Top 5 of the Week of May 7
Writing for Alpha Architect, Larry Swedroe heads up our Top 5 this week looking at risk-based explanations for momentum premium. From Pragmatic Capitalism, Cullen Roche explains why Bitcoin won’t become a dominant form of currency. And for Bloomberg, Noah Smith considers what the Bitcoin bubbles can teach us about new assets.
Of Dollars and Data author, Nick Maggiulli helps us recognize when we are lost in the market and acting wildly. And The Irrelevant Investor Michael Batnick examines expectations and reality in the stock market…
Shedding a Little Light on Momentum
- Most momentum research concentrates on behavioral aspects e.g., how investors over or underreact to information which leads to mispricing
- This research shows that the momentum premium might actually be rooted in risk as momentum strategies exhibit large negative skewness and excess kurtosis, as well as occasional large crashes
- Risk “cannot be arbitraged away,” but mispricing can, so you can anticipate the momentum premium to continue
- Cryptocurrencies aim to eventually decentralize money and disconnect it from the archaic banking system we have in place
- Decentralizing money goes against the way our economy works though as it will remove consumer purchasing power and options
- Our economy is built on ‘money’ in banks that creates flexibility around consumers and banks jointly sharing an asset/liability relationship
- The fixed nature of Bitcoin coins and their scarcity means that it can’t become the dominant form of money—it can never be used as credit
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The Bitcoin Bubbles
- There have been three Bitcoin bubbles since 2011—each one being larger than the previous
- Firstly, because Bitcoin was seen as a ‘new asset’—no one knew how many cryptocurrencies there would be; secondly, due to a lack of liquidity; and thirdly, as it was hard to bet against
- But price is determined by optimistic investors who stay in the game, not the pessimistic ones—letting these guys publicly register their pessimism through more futures trading and other exchanges may regulate new asset bubbles
Exploring Unchartered Territory
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The future of the stock market is unchartered territory for every investor, but many act like they know what may happen and fit the following traits:
- Denial of the situation, pressing forward relentlessly with trades and frantically buying or selling as the urgency of being lost presses on you further
- Bargaining and depression come next as strategies that you attempt to get back on track don’t work to resolve the conflict and finally, acceptance that you are lost and cannot do this on your own
The Cold Difference Between Anticipation and Reality
- Anticipation: Investors will always pay a premium for revenue growth
Reality: Even if that growth hasn’t translated across to a company’s bottom line
- Anticipation: The market improves by nearly 50%
Reality: Even if earnings have been cut in half though
- Anticipation: Astronomical revenue growth
Reality: Anything less than astronomical growth and the stock takes the hit
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 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.