Welcome to a year-end installment of Reproducible Finance with R, a series posts that will be a little bit different from the norm on Alpha Architect (see here for my last post). We will search for and hopefully unearth some interesting market conditions, but we’ll primarily focus on the code that

One of the foundation concepts of the Alpha Architect investment philosophy is the utilization of Enterprise Multiples in the value discovery process. Enterprise multiples are often referred to as the “business buyer metric” and are a key valuation tool used by investment bankers and business

Funds flows are frequently analyzed by investors to gauge the demand for investment strategies, but it represents a challenging exercise. Key issues are data availability as few market participants disclose their holdings as well as reporting frequency as limited data is published in real-time. The

The American Finance Association Annual Meetings have now come and gone (here is information on the broader conference). The conference was in sunny San Diego this year and I’m told it did not disappoint! 1 This 3-day conference collects the brightest minds in academia to discuss hundreds of new

We have done a fair amount on the investment merits of ESG investing, but the question of how ESG affects the fundamental performance of a firm (in a causal fashion) is addressed in this study. For example, this paper askes questions such as, “Are high ESG scoring firms more adept at managing

One of the interesting puzzles in finance is that stocks with greater idiosyncratic volatility (IVOL) have produced lower returns (see an earlier post here). This is an anomaly because idiosyncratic volatility is viewed as a risk factor—greater volatility should be rewarded with higher, not lower,

Shiller’s CAPE ratio is a popular and useful metric for measuring whether stock prices are overvalued or undervalued relative to earnings. Recently, Vanguard analysts Haifeng Wang, Harshdeep Singh Ahluwalia, Roger A. Aliaga-Díaz, and Joseph H. Davis have written a very interesting paper on

Variance and covariance are widely accepted risk measures for liquid assets that trade in public markets. Illiquid assets are not part of this framework because of their lack of regular price quotes and thus time variance. Due to the difficulty in using standard risk measures to assess non-traded

In an influential piece, Sharpe (1991) 1 put forward the proposition that active investing must be a losing pursuit in aggregate, as it amounts to a zero-sum game in gross terms and hence must be a negative-sum game after costs. I take a critical look at the underlying concepts and assumptions

We’ve taken a lot of time reviewing multi-factor allocation techniques within the equity portion of a portfolio here and here. But thus far we have only written on the concept of utilizing a multi-factor investment technique in contrast with traditional asset allocation here. In this post, we are

Klaus Grobys contributes to the literature on asset pricing models with his October 2019 paper, “Another Look on Choosing Factors: The International Evidence.” Using bootstrap simulations, Grobys examined international markets, specifically the four regions of North America (NA), Europe, Japan

Transaction costs are a major concern for practitioners attempting to implement factors investing strategies identified in academic literature. Naturally, this is a subject that has been covered before here, here, and here, but a new look at transaction costs never hurts. The authors of this paper

In Part 1 of this article, we reviewed the performance of using a more complex form of simple trend following (i.e. adding a channel breakout rule alongside a simple time-series momentum rule). The simple trend signal (S) used was based on the sign of the trailing 12-month return of the asset. The

This is our third post in our series on “net-nets” having previously analyzed “Benjamin Graham’s Net Current Asset Values: A Performance Update” by Henry R. Oppenheimer and “Graham’s Net-Nets: Outdated or Outstanding?” by James Montier. The focus of this post is the research paper

A large body of evidence demonstrates that investment strategies focused on buying stocks that are cheap relative to measures of fundamental value have achieved higher long-term returns than the broad market. Motivated by such legendary investors as Benjamin Graham, David Dodd, and Walter Schloss,

We’ve done a poor job hiding our interest in Trend Following (see Trend, Trend, Trend, is your friend. And swing over to Corey Hoffstein’s site for even more!). So this paper hits on a subject we know and love. The authors of this study (part 1) have one basic objective: determine if the

A large body of research demonstrates that “familiarity breeds investment.” For example, a study by Gur Huberman found that shortly after AT&T was broken up and shareholders were given shares in each of what were called the Baby Bells, the residents of each region held a disproportionate

Since the global financial crisis, the financial press has periodically asserted that the Federal Reserve’s actions were the driving force behind rising stock prices. This study investigates this assertion by asking the following research question: Is there a relationship between stock prices and

The standard academic approach to factor analysis is through the lens of long-short portfolios (which often confuses practitioners!). For example, a researcher may take the universe of the largest 1,000 stocks and sort them on “value”, as measured via book-to-market. The “value factor”

The use of valuation multiples in selecting equity securities is well established in the literature, and we’ve covered the research on enterprise multiples here (here is a recent JPM on the topic). However, there are relevant questions as to the effectiveness of multiples when applied to national

There is a substantial body of evidence linking various accounting ratios to expected stock returns. One explanation of the links is that they could be explained by the accounting ratios being associated with systematic sources of risk. Alternatively, they could be associated with mispricing that

Recently I was invited to talk with Stig and Preston on The Investor’s Podcast. I thank them for the opportunity and enjoyed the conversation! Below are some of the topics we discussed: What is factor investing? Which factors have historically performed the best? Should one use a single factor or

Over the past decade academics and practitioners alike have argued that multi-factor portfolios offer significant benefits to investors looking for enhanced and more diversified solutions. Among the papers making this argument is “The Death of Diversification is Greatly Exaggerated”, co-authored

It is well documented in the literature that over the long term, low-investment firms have outperformed high-investment firms.(1) This finding has led to the investment factor (CMA, or conservative minus aggressive) being incorporated into the leading asset pricing models—the four-factor Q model

A new DFA article by Rizova and Saito (2019, “Investment and Expected Stock Returns”) (1) rehashes previous arguments in Fama and French (2006, 2015) on the investment factor. The core arguments are as follows: Valuation theory predicts that expected investment is negatively correlated with

