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Why You Should Not Bet On (High) Beta

by: Lawrence Hamtil  on Thursday, August 09, 2018

One of the more fascinating theories in behavioral finance is the "theory of leverage aversion," which, simply put, is the notion that investors who cannot or do not wish to add leverage to their portfolios (in order to magnify returns) instead do the next best thing, which is to load up on stocks with high beta.  In rough terms, a high beta stock is one with higher-than-average volatility than the overall stock market, but also therefore a higher chance of outperforming the market by delivering outsized returns, something researchers have come to call "lottery stocks."   Read More

A Min Vol - Momentum Barbell for Overseas Markets

by: Lawrence Hamtil  on Monday, August 06, 2018

A few months ago, I wrote about the compelling case for pairing minimum volatility with momentum strategies in a "barbell" approach.  The idea, in a nutshell, was to create a 50-50 portfolio of Minimum Volatility & Momentum (rebalanced annually).  This balancing of two extremes would help limit the extremes experienced by each factor portfolio during certain cycles (think the tech bubble and its aftermath for momentum), making the ride much smoother for investors by reducing long periods of underperformance.   Read More

Signals of Warning vs Signals of Opportunity

by: Lawrence Hamtil  on Tuesday, July 31, 2018

As Sam Lee has written, valuation in isolation can be a poor tool for making portfolio allocation decisions.  However, when paired with a less quantifiable - though no less real - measure such as investor sentiment, valuation-based timing can be powerful.  Consider the cases of two industries, which began the current millennium in utterly different circumstances:  telecommunications, which in March of 2000 was at its apex in terms of share of stock market capitalization and investor appetite, and tobacco, which was widely shunned by the investment community, the result of government lawsuits against the industry. Read More

Additional Perspective On Value vs Growth

by: Lawrence Hamtil  on Friday, July 27, 2018

Last year, I discussed why I thought the narrative about value lagging growth was overdone, if not misguided.  As a follow-up to that post, I wanted to provide some additional data, which I believe lend perspective to this discussion.   Read More

S&P 500: Why Sector Divergences from the Index Should Not Concern You

by: Lawrence Hamtil  on Tuesday, July 24, 2018

Recently, I have seen a few analysts raise concern over how narrow the S&P 500's performance has been when considering sector participation in the year's advance.  While it is true that as of the end of June only five S&P 500 sectors have so far registered positive total returns for 2018, - tech, consumer discretionary, energy, healthcare, and utilities, - it is also true that this is more noise than signal. Read More

Exploring Why P/E 10 Works Better In Some Markets Than Others

by: Lawrence Hamtil  on Monday, July 16, 2018

It is well-documented that starting valuations have been found to be highly predictive of subsequent returns, not just in the United States, but in many other equity markets around the world.  One of the more popular valuation metrics for evaluating prospective returns in a given market is the 'cyclically-adjusted price-to-earnings' ratio, or 'CAPE,' developed by Professor Robert Shiller of Yale University.  Essentially, Professor Shiller's model adjusts earnings for inflation, and smooths out the noise in the earnings data by stretching it out over ten full years.   Read More

A Cautionary Tale for Index-only Investors

by: Lawrence Hamtil  on Monday, July 09, 2018

Based on fund flows, indexing is the undisputed investment style of choice these days, and it has much to commend it.  Yet, as I have written before, it is not without its flaws, not least of which is its tendency to have at times heavy concentrations in hot companies and sectors that have recently performed very well.  Given that there are now faint echoes of 1999-2000 in today's S&P 500 index (a good-sized weighting in tech stocks not least among them), I thought it would be worthwhile to revisit here Howard Mark's April 2001 memo, in which he offers a post mortem of the last stages of the tech bubble and its subsequent popping, a comparison that I think yields useful lessons for today's investors.  Marks writes: Read More

The Skew and Equal-Weighting

by: Lawrence Hamtil  on Friday, June 22, 2018

Indexing advocates like to point to the historical skewness of stock returns as evidence that indexing by market valuation is the surest way to capture what rewards the stock market offers.  The logic of this popular argument seems sound:  history shows that only a handful of stocks are responsible for the market's aggregated gains over its history, and attempts by active management to beat the market are usually done so with concentrated portfolios, which inevitably underperform because active managers fail to identify, let alone capture, those few stocks that generate outsized gains. Read More

Relative Valuation Update - US vs EM, Europe, and Foreign Developed

by: Lawrence Hamtil  on Wednesday, June 13, 2018

Last fall, I detailed the correct way to frame relative valuations when comparing aggregated stock indices such as the MSCI USA Index and the MSCI ACWI ex-USA Index.  That post is very detailed, covering even the crucial currency aspect of relative performance between two foreign equity markets, and so it is worth reading in its entirety if you have not done so previously.   Read More