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Any Abracadabra in Investing?

Top 5 of the Week of June 6

We begin this week’s Top 5 with Wesley Gray from Alpha Architect, who looks behind the smoke and mirrors to question the magic behind value funds. From Hargreaves and Lansdown PLC we learn that diversification isn’t a new concept; it’s actually been around for 2,000 years already. And Patrick O’Shaughnessy, author of The Investor’s Field Guide, looks into factor-investing versus the Smart Beta approach.

Matthew Frankel from The Motley Fool helps us understand why stocks become undervalued and how to find them. And Graham Bentley from the Professional Advisor considers how previous generations used to squirrel away money for the future, is the same true for Millennials?

Any Abracadabra in Value Investing?


  • Value investing is constructing portfolios that comprise cheap ‘value’ stocks; achieved by systematically buying high book-to-market stocks, or low P/E stocks for example
  • Compare the “active” funds performance to the S&P 500 and a deep value B/M index: if it’s close to the first broad market one; it’s a closet-indexer, but if it tracks the other; it’s an actual value fund
  • While there’s no magic necessarily, active value investing should do exactly what it says on the tin with the right fund; offer value long-term in cheap stocks even though it may underperform during occasional time periods

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Diversification; An Old Concept With Modern Benefits 


  • Let “Every man divide his money into three parts, and invest a third in land, a third in business, and a third let him keep by him in reserve,” counseled the Talmud—the old Jewish body of civil and ceremonial law
  • Investment strategies have moved on from then, but the concept is still the same; holding lots of stocks is not the same as diversifying if they’re closely correlated or subject to similar external factors
  • Find the right diversification balance; too much and you will offset the potential benefits and be open to paying higher costs

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On the Hunt for Outperformance and Scale


  • In the asset management business it’s important to strike the right balance; holding too much asset will eventually impact returns—known as diseconomies of scale—it’s easier to outperform if you only manage $1m vs. $1bn
  • The Smart Beta approach capitalizes on proven historical investment factors or market inefficiencies
  • The factor-investing method determines its strategy based on risk adjustment and tends to be cheaper and safer
  • Aim to create a combination portfolio that will make the most of different factor-investing products

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Bargain Hunting in the Stock Market


  • In value investing stocks become mispriced by the market from time to time due to expectation shortfalls, market crashes, shares plunging following bad news, and being in unpopular sectors
  • Be sure to buy shares in companies you know and check their metrics, but don’t stop there; it’s worth looking out for other indicators of value
  • Be patient: when bargain hunting for undervalued stocks don’t force the issue and make a regrettable investment, they will eventually happen in time

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Spend Today or Save for the Future?


  • A lot can happen while saving money, so the difference between discount rates rising and falling can have either a negative or positive impact on the value of future money
  • After 35 years of falling interest rates, discount rates are unlikely to fall further, so it is more probable that inflation and interest rates will stay the same or rise too
  • The ratio of people saving has fallen from 14% twenty-six years ago to 4% in 2016, with the discount rate being low, the Millennial generation is inclined to spend today rather than save

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Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form – and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.


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DISCLAIMER: This content is for information purposes only. It is not intended to be investment advice. Readers should not consider statements made by the author(s) as formal recommendations and should consult their financial advisor before making any investment decisions. While the information provided is believed to be accurate, it may include errors or inaccuracies. The author(s) cannot be held liable for any actions taken as a result of reading this article. The Babinow Team doesn’t necessarily endorse any stocks or shares mentioned in the articles or the author of such articles linked to and summarized in Top 5 of the Week and cannot guarantee the accuracy of its information.