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The Impact of Cycles on Equal-Weighted and Market-Weighted Portfolios

by: Lawrence Hamtil  on Tuesday, June 27, 2017

It is fairly common knowledge in financial circles that equal-weighted portfolios tend to outperform portfolios weighted by market capitalization, whether the portfolio is composed of U.S. stocks, foreign stocks, or emerging market stocks.  As Tobias Carlisle has written (citing research by Joel Greenblatt), equal-weighted portfolios tend to outperform market-cap weighted portfolios because they avoid the main flaws of market-weighted portfolios, which are generally buying more of the same stocks as they become ever more expensive (thus leaving less exposure to cheaper stocks), and having greater exposure to hot sectors during bubble-type periods, such as the tech boom of the 1990s.  Furthermore, equal-weighted portfolios tend to have far more exposure to smaller companies which, as they grow, are more likely to outperform larger companies, which may have more limited growth opportunities. Read More

The Asian Financial Crisis 20 Years Later

by: Lawrence Hamtil  on Wednesday, June 21, 2017

Next month marks the beginning of the 1997 Asian financial crisis, which saw the equity markets of several nations plunge more than eighty percent in less than two years, a drawdown the severity of which American investors have not experienced since the Great Depression.  The point of this post is not to articulate the history and causes of the Asian crisis, - there are many detailed resources available for that, - but rather to illustrate that even modern markets can be subject to near total wealth destruction in less time than many of us can even imagine. Read More

Lessons From the Last Bear Market

by: Lawrence Hamtil  on Tuesday, June 20, 2017

It is strange to contemplate, but we are now just a few months removed from the tenth anniversary of the previous market top of October 9th, 2007.  Over the next year and a half, the ensuing bear market would go on to erase almost 60% of the S&P 500's peak value, shaking the confidence of many investors in the efficacy of equity investing, something which previously had been considered unthinkable. Read More

The Market Is Not As Top-Heavy As It May Seem

by: Lawrence Hamtil  on Wednesday, June 14, 2017

In "Relative Equity Valuations, Diversification, and Creative Destruction," I argued that one of the main attributes of the U.S. equity market, -  one that warrants it a premium to other global markets, - is its dynamism, which almost ensures that the leadership of the market, whether by sector, industry, or company, is constantly changing.  The practical effect of this is that investors in U.S. equities, unlike most of their foreign counterparts, are not relying on the same handful of companies that have dominated other markets for years, if not generations.  An additional result of this innate market dynamism is that the ability of only a few giant companies to dominate the market is checked by the creative destruction that serves as a kind of automatic rebalancing mechanism for the market. Read More

The U.S., Europe, and the Growth - Value Divergence

by: Lawrence Hamtil  on Tuesday, June 06, 2017

I have written a few times why comparing valuation metrics for the U.S. equity market and most others around the world is a futile exercise, mainly because the U.S. market is significantly different in terms of its sector composition, and furthermore because global sector compositions are vastly different by region and industry.   Read More

Value Is Still A Winning Strategy

by: Lawrence Hamtil  on Sunday, June 04, 2017

Going back to December of 1974, value stocks have outperformed growth stocks by an average of more than 200 basis points per year.*  Yet over the last ten years, growth stocks have outpaced value stocks in every major segment of the global market: Read More

Cycles, Sectors, and The Perils of Aggregated Data

by: Lawrence Hamtil  on Wednesday, May 24, 2017

The 20th century ended with a bang with U.S. equities peaking on March 24th, 2000 with the apex of the tech bubble.  Only in the last few years have major market averages such as the Dow Jones Industrial Average and the S&P 500 index significantly surpassed the levels initially reached then.  What is more, the real trade-weighted dollar index has more or less completed a cycle of its own, ending last year little changed from where it was in the spring of 2000: Read More

What Will It Take For Europe To Outperform?

by: Lawrence Hamtil  on Friday, May 19, 2017

Going back to December of 1970 (the earliest for which I can find data), the Wilshire 5000 total return index has posted 10.65% annualized returns (through April of this year), versus 10.4% for the MSCI Europe total return index.  Given the fairly similar annual performances of the indices, one would be tempted to think that they have tracked relatively similar paths along the way to achieving those returns.   Read More

When It Comes to Foreign, There's No Reason To Own Everything

by: Lawrence Hamtil  on Tuesday, May 16, 2017

The trend toward "passive" investing - by which I mean investing in low-cost index-type funds that own broad swathes of the investable marketplace - is certainly a phenomenon that has many more years to play out.  Investors, frustrated with the high costs of actively managed funds, have shifted billions of dollars in assets from active funds to passive funds, and they have done so somewhat indiscriminately.   Read More

The Role of Luck In Investment Success Is Overrated

by: Lawrence Hamtil  on Sunday, May 14, 2017

Of Dollars and Data shared an interesting post titled, "Bad Investment Results?  Your Birth Year May Be to Blame:  How Luck Influences Investment Success and What To Do About It."  As the title implies, the post largely explains how being born at different periods throughout history would likely have played a role in how one's investments turned out, at least over subsequent decades.  This is an important consideration as the benefit of good fortune cannot be discounted.  In fact, more important than the year in which you were born is the country of your birth.  Given that the United States is an anomaly when it comes to stock market success, an American investor holds a sizable natural advantage to one born into less successful markets such as Austria or Italy.  Read More