Yesterday, we discussed the history and overview of the efficient market hypothesis. Today we’ll look at some of the evidence on the efforts of mutual funds and pension plans to generate alpha. Mutual Funds Each year, Standard & Poor’s publishes its Indices Versus Active Funds Scorecard, more commonly referred to as SPIVA, presenting the evidence on the…
Today begins a four-part series on the efficient market hypothesis. We’ll begin with a brief history and explanation of the EMH. Eugene Fama, recent recipient of the Nobel Prize in economics, is considered the father of the efficient-market hypothesis (EMH). The EMH asserts that financial markets are “informationally efficient.” As a consequence, we would expect…
Modern financial theory now includes the existence of many anomalies that shouldn’t exist if investors were perfectly rational and markets were perfectly efficient. Perhaps the most important anomaly is the persistent and pervasive momentum premium. Among the others are the low-volatility anomaly (low-volatility stocks have outperformed high-volatility stocks) and the poor performance of extreme small…
Today concludes our two-part series on the research aimed to provide explanations for risk. We’ll pick up with more research on the topic. We looked at three different papers in Part I as we sought to assess the value premium through the lens of risk, and today we turn to a fourth paper: The 2005 study “Understanding…
It is absolutely possible to beat the market, just as I’m sure it’s possible that someone could climb Mt. Everest in a pair of roller skates. It is so improbable, however, that it’s rendered a fruitless, if not counterproductive, pursuit. After 16 years in the financial industry and seeing countless great investors eventually humbled by market…
When we think of financial planning, we naturally focus on the future. We start by getting really clear about where we are today, then we spend time thinking about where we want to be 10, 20 or even 30 years from now. Part of the process includes deciding how much we’ll want to spend, when…
by Stephen High As the saying goes, the worst lies are the ones we tell ourselves. It’s not that we intend to deceive ourselves. Sometimes, we can have an unhealthy perception of reality, especially when it comes to planning for retirement. Perhaps it’s because planning for retirement involves risks, and risks entail uncertainty. Uncertainty often…
2013 was another great year for the global hedge fund industry. Net inflows were almost $64 billion and total assets reaching $2.63 trillion. Unfortunately, investors in hedge funds haven’t fared as well as the purveyors. Thus, we have one of the more puzzling anomalies in finance — the continued growth of an industry that for…
Now that we’ve got one quarter of 2014 behind us, it’s time to review how some financial pundits’ “sure thing” predictions for this year are turning out. Keep in mind that if they were “sure things,” they should all (or at least most) be coming true. We’ll give a score of +1 for a forecast that’s coming…
The recent appearance of Michael Lewis, author of Flash Boys: A Wall Street Revolt, on 60 Minutes, created quite a stir about the impact of high-frequency traders (HFTs), claiming the game was, and has been, rigged, with the victims being all investors. High-frequency trading is a set of computerized trading strategies characterized by extremely short position-holding periods….
Summary Ideally, to eliminate style drift investors should rebalance daily. However, because the real world involves costs, investors should reduce, not eliminate, style drift to an acceptable level. Investors should rebalance wherever there is sufficient cash to make the effort worthwhile, thus eliminating any tax issues and either eliminating or minimizing trading costs. An investor’s…
From 2000 through 2010, the MSCI Emerging Markets returned 10.9 percent a year, outperforming the S&P 500 by 10.5 percent a year. In typical fashion, investors flocked to emerging market funds. Since then, returns have been poor, providing negative returns in both 2011 and 2013 (as well as in the first two months of this…
Summary Investors often don’t properly diversify because they think international investing is risky. U.S. equities are mistakenly assumed to be the “safest.” Even if the U.S. is the safest, that does not mean investors should have all their eggs in one basket. Financial economists recommend that investors add international assets to their portfolios, because they…
William Sharpe and John Lintner are typically given most of the credit for introducing the first formal asset pricing model, the capital asset pricing model (CAPM). CAPM provided the first precise definition of risk and how it drives expected returns. The CAPM looks at returns through a “one-factor” lens, meaning the risk and return of…
My last post showed that the quality (or profitability) premium provided valuable insights into not only U.S. stock returns, but international developed markets as well. Today I’ll look at the question of whether this quality factor applies to emerging markets. The simple answer is yes. To review, the profitability/quality factor tells us that more profitable firms outperform…