Recent studies of startup activity in the U.S. find that only roughly 10–15% of startups are founded by women. There are a number of potential explanations including gender differences in technical training or risk preferences. However, many have also speculated that part of the gender gap may, in

Anomalies such as Value and Momentum have been exploited for years, yet the source of these premiums emerged as a major unresolved puzzle. Potential explanations can be grouped into two broad categories: “compensation for risk” or “mispricing”. This paper studies this puzzle by investigating

The size premium is one of the factors that we have researched and dug into several times on the blog. You can find just a few here, here, and here. This paper though took a fresh look at the size premium and adds a new perspective that we haven’t previously covered. What are the research

Researchers love novel datasets–it gives them a new set of information to conduct studies and test theories. That brings us to this paper, titled “Core Earnings: New Data and Evidence” by Ethan Rouen, Eric So, and Charles C.Y. Wang. The paper uses a novel database created by our friends at

Many famous investors are outspoken about their investment philosophies, and carefully apply them to a select number of securities. Who among us hasn’t thought if they could at least capture some of the talents of our favorite investors in a bottle, we too could be super investors? Turns out you

While the quality factor has been identified in the literature (including papers such as “Buffett’s Alpha,” “Global Return Premiums on Earnings Quality, Value, and Size,” and “The Excess Returns of ‘Quality’ Stocks: A Behavioral Anomaly”), and there are now a number of investment

The crowning achievement for investors is the ability to identify which of the few active mutual funds will outperform in the future. Despite an overwhelming body of academic research which has demonstrated that past performance doesn’t guarantee future performance and (as the annual SPIVA

What is a crowded trade? What is asset centrality? Does asset centrality predict bubbles? Can it be exploited? What are the Academic Insights? In the normal course of events, investors perceive and act upon changes in fundamentals that will persist indefinitely (or until the next change in

Research into the momentum factor continues to demonstrate its persistence and pervasiveness, including across factors. Recent papers have focused on trying to identify ways to improve the explanatory power and performance of momentum strategies. Prior research on Momentum The study “Momentum Has

In an earlier post we analyzed the prominent and often-cited study on “net-nets” conducted by Henry R. Oppenheimer from the Financial Analysts Journal (1986). In this post, we analyze the article “Graham’s Net-Nets: Outdated or Outstanding?” by James Montier. The objective of the article

Asset allocation is a very important decision for investors. Model portfolios are constructed with an optimized asset allocation process to help meet investor needs and preferences. The authors investigate the following research question: How does one construct a model portfolio? What are the

It’s not a perfect world out there and often times alternative funds are mischaracterized, misused, and not put through a rigorous enough portfolio construction process. It’s my hope that I can forewarn you of the proverbial landmines and better prepare you to invest (or not invest) in the

Some background on Bond duration: Duration measures bond’s price sensitivity to interest rates changes. It’s estimated based on the discounted expectations of the bond future cash flows and expressed in the number of years. The longer the duration, the higher the bond interest rate risk. (read

The authors do a very nice survey on measures of quality found in the academic literature and in commercially available quality indexes. They examine seven quality categories including: profitability, earnings stability, capital structure, growth, accounting quality, payout/dilution and investment.

In my June 4, 2019 article “The Re-Death of Value, or Déjà Vu All Over?” I noted that one possible explanation for at least part of the poor performance of value stocks over the past decade has been the sharp fall in both the real interest rate (due to weak global growth) and unexpected

One dirty little secret that has been hiding behind the curtains of finance for a long time, is that high-risk stocks do not have higher returns than low-risk stocks. Back in 1975 Haugen and Heins first recognized the low-risk anomaly: Our emperical efforts do not support the conventional hypothesis

There is a substantial debate on the topic of factor investing and whether or not the “backtested” excess returns are actually achievable in practice. Much of the research on the topic suggests that practitioners in the field are unable to capture any of the so-called “factor premiums”. For

It’s no secret that value has had a bad bout of performance in recent memory. This underperformance has been thoroughly examined by multiple research teams and we’ve done some of our own work on the subject. We’ve also done in-depth rebuttals to “value investing is dead” articles in the

Value and Momentum each had back to back extreme returns (five sigma) days on Monday, September 9th and Tuesday, September 10th. The Dow Jones Thematic Market Neutral Value Index (“Value”) started the week up 3.45%, its best day since inception on December 31st, 2001. The Value Index followed

Action Item: Please let us know your trip details so we can support you as much as possible. We are a little over 3 weeks away from March for the Fallen (#MFTF). NOTE: There is a monster training event occurring simultaneously to MFTF this year so be prepared to dodge humvees and watch out for stray

The study examined the performance of securities that were trading at no more than two-thirds of its Net Current Asset Value (“NAV”) during the 1970-82 period in the US Net nets, on a gross basis, more than tripled the returns of the market (as measured by the S&P 500 TR) Net nets, on a net

This is part 2 (part one is here) of an excellent article that examines the feasibility and effectiveness of protecting equity portfolios using traditional passive means and more contemporary active strategies. It is jam-packed with information and analysis that is best consumed in two parts;

One of the big problems for the first formal asset pricing model developed by financial economists, the CAPM, was that it predicts a positive relation between risk and return. But empirical studies have found the actual relation to be flat, or even negative. Over the last 50 years, the most

With a growing availability of filtered (news) and unfiltered (social media) information, the author investigates the following question: Do news or social media contain any information that is of relevance for investment decision making and if so are the two sources are complementary or

This is a unique article in that it directly assesses the feasibility and effectiveness of protecting equity portfolios using traditional passive means and more contemporary active strategies. It is jam-packed with information and analysis that is best consumed in two parts; however, a good summary