May 2016

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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 in the mirror. And there’s plenty of academic research to support that view. Much of...

Three Ways to Think About ‘Is It Worth It?’

Date30 May 2016

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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 a different question. Will I eat the bologna or prosciutto? Drink tap water or bottled?...

CAPE 10 Ratio In Need Of Context

Date30 May 2016

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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 or overvalued. Employing a 10-year average for earnings, instead of the most current 12-month earnings,...

The Three Biggest Investing Anomalies

Date30 May 2016

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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 generation, or ever.” Given his cult-like status, you’d think investors would hang on his every...

Choose Experiences Over Stuff, and Maybe Over Security Too

Date30 May 2016

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You’ve heard of the American dream, right? The American dream was this machine we built to get rid of uncertainty and create security. It’s the white picket fence, the job and the minivan. You watch Dan Rather and a sitcom. You go to bed, go to sleep and repeat. It may not be that exciting,...

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