Challenging Conventional Wisdom
Top 5 of the Week of November 20
A Wealth of Common Sense’s Ben Carlson heads up our Top 5 this week by sharing the questions on his mind at the moment. Research Affiliates Michele Mazzoleni reveals some misconceptions about treasury bonds. And the founder of Macro Ops Alex Barrow discusses the crazy rise of bitcoin.
ETF.com’s Larry Swedroe examines the persistence of time-series momentum. And writing for Alpha Architect, Dr. Jack Vogel looks at factors versus characteristics…
In a Ponder…
- Who is in the most trouble with the predicted lower financial market returns? Baby boomers, who were perhaps banking on historical past returns for their future retirement
- Could high asset prices actually be good for the economy? Steep stock prices and reduced bond yields may push capital to help establish new businesses thus leading to more jobs
- Will anything stop tech stock’s supremacy? 21% yearly returns for the past decade are clearly significant, but it will probably end at some point
What questions are on your mind at the moment? Share your comments in the section below
Challenging Conventional Wisdom
- The warnings of stock overvaluation recently has caused speculation that U.S. Treasury bonds are experiencing a similar problem—but they’re not bubble bound yet
- That bonds are slightly overvalued at the moment can be explained away by macroeconomic trends—quantitative easing programs have not caused the drama that was expected
- Bonds have had a valuable negative correlation with the U.S. stock market in the past 25 years, making them great against macroeconomic risk and not as unattractive as they seem
Bitcoin—The Next Cryptocurrency King or Cryptocurrency Joker?
- Bitcoin enables online users to trade money/assets to another in exchange for digital property, with complete legitimacy and security
- In the 8 years since its inception, the value of bitcoin has soared tremendously, and it is being hailed as revolutionary—though it is still uncertain what the impact of it will be
- But at the moment, given the expense of bitcoin’s mining activities and the trading speculation driving the price up, it does not yet meet the requirements of a proper medium of exchange
The Source of Time-Series Momentum Premium
- The investment approach time-series momentum—also called trend- or absolute momentum—has been around for a long time
- The portfolio consists of long assets that have gained recent positive returns and short assets that have yielded recent negative returns—this strategy is also known as “managed futures” when taking long/short positions in futures markets
- Investor’s continued subjection to behavioral biases—as well as ongoing market frictions and interventions—will continue to effect this price behavior
“Factor Investing Is More Art and Less Science”
- There is an ongoing debate regarding whether higher returns in value and small firms are motivated by factors or characteristics—so, is the premium explained by risk and/or mispricing?
- The argument is between factor “loading,” on a chosen factor or characteristics, which help yield higher returns due to higher B/M ratios
- Evidence shows that both models have relevance as factors and characteristics yield similar results from a “CAGR and ex-post factor loading perspective”
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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