Have the Right Eggs in Your Basket
Top 5 of the Week of October 16
Alex Barrow, co-founder of Macro Ops, heads up our Top 5 this week with a view on the ‘Holy Grail of Investing’. The writer of the Value and Opportunity blog explains why value investors should care about venture capital and startups. And Ben Carlson for Bloomberg discusses market myths which can hurt investors.
Factor Research’s Nicolas Rabener presents the results of the 2017 “Factor Olympics.” And Joe Mcgrath, writing for the Institutional Investor, introduces us to the new activist investor players…
Have the Right Eggs in Your Basket
- There is evidence to suggest that a portfolio of 1,000 stocks with 60% correlation would provide no better diversification than just 5
- The road to creating your fortune instead lies in finding 15 – 20 decent uncorrelated return streams—this approach mitigates your return per unit of risk and enables you to achieve a market-neutral position
- This market-neutral portfolio provides diversification for asset classes to perform well at different stages and collect “beta in a smart risk-adjusted way”
Disrupting Value Investing
- Young companies are rarely considered by value investors because they have no operating history, assets or earnings track record and are high in risk factors
- But value investors should be keeping an eye on how startups can disrupt the bigger players in their portfolio—as major companies have had the rug pulled from beneath them by a unicorn startup before now
- Be a savvy value investor and keep a watchful eye on venture investing and new technologies—it may also help uncover future value traps
Market Rules of Thumb Which Don’t Add Up
- Low trading volume rallies mark problems for stocks: The amount of stocks being turned over in the market has nothing to do with the market’s direction
- Everyone has a stockpile of cash waiting to be invested: Trades are a two-way agreement—someone buys and someone sells—so for cash that ‘floods in’, cash will also flood out
- When interest rates rise, bonds lose money: These two are often inversely related but this ignores the times when total returns were positive when interest rates were rising
Would you add any other harmful market rules of thumb to the list? Share your comments in the section below
Factor Performance in 2017
- Overall, factor investing has hit an all-time high in 2017 with low volatility in performance—reflected by low market volatility too
- Quality and Growth are almost identical in their strength and performance demonstrated by the Tech sector which represents most of the portfolios in both
- And interestingly, in comparison to 2016, Value and Size are this year’s global factor losers—demonstrating a role reversal as last year’s winners become this year’s losers and vice versa
Passive Players Are Coming Out of the Shadows
- History shows a number of “activist investors” who have rallied against major companies in shareholder revolts in the past
- Most recently though, this position has been filled by Blackrock and Vanguard in a rally for yearly climate risk reporting at ExxonMobil
- It seems these large players are no longer content with playing a passive role on policies which seek to minimize climate damage and will use the carrot or the stick to make changes
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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