In some ways, investing is simple. After all, we all want the same things. High returns. Low volatility. Small max drawdowns. Unfortunately, it’s very difficult–if not impossible–to have your cake and eat it too. There are always tradeoffs among these desires that have to be managed by

My last post, “Will bonds deliver crisis alpha in the next crisis?,” created quite a stir on the blogosphere. The underlying assumption of the analysis is that stocks are a core component of a portfolio and bonds are included to diversify the portfolio. The key takeaway from my analysis is that

How do you handle repetitive tasks? If you’re like most people, you work through a task in a variety of ways, find the most efficient approach, and then stick to that workflow. Consider email address autofill, automatic payment plans, or automatic renewal of magazine subscriptions. Because of

Bonds are often viewed as being great diversifiers due to the perception that they perform well during tough times for stocks. Historically this has been a true statement. But will it continue? Our answer: unclear. Most investors use correlation to measure the diversification benefit an investment

We just wrote a piece for Forbes on financial bubbles in the lab. Punchline: investors initially underreact to fundamentals, then they overreact, and eventually prices correct. But how common are crashes? Ben has some interesting thoughts, but the results are limited to the US market. Now, one of my

Harry Houdini is perhaps the best-known magician of all time, gaining notoriety in the early 20th century through his daring escape acts. Houdini escaped from straight jackets while suspended from chains, fought his way out of submerged mailbags, and performed a “buried alive” stunt. Crowds

At this point, even hard core efficient market fans will likely admit that behavior can influence investment decisions. Humans aren’t robots. However, just because some investors exhibit bad behavior that doesn’t mean they can influence prices. As the story goes, smart investors are prepared to

We’ve discussed return seasonalities in the past, especially as they pertain to our approach to momentum. Turns out seasonality effects aren’t confined to momentum — they are literally everywhere and they are incredibly strong. This paper will blow your mind once you let the results settle in

Low volatility funds are everywhere. The reasons for their proliferation are clear: Who wouldn’t want to own something with the label “low volatility” and Recent performance has been great. Open the AUM floodgates! But perhaps not all is well in low volatility land. A recent snippet by Josh

Value investing is an investment philosophy that has been extensively discussed and examined at least since the days of Ben Graham, who popularized it as a discipline in the 20s and 30s. While there are some who are dismissive of its advantages as a long-term strategy, the historical evidence is

We investigate the biases in the backtested performance of “alternative beta” strategies using a sample of 215 commercially promoted trading strategies across five asset classes. Our results lend support to the cautions in recent literature regarding backtest overfitting and lack of robustness

What does it mean to be the “best” research? For me, this means the most influential in changing my view on the world. So the below list of “best” research represents the research that 1) changed my view of the world 2) helped sharpen my thinking. For context, I’ve been reading source

Investors love to chase after the “next big thing,” as investment strategies and styles come in and go out of vogue. The latest object of investor infatuation may be a revitalized interest in merger arbitrage. Consider this bloomberg headline: “Hedge Fund Investors Have Fallen in Love with

This paper documents a new empirical fact. Long-short anomaly returns are strongly related to the day of the week. Anomalies for which the speculative leg is the short (long) leg experience the highest (lowest) strategy returns on Monday. The exact opposite pattern is observed on Fridays. The

Some weekend reading for trend-followers who want to question their beliefs. Valeriy Zakamulin is an animal when it comes to generating research on moving averages. We’ve done a lot of the same work, but we’re too lazy to tabulate the results in an academic paper format. king of ma The king of

Twitter seems to be a favorite dataset for financial researchers. Researchers keep trying to map tweets to profits. For example, we covered an idea related to this almost 5 years ago: Is trading with twitter only for twits? We had another post that was released about a year after our original

Large institutional investors have had access to low-cost "smart beta" for many years. But for retail investors and their financial advisors, "smart beta" ETFs are a welcome innovation. Instead of trying to identify an expensive manager who can pick stocks, a retail investor can

Jack and I published, “Analyzing Valuation Measures: A Performance Horse-Race Over the Past 40 Years,” in the 2012 Journal of Portfolio Management. horse race Here is a summary of the research paper on our own blog. The paper asked a simple question: “Which valuation metric has historically

Obsession with short-term performance against market cap benchmarks preordains the dysfunctionality of asset markets. The problems start when trustees hire fund managers to outperform benchmark indexes subject to limits on annual divergence… Benchmarking causes, first, the inversion of the

In the past we have discussed how to combine value and momentum strategies to improve an equity allocation. In this piece we discuss why an investor should combine use value and momentum.* Many investors recognize that stand-alone value and momentum strategies have historically worked. Of course,

Last year we highlighted what we deemed the “value investing pain train.” In 2015, cheap high-quality stocks started getting crushed by expensive junk stocks. Here is a recap of the carnage. In many respects, value investing is a lot like Terry Tate — the huge “office” linebacker that

Having spent what seems like a lifetime in the financial industry at this point, I’ve always had this nagging suspicion about private equity (PE): private equity investments are not special. And I’ll take my hunch a bit further: public equity markets can deliver the same return profile as

We’ve discussed the use of predictive regressions in the past. Here is an article to learn a bit more about the technique. And while the idea sounds cool, and could even be relabeled a low-tier “machine-learning” technique if someone wanted to sell the idea, we can’t find anything exciting

Psychology research suggests that when we make predictions, we suffer from “representative bias,” and mistakenly overweight observations that fit a particular narrative, and fail to consider base rate probabilities. For example, if we flip a coin 5 times and it shows up H, H, H, H, H, we may

Hot off the press and haven’t had time to reverse engineer and verify, but this is pretty interesting stuff at first glance. The Enduring Effect of Time-Series Momentum on Stock Returns Over Nearly 100-Years This study documents the significant profitability of “time-series momentum”

We examine the causal effect of limits to arbitrage on ten well-known asset pricing anomalies using Regulation SHO, which reduced the cost of short selling for a random set of pilot stocks, as a natural experiment. We find that the anomalies become substantially weaker on portfolios constructed with

Empirical asset pricing research can sometimes get monotonous because you end up circling back relentlessly to the same conclusions: value works, momentum works, and yet, markets are remarkably efficient. But, sometimes, research uncovers absolutely stunning and counter-intuitive results–and this

One of the most overused– and misunderstood — terms I’ve seen used by finance practitioners is “behavioral finance.” Many professionals consider themselves to be “behavioral finance experts” because they identify irrational investors.1 Newsflash: Identifying irrational investors is not

We examine the effect of security analyst recommendations on stock price momentum. Results show that momentum profits are directly linked to analyst optimism. Specifically, we find that a 1-unit change in recommendation quintile translates to about a 50 basis point change in subsequent 3-month

We show that opportunistic insider traders can be identified through the profitability of their trades prior to quarterly earnings announcements (QEAs), and that opportunistic trading is associated with various other kinds of managerial and firm misconduct. The subsequent buys and sells of

Momentum in firm fundamentals, i.e., earnings momentum, explains the performance of strategies based on price momentum. Earnings surprise measures subsume past performance in cross sectional regressions of returns on firm characteristics, and the time-series performance of price momentum strategies

Accruals are the non-cash component of earnings. They represent adjustments made to cash flows to generate a profit measure largely unaffected by the timing of receipts and payments of cash. Prior research finds that expected returns increase in firm profitability. However, firms with high accruals

A really interesting paper hit the NBER wires recently. The central argument of the paper is that “rock star” thought leaders dominate a field, but when they die, new thought leaders are able to emerge. In summary, there seems to be a cost and a benefit attached to a powerful intellectual: On

We show that interest rates drive mispricing at the turn of a tax period as investors face the trade-off between selling a temporarily-depressed stock this period and selling next period at fundamental value, but with tax implications delayed accordingly. We confi rm these patterns in US returns,

