No Cherry-Picking Information, Guys
Top 5 of the Week of November 27
Opening up our Top 5 this week, Factor Research’s Nicolas Rabener mixes the perfect integrated portfolio from a winning factor combination. Larry Swedroe, writing for ETF.com, explains why asset type matters with factors. And the team at Farnam Street Blog support us in seeking out discomforting evidence to overcome confirmation bias.
Richard Bernstein from Advisor Perspectives looks underneath the Technology sector’s ongoing disguise. And Evidence Investor Robin Powell reveals how investors are not that great at bargain hunting after all…
A Winning Portfolio Recipe
- This year’s winning factors, Growth and Quality, were last year’s losers and integrated with Value provide the recipe for an attractive portfolio
- Thanks to the fact, that integrated portfolios which position stocks based on multiple characteristics maintain a consistent performance
- A strategy which effectively mitigates the problems involved with factor timing—but, you’ll never entirely get rid of the issues that factor selection comes with, as there are only a few which demonstrate positive yield
Which factors are integrated into your portfolio? Share your comments in the section below
Mispricing Mistakes
- There is a substantial amount of evidence to support the argument that there is a link between factor exposures and return expectations
- That increased profitability actually suggests lower systematic risk—instead of higher—and that investment level isn’t linked with systematic risk
- This idea proposes rather that positive stock returns from high profit firms and low investment firms are not because of this systematic risk exposure but due to equity mispricing and behavioral errors
No Cherry-Picking Information, Guys
- We submit to confirmation bias when we allow ourselves to cherry-pick ideas and data which support our pre-existing theories
- Being unbiased with our interpretation of this ‘proof’ only compounds our bias and leads to critical miscalculations
- While it is a human trait to ignore disconfirming evidence—because our brains can’t cope with it—we must actively seek it out if we are to recognize and overcome our biases
Robots in Disguise
- Overweighting in one sector is generally frowned upon in investing, but Technology has been a consistent best performing sector since 2015
- The Tech sector’s perpetual disguise—the “stable growth” that we are all seeing is actually a mask for deep cyclicality
- Of course, it makes sense to own cyclical stocks during a cyclical upturn, and the Tech sector continues to pull off its disguise due to its continually growing profit cycles too—both global and U.S.
Does Everyone Love a Bargain?
- While we all eagerly enjoy the holiday sales—especially Black Friday where we spend billions—we think nothing of spending ten times what we should on our retirement
- And ‘ten times’ is being mild; index funds can cost just 25 basis points, yet investors pay up to 310 basis points for an actively managed fund
- Why then do we consistently choose to spend a fortune on people actively ‘managing’ our money rather than opt for index funds’ better diversification and similar returns when they’re always on sale?
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.