+ This Institutional Investor article has an active management feel and suggests a tactical tilt toward value (which is like market timing), but the data that it cites are real. Historically, value stocks have performed well in the early stage of the economic cycle. This was documented academically in the 2017 paper Fama-French Factors and Business Cycles by Arnav Sheth and Tee Lim. There is no evidence to suggest that it is possible to successfully time exposure to any risk factor to earn excess returns, but we do know that the value premium has been persistently positive over the long-term. The big challenge for investors is staying invested in value during the inevitable periods where value trails growth. If the behaviour of value stocks in past economic cycles tells us anything, now might be the best time to be a value-tilted investor....Quant Strategists Say Now’s the Time to Tilt Toward ‘Value’ [Institutional Investor]
+ There has been a shift toward private equity investing, the risks of which have been highlighted recently by the widely publicized collapse of WeWork. As much as private equity seems exotic and exclusive the return characteristics do not necessarily make it an attractive asset class on average. In a discussion on The Compound, Dan Rasmussen of Verdad Capital explains why he thinks that capital allocators have unrealistic expectations for private equity returns, and completely underestimate its risk....Everything Is Private Equity Now [Bloomberg]
+ Harvard's endowment, the largest academic endowment in the world at $40 billion, has a long history of failing to deliver superior performance. The data for the fiscal year ending June 30 are no different, showing that Harvard's endowment trailed both the stock market and the bond market for the year. This challenges the idea that it is possible to beat the market using smart active managers and alternative asset classes like hedge funds and private equity. PWL recently released a new paper on the performance of US endowments that digs into the details....Opinion: Here’s what you likely have in common with Harvard’s endowment managers [MarketWatch]
In Episode 66, we discussed the gap between investor performance and fund performance, the potential reasons why asset allocation funds produce a positive gap, and the role that timing and volatility play in a negative behaviour gap. We talked about the shift toward private equity and the risks embedded in a closed market, and we had a (thrilling, we know) discussion about the applications of theoretical and empirical finance.
We had a fascinating chat with Jill Schlesinger (Episode 67), host of the Jill on Money Podcast. We received a lot of positive feedback on this episode - Jill has great energy and insight. Jill helped us think about people's emotional and psychological responses to money, and shared with us the areas that people tend to struggle with the most when it comes to their financial lives.
For Episode 68, we answered two excellent listener questions to start: does overweighting factors make a portfolio riskier, and does it ever make sense to hold individual stocks with large unrealized capital gains? Then we talked about the concept of the market being over-indexed using some new data from an Economist article. We discussed a framework for thinking about risk in investing that should help people make more rational asset allocation decisions, and finally we had another discussion about annuities including some real-life examples.
We were happy to have Wes Gray (Episode 69), CEO of Alpha Architect, a US firm that specializes in concentrated factor strategies, join us to talk about - you guessed it - concentrated factor investing. Wes has his PhD from the University of Chicago where he studied under Nobel Laureates Eugene Fama and Richard Thaler. He took a leave from his studies to serve with the US Marines. The discussion covered the limitations of human investors, what drives factor premiums, idiosyncratic risk in concentrated portfolios, and how Wes invests his own money.
Finishing the month of October with Episode 70, we discuss the best way for DIY investors to get financial advice, including a special offer from Robb Engen (Boomer and Echo) for listeners of the podcast. Cameron gave his top five takeaways from the 2019 Dimensional Fund Advisors advