How To Catch Baitfish

watch video on youtube hereHow To Catch Baitfishhttps://www.youtube.com/channel/UCEFpkrKv7OwCy_GkdAVlVhQ >https://www.youtube.com/channel/UCEFpkrKv7OwCy_GkdAVlVhQ

Sticking With the Best Alpha Generators

Barron’s profiles Dan Wiener, who runs The Independent Adviser newsletter , founded the firm Adviser Investments, and was ranked number 69 on Barron’s list of the top independent investment advisers. Wiener, whose newsletter focuses primarily on Vanguard, says “I think what people have lost sight of is: You have access to some of the best investors in the world through a mutual fund. According to Barron’s, his firm’s typical portfolio has eight to nine mutual funds, usually a third from Vanguard, a third from Fidelity, and a third from other firms.” In selecting the funds, Wiener focuses on the best active managers. He acknowledges that the average active manager probably underperforms the indexes, but says: “we don’t buy the average manager. We buy the best managers. People say you can’t find them. But, yeah, you can.” His firm creates custom benchmarks that allow studying the long-term performance of a manager before investing.  A moderate portfolio with Adviser Investments typically has 76% stocks, 22% bonds, and 2% cash. Wiener is “long-term bullish on equities.” While he says “I don’t think uncertainty is going away anytime soon,” but says in such times “you have to bring it back to two things: earnings and interest rates.” Further, he says “there isn’t some major thing going on out there that’s a black cloud. Right now, it’s just people are anxious,” suggesting that “they forget we have gone from March 2009 to the beginning of 2015 – and the market has been up 180%.”

Tagged: active management, Dan Wiener

from Validea's Guru Investor Blog http://ift.tt/21hrcHl

The Small-Cap Premium Lives Despite Its Doubters

Larry Swedroe of Buckingham (and director of research with The BAM Alliance) writes on ETF.com that “investors should be suspicious of claims that they can benefit from well-known information,” making the point by dissecting a recent popular media article claiming that small-cap stocks have underperformed since 1979. Swedroe focuses on an article by Pension Partners LLC that uses the Russell 2000 Index (R2K) as a measure of small-cap performance to make its claims. Swedroe states that “it’s well-known that there are problems with that index . . . and eventually most index funds . . . abandoned the use of that benchmark.” Further, he asserts that the numbers employed in the Pension Partners article are inaccurate – it claimed the R2K returned 10.3% annually since 1979, but Swedroe says the return was actually 11.4% (which makes it just under the S&P 500 for the same period). Beyond that, Swedroe says that “a superior small-cap index is the CRSP (Center for Research in Securities Prices at the University of Chicago) 6-10 Index” and that “simply by using a more appropriate index, the [purported] underperformance of small-caps disappeared and they outperformed.” (The CRSP 6-10 Index returned 13% compared to the S&P 500’s 11.8%).

From there, Swedroe explains the “well-known” reasons for “a small-cap premium,” such as that small companies tend to be more leveraged, have more earnings volatility, and lower levels of profitability. He also highlights a 2002 research article that found that “small and value firms are more susceptible to distress in times of restrictive monetary policy.” His point, however, is primarily that “these relationships have all been well-documented and are well-known” and “if the market already knows the information, it should already be embedded in prices, so it’s unlikely that investors can exploit it.”

The remainder of Swedroe’s article explores “how easy it is to manipulate data to tell the story you want to tell,” relying on work by economics professor Gary Smith. Noting that “‘correlation’ doesn’t mean ‘causation,'” Swedroe says that “in the era of big data, it’s easy to torture the data to uncover some correlation that appears to explain returns.” This, he suggests, may be what is behind the Pension Partners article’s claims. Because “it’s possible to test thousands of relationships until you find the one that ‘works,'” he says, “unless you come up with the theory first, the data may not have any value.” Referencing Smith, he says, “data should be used to find evidence that supports [a] theory, or doesn’t,” but “too many people work in reverse, mining the data and only then coming up with (concocting) a theory to support the data.”

Tagged: Larry Swedroe, Small-Cap Premium

from Validea's Guru Investor Blog http://ift.tt/1W3bhLk

AAII Sentiment Survey – A Contrarian Indicator?

A brief piece in the Wall Street Journal by reporter Steven Russolillo comments on the American Association of Individual Investors’ weekly survey of sentiment, which is often regarded as a contrarian indicator. As the graph below illustrates, “stocks often have a tendency to do the opposite of how investors say they have felt about the market.” For example, the AAII registered its lowest bullish reading in 17 years on March 5, 2009 – precisely the beginning of the current bull market. However, a similarly low bullish reading in January 2008 was followed by a 34% tumble in the S&P 500 over the next year. Given such non-contrarian occurrences, “the survey may be regarded as “an interesting metric that tends to glean more insight at extreme levels” while recognizing it is “far from a perfect market-timing mechanism.” Russolillo also points out that the survey covers “a tiny sliver of the investing public” (AAII’s roughly 175,000 members) and also questions whether “the social media age [in which] investor mood swings tend to be sharper and more hyperbolic than usual” may undermine the value of even “extreme levels of sentiment.” Nonetheless, he suggests “the AAII survey is often best used in the context of other market sentiment indicators, including mutual-fund flows or the CBOE’s Volatility Index.”

