Current Value Investing Readings

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"Quick reminders on value and growth. I define value as the cheapest 10% of U.S. stocks and growth as the 10% most expensive U.S. stocks. In the average 12 month period, value outperforms the equal-weighted market return by 5.6% (and its somewhat consistent: value has a 76% win rate).  A long-term value investor of this type has obviously been hugely successful. Growth is pretty much the inverse. Average annual underperformance of -6.8%, and a 73% lose rate.

But here is the interesting part. The "edge" for our value investor is pretty similar to that of the casino. Within that cheap value portfolio which does so well on average and over time, just 53% of the stocks beat the equal-weighted market return. These winners outperform by an average of 29.2%, but 47% are still losers. Growth looks very different. Within the expensive growth portfolio just 34% of the stocks beat the equal-weighted market return. This 34% outperforms by a much higher average of 48.9% (as compared to the 29.2% for the value "winners").
Growth has the more significant tail (more growth stocks deliver ridiculous excess returns), but the overall odds for value are much better.
Just like the house in a casino, value investors sometimes get destroyed. Several very high profile investors with great long term track records felt that pain in 2015. Real value stocks (and strategies) hurt to buy and sometimes really hurt to hold.
 Value investing (historically) is like selling insurance, like writing puts, like being the house. In each of these examples, the key is turning a small advantage on each individual bet into a huge advantage across a large number of bets over a long period of time.
With more people aware of these odds than ever before, the magnitude of the "edge" is an open question for the future. Not everyone can open a casino and be the house, you need gamblers too. But even a reduced edged, paired with steel discipline, can grow to a huge advantage over an investing lifetime."

Do Strong Returns Follow Strong Returns? (Posted February 18, 2016 by Michael Batnick)
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"Cliff Asness describes momentum as “the phenomenon that securities which have performed well relative to peers (winners) on average continue to outperform, and securities that have performed relatively poorly (losers) tend to continue to underperform.”
momentum exists within individual stocks
What I wanted to see is if I could find this anomaly at the index level.
I did not set out to disprove momentum (which I'm not), but I want to share what I found in the data. I only used the S&P 500 so this is not meant to be a robust study disproving anything.
You'll notice that stocks tended to do better following periods of under performance. For instance, the average returns of the worst decile is -29.8% with the next 12 months experiencing an average return of 9.6%. This was the strongest subsequent performance of any decile which means the worst performing 12-month periods experienced the sharpest mean reversion.
So the previous twelve months tells you nothing about what will happen in the next twelve months (R-Squared of 0.004), but what if we cut it down to a three-month period; maybe momentum only holds over shorter periods of time?
Three months later does show slightly better chances of being positive, but again it's difficult to draw any strong conclusions. 
The bottom line is that past returns are absolutely not indicative of future results, especially in the S&P 500."


Marc Faber on Negative Interest Rates (Sunday, February 21, 2016)

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“Marc Faber: The question should be, "Which central bank is the most insane?" Because you understand, the central banks have been manipulating just about everything. They manipulate the currencies, they manipulate interest rates, they manipulate stocks. It's interesting sometimes if you observe in the U.S., when the market is very weak overnight, in other words the S&P futures go down 20, 30 points, suddenly, a buyer emerges and pushes up the market. I believe that the Fed has not just intervened in bonds through Operation Twist, in interest rates through QE programs but occasionally they step into the stock market to stabilize the market and try to push it up. I think other central banks around the world ... in Japan, they announce it, the central bank, the Bank of Japan, is buying shares through ETFs.”

Don't Give Stocks 100% of Yourself   By Nir Kaissar    Feb 19, 2016


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"Stocks have a higher expected return than bonds, and the longer your investment period, the greater the probability of capturing that higher return.

The problem, of course, is that investors fail to hang on. You wouldn’t know it by looking at mutual fund returns because those returns ignore the timing of investors’ buy and sell decisions, and assume instead that investors bought and held their fund shares for the entire period. But if you’ve ever looked at a fund’s performance and thought, “That’s not the return I got,” you know that the actual return depends on when you bought and sold the fund.

U.S. large cap mutual funds returned 4.9 percent annually to investors from 2001 to 2015 (the longest period for which the data is available), but the average investor captured only 3 percent of that return during the period

U.S. small cap mutual funds returned 7.2 percent, whereas the average investor’s return was 5.9 percent. Developed international funds returned 4 percent, whereas the average investor’s return was 3.2 percent. And emerging market funds returned 8 percent, whereas the average investor’s return was 6.5 percent.

So the average investor has only captured roughly 75 percent of stock mutual fund returns over the past 15 years

Granted, the returns for U.S. stocks and bonds are likely to be lower from today’s vantage point because both U.S. stocks and bonds are expensive in historical terms. But that doesn't alter this basic truth: The average investor (the investor who can't actually buy and hold for huge spans of years) is likely to be as well off -- or even better off -- with a modest stock allocation as with a 100 percent allocation.

This is, of course, a crucial perspective. Stock allocation in a portfolio has a greater impact on the expected risk and return of that portfolio than any other allocation decision investors make -- more than regional allocations, more than large cap versus small cap, bonds versus cash, more, even, than the much-obsessed-over decision about active versus passive management."

Why You Should Hope for a Bear Market February 19, 2016 by Justin Sibears


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