I was asked recently about a situation in which an investor had to sell stocks from his taxable account in order to meet a cash flow need; in this case, a down payment on a home. He pointed out the “good news” half of his situation. Because the present value of the equities was well…
The existence of a value premium—the difference in returns between high book-to-market stocks and low book-to-market stocks—has been well-documented. However, there’s a major controversy as to its source. Some believe it can be explained by risk—that value stocks are the stocks of riskier companies. On the other hand, behavioralists believe the premium results from pricing…
The historical evidence shows us that, in the long run, a thoughtfully designed, diversified portfolio of passively managed funds typically beats the performance of all but a few active managers. And while it’s simple to structure such a portfolio, it’s not easy to maintain. All too often, emotions—such as greed or envy in bull markets,…
Despite the publicity surrounding the long-term investment performance of certain endowment funds, such as those belonging to Yale and Harvard, little has been known about the overall performance of university endowments until recently. We are learning more these days, thanks to some solid research, including from Vanguard Group, and it’s not terribly encouraging. Discouraging takeaways…
The superior performance of low-volatility stocks was initially documented in the literature back during the 1970s, by Fischer Black, among others. That’s even before the size and value premiums were officially “discovered.” And since its existence became known, two main explanations for the low-volatility phenomenon have arisen. They are that: Many investors are either constrained…
Building upon the work of Harry Markowitz, the trio of John Lintner, William Sharpe and Jack Treynor are generally given most of the credit for introducing the first formal asset pricing model, the capital asset pricing model (CAPM). It was developed in the early 1960s. The CAPM provided the first precise definition of risk and…
Educational institutions hold billions of dollars in endowment funds. As of June 2013, the most recent data available, the five largest educational endowments (Harvard University, Yale University, The University of Texas system, Stanford University and Princeton University) collectively managed nearly $110.5 billion. All educational endowments managed in excess of $448 billion. While they are often…
A recent CNBC poll asked, “Which asset are you buying as a hedge against inflation?” The three choices offered were equities, precious metals or alternative assets. My colleague and co-author, Kevin Grogan, found it interesting that the poll provided takers only three choices, none of which is among the best available hedges of inflation. We’ll…
Baseball’s “modern era” began in 1903. Prior to that time, foul balls that weren’t caught weren’t considered strikes, giving hitters a major advantage. From 1903 through 1941, seven different players achieved a batting average of over .400 a total of 12 times—Ty Cobb and Rogers Hornsby each did it three times, and George Sisler did…
Since the 1992 publication of “The Cross-Section of Expected Stock Returns” by Eugene Fama and Ken French, the size factor has been among those used in asset pricing models that attempt to explain the differences in returns of diversified portfolios. While Fama and French limited their model to three factors (beta, size and value), asset…
In my 20 years’ experience as a financial advisor, I’ve learned that even if there were such a thing as the “perfect portfolio,” choosing the asset allocation that’s most likely to allow you to adhere to your financial plan is even more important than the allocation itself. Because adhering to your plan should give you…
The carry-trade strategy involves borrowing (going short on) a currency with a relatively low interest rate and using the proceeds to purchase (going long on) a currency yielding a higher interest rate, capturing the interest differential. The strategy can be “enhanced” though the use of leverage. The success of this strategy has led to its…
Gold has long been used as a store of value, as a unit of exchange and to make jewelry. More recently, due to the popular view that it’s a safe haven in times of economic trouble, gold has come to be thought of as an investment asset with a potential role in the asset-allocation decision,…
The private equity industry has changed substantially since the “Prudent Man” rule was modified in 1978 to give institutional investors the ability to allocate part of their portfolios to alternative assets. The industry has grown tremendously over the past 30 years, thanks largely to high returns on early investments. Total fundraising by buyout and venture…
Historically, value stocks have outperformed growth stocks. The evidence is persistent and pervasive, both around the globe and across asset classes. While there’s no debate about the premium, there are two competing theories to explain its existence. The Classic Theory The theory from classical financial economics is that value stocks are the equities of riskier…
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