Below is a snapshot of the current AAII Sentiment Survey readings along with the historical averages for comparison purposes.

Tagged: AAII Sentiment Survey

from Validea's Guru Investor Blog http://ift.tt/1LF7inG

NYU Prof, Damodaran, on Price vs. Value: Reading Earnings Reports

NYU finance professor Aswath Damodaran writes in the blog Musings on Markets about “the pricing and value game and how they play out, especially around earnings season.” Contrasting the two concepts, Damodaran says that value “comes from a company’s fundamentals, i.e., its capacity to generate and grow cash flows,” while pricing “is a market process” that results from supply and demand and is “a function of market mood/sentiment and incremental information about the company.” Accordingly, he says that “investing is about judgments on value . . . and trading is about making judgments on future price movements.” Further, he says, earnings reports are particularly important because “revelations about what happened to a company in the most recent three-month period become a basis for reassessments of price and value.” In “the pricing game,” Damodaran asserts, an earnings report is “measured up against expectations,” such that exceeding expectations raises prices while failing to meet them lowers it. He says this “pricing game” is an “unpredictable one for three reasons.” First, the “actual numbers” of earnings reports are a manipulable “mixed bag.” Second, there is the question of whether the relevant “expectations” are those of analysts or the market. Third, “the market reaction to surprise” is unpredictable. Regarding the “value game,” however, Damodaran paints a different picture. He contends that “the one area where there should be agreement across investors is that every good intrinsic valuation should be backed by a narrative that not only provides structure to the numbers in the valuation, but also provides them with credibility.” He continues that “if you accept the notion that value changes when your narrative changes,” there are three points that follow.

 

#1 – “an earnings report can cause big change in value” because “a key part or parts of the narrative [may have] changed by an earnings report.”

#2 – “big changes are more likely in young companies” and “consequently, you should not be too quick in classifying a big price move on an earnings report as a market overreaction.”

#3 – “there is more to an earnings report than earnings per share,” which means that factors such as “product breakdown, geographical growth or cost patterns” can be very significant.

 

In summary, Damodaran says that “new earnings reports . . . provide timely reminders that no valuation is timeless and no corporate narrative lasts forever.”

Tagged: Aswath Damodaran, Company Earnings, Security Analysis

from Validea's Guru Investor Blog http://ift.tt/1p2d216

Adding an Acceleration Factor to Momentum Investing

In a post on the CFA Institute’s Enterprising Investor blog, Joachim Klement of the CFA Institute Research Foundation highlights research suggesting that “one can improve the results of traditional momentum investing by looking at momentum acceleration.” Klement expresses some skepticism regarding momentum investing – “why should prices go up just because they have gone up in the past?” – and notes the risk of “momentum crashes.” Nonetheless, he notes that Cliff Asness and others have pointed out that the “momentum effect has persisted for more than 200 years, exists across many different asset classes, and can be profitably exploited by almost every investor.” According to Klement, “there is plenty of evidence that momentum investing works in the medium term,” meaning that “winning investments of the last three to 12 months tend to outperform in the subsequent months.” His main focus in the post, however, is the “forefront of current research,” including work by Moringstar and by Didier Sornette at ETH Zurich, which suggests that “a simple measure of past change in momentum . . .can predict future performance.” Specifically, “stocks with the highest acceleration . . . tend to have higher returns in the future than stocks with lower acceleration.” The idea is “to identify trends right when they take off” and when “the influx of fresh investors abates and the trend decelerates again”  — i.e., “to invest in a trend early and get out before it is too late.” While noting that such research is “still in its infancy,” Klement expresses optimism that “the acceleration factor may not only be used to improve the results of traditional momentum strategies, but may predict future . . . market declines or even crashes.”

Tagged: Factor-based Investing, Momentum Investing

from Validea's Guru Investor Blog http://ift.tt/1QVv5lB

Valuations have One Top Manager Sitting on Lots of Cash

Hamish Douglass, manager of the Magellan Global Equity Fund, is holding over 15% of the fund’s $5.4 billion in cash, Financial Advisor reports. The fund beat 99% of its competitors over the last five years, and with a 0.4% gain over the past year has beaten 90% of its peers over that period (during which the MSCI All-Country World index lost 13%). Douglass more than tripled the fund’s cash holdings from July to August 2014 and now says, “we’re happy to bide our time in the cash position.” He remarks, “it’s better being six months too early than six minutes too late on these things.” Although the move to cash was prompted in part by expectations of market turmoil, Douglass remains in cash due to concerns about valuations. He says that high-quality stocks “are still at very expensive levels, effectively factoring a zero interest rate virtually forever,” and so “we’re holding cash rather than the most defensive equities we would have otherwise held.” The MSCI World Minimum Volatility Index, composed of stocks thought to be relatively safe in tumultuous times, is trading at a 31% premium over MSCI’s regular world share price gauge. Douglass predicts that “China will steady over the next 12 months,” and continues: “if that happens, as U.S. rates start to go up, we’ll get some interesting repricing that enable us to deploy the cash.”

from Validea's Guru Investor Blog http://ift.tt/1UzeLXl