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Innovation, Disruption, and the Illusion of Value

by: Lawrence Hamtil  on Friday, August 18, 2017

Ten years ago, investors interested in the rapidly growing mobile device market were presented with two options, "Company A," which was the dominant player in terms of market share, and "Company B," which was a known player in the technology sector, but a newcomer to the mobile phone industry.  For value investors, the choice seemed to be clear as Company A traded at a steep discount to Company B no matter what valuation metric was used: Read More

The Real Benefit of Low Vol Strategies

by: Lawrence Hamtil  on Wednesday, August 09, 2017

In recent years, much has been written about the rising popularity (as measured by fund flows) of low-volatility portfolios with investors.  All sorts of explanations have been offered for this phenomenon, almost all of them specious.  For example, a popular theory holds that investors are now using low-volatility equity portfolios as 'bond replacements,' given anemic yields on traditional fixed-income.  More reasonably, another theory simply states that investors are engaging in performance-chasing, as returns on historically less volatile sectors such as utilities and consumer staples have been quite healthy over the last few years.  Whatever the explanation for the inflows, one recurring caveat issued by commentators has been that investors in low-volatility funds are trying to have the reward of the stock market without the risks that investing in equities entails as surely at some point volatility would reach even these quiet sectors of the market. Read More

Imagining the Next Bear Market (with Examples from the Last Two)

by: Lawrence Hamtil  on Monday, July 31, 2017

In the midst of a prolonged bull market, investors have been waiting for a long time for the bear market's return.  While it is certain that the bull market will end at some point, it is obviously unclear what shape the bear market will take.   As I have written before, each bear market is unique in its own way, with some being very protracted inflationary or deflationary cycles, such as the 1970s or 1930s, and some being quick and relatively short-lived, such as the crash of 1987.   Read More

What You Probably Believe About the Bull Market Is Wrong

by: Lawrence Hamtil  on Thursday, July 27, 2017

In early 2009, when the bull market began, a fair amount of financial commentators referred to the new upswing as a "bear market rally," meaning they considered it to be a minor counter-trend move, which would eventually give way to the broader trend, which of course was downward.  Obviously, the bull market has persisted, and is now one of the longest on record. This persistence, along with a steady expansion of multiples to levels previously associated with "bubble" territory, have contributed to a kind of cottage industry that has churned out myth after myth about the bull market, not least in regard to the sources of its energies, and the robustness of its duration. Read More

Examining the 2017 Surge in EM Equities

by: Lawrence Hamtil  on Friday, July 21, 2017

2017 has started off as a good year for equities around the world, with all major regions of the world rallying.  As measured by MSCI, the U.S. equity market has returned about 9.5% through June, while the non-U.S. developed market index, the "EAFE," has returned more than 14%.  However, emerging markets have been 2017's clear winner so far, with the MSCI EM index delivering returns approaching 19%.   Read More

Developed Market Scorecard

by: Lawrence Hamtil  on Monday, July 03, 2017

Credit Suisse's Global Investment Returns Yearbook is always fun to read, not least because it is always full of fascinating financial history for the various developed markets with lengthy track records.  While I am not attempting here to offer a competing analysis to their wonderful product, I do think it would be interesting to look at the major developed markets with only more recent data (MSCI's in this case), and to add one or two twists to the data for a slightly different perspective. Read More

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