An interesting out of sample test on return drivers in the Vietnamese market from 2006 to 2014. Not surprisingly, value and momentum show some mojo - Liquidity as well…size, not so much. But size only matters if you control your junk, apparently. This is in line with our own research and the

I have a love-hate relationship with sin stocks. On one hand, my first big winning stock pick was Swisher Sweet Cigars, which nearly doubled a month after I bought it in 1998, thus proving that I was a stock picking genius and much self-satisfaction (at least until several years later when I lost

The efficient market hypothesis suggests that stock prices are always “right” in the sense that stock prices reflect all available information. Of course, during tax season, fundamentals go out the window: I’m selling my losers, and letting my winners ride! And I’m not the only investor

Having been a full-time academic financial economist in a former life (still dabble, when able), I became accustomed to my annual pilgrimage to the annual American Finance Association (AFA) meeting. For the uninitiated, the AFA annual meeting is a gathering of all the major brainpower in academic

Chief financial officers are responsible for managing the financial reporting process. We test whether the quality of a firm’s financial reports is a function of the effort expended by the CFO. Using golfing records to measure leisure consumption, we first show that CFOs consume more leisure when

Using a sample of 97 stock return anomalies documented in published studies, we find that anomaly returns are 7 times higher on earnings announcement days and 2 times higher on corporate news days. The effects are similar on both the long and short sides, and they survive adjustments for risk

Value investing was a lot easier in 2012 and 2013 when our value approach beat the market by a substantial margin and we had a reasonable edge on other active value players. But now that we have lived through 2014 and 2015, most value approaches (simple, complex, quant, human, small, large, etc.)

Awww…modern portfolio theory…that feel-good construct I teach to all of my graduate-level finance students each year. Simply input 1) a vector of expected returns and 2) a covariance matrix into your computer, and voilà, you have your optimal portfolio weights. Like all things viewed with the

Our Quantitative Momentum (QM) system seeks to identify stocks with the highest quality “momentum.” We consider the term momentum to mean a continuation of past returns—past winners tend to be future winners, while past losers tend to be future losers. How can we exploit this phenomenon? At

With Januaries (a month in which lagged "losers" typically outperform lagged "winners") excluded, the average monthly return to a momentum strategy for U.S. stocks was found to be 59 bps for non-quarter-ending months but 310 bps for quarter-ending months. The pattern was stronger

The enterprise multiple (EM) predicts the cross section of international returns. The return predictability of EM is similarly pronounced in developed and emerging markets and likewise strong among small and large firms. An international portfolio of low-EM firms outperforms a portfolio of high-EM

We test a frog-in-the-pan (FIP) hypothesis that predicts investors are inattentive to information arriving continuously in small amounts. Intuitively, we hypothesize that a series of frequent gradual changes attracts less attention than infrequent dramatic changes. Consistent with the FIP

This study investigates whether the risk adjusted returns of a global REIT portfolio would be enhanced by adopting a trend following strategy (which is an absolute concept), a momentum based strategy (which is a relative concept and requires individual country allocations), or indeed a combination

Kewei Hou and Roger Loh have a fun paper on the idiosyncratic volatility puzzle, which is set to be published in the Journal of Financial Economics. The idiosyncratic volatility puzzle is associated with the empirical evidence which suggests that stocks with higher idiosyncratic volatility

The prediction of higher interest rates has been ongoing since the government went all-in on a variety of so-called “inflationary” efforts. Inflation hasn’t happened and rates are still low across the yield curve. So-called “bond vigilantes,” having been wrong for 7 years now and are still

David Dreman is a personal hero of mine. Years ago, I stumbled on his book, “Psychology and the Stock Market: Investment Strategy Beyond Random Walk,” which was originally published in 1977. It had a huge impact on me. It’s timeless, with lessons that still apply to value investing today. It