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Will Time Heal All High-Valuation Wounds?

Top 5 of the Week of January 1

The team at Become a Better Investor would like to wish all our readers a Happy—and prosperous—New Year! We kick off 2018 with a look at market anomalies and momentum with Larry Swedroe on Alpha Architect. Next, financial blogger Jake questions whether time can solve high-valuation issues on his site, Econompic Data. And writing for The Fat Pitch, Urban Carmel reveals what we should expect from the U.S. stock market in 2018.

Jason Zweig picks apart the “January effect” over on his blog, The Intelligent Investor. And Tren Griffin reveals The Dude’s investing lessons from The Big Lebowski


Can We Time Market Anomalies with Cross-Sectional Momentum?

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  • A traditional momentum approach seeks to exploit stock price persistence, so research has been undertaken to ask if the same persistence occurs in other anomalies (e.g., asset growth, return on assets, abnormal capital investment)
  • Backtesting results indicate that a strategy combining a long-short mix of both best and worst performing assets yield major positive risk-adjusted returns in the post-2000 period
  • This is thanks to the risk mitigation of each individual strategy together with the fact that Value at Risk yields downside risk mitigation in both sub-periods (pre- and post-2000)

Do you employ Factor Timing? Share your comments in the section below

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Will Time Heal All High-Valuation Wounds?

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  • There is no doubt that stock valuation has a direct impact on future returns, but with today’s high prices and low bond yields, just how much of an impact will it have over the long-term?
  • Studies of the path our extreme valuations are taking suggests that investors who predominantly hold U.S. stocks could be in for interesting times ahead
  • Given that research demonstrates our traditionally-held perspective that time will heal all high-valuation wounds is looking unreliable

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Stock Market Predictions for 2018

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  • Stocks will probably continue to rise during 2018, though by how much is too difficult to estimate as the standard deviation of annual returns is so broad
  • A mostly bullish investor attitude and high valuations do not mean we are headed for negative returns—this year’s stock market growth should not negatively affect next year’s returns
  • As Fed rates will doubtless continue to rise, which likely means stock prices will too—though political effects are likely to remain minor even though we head into Trump’s 2nd Presidential year

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The January Effect: Stuff and Nonsense

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  • As well as being the festive season, these months also herald the beginning of financial commentators warning about the January Effect
  • The idea being that small stocks will all of a sudden begin to outperform: but while it’s statistically likely to happen, it’s not economically going to have any significance
  • If the January Effect involves stocks so small that investors are unlikely to own them, then the predicted returns are probably as equally insignificant

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Words of Wisdom from The Dude

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  • “Sometimes you eat the bear and sometimes… well, he eats you.” Markets will always cycle around, it depends on your level of patience as to your success with them
  • “Ya well, that’s just like, you’re opinion man.” Everyone is entitled to their investing opinions, just be sure you weigh in credibility before heeding someone’s advice
  • “I can’t be worrying about that shit. Life goes on, man.” This is the best advice investors could take away from 2017, life—and the market—goes on, don’t dwell on the past

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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.


 

Anything you would like to discuss about this week’s top 5? Do you have another favorite that isn’t mentioned here? Feel free to add it below. Let’s start a discussion in the comments section!

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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 Become a Better Investor 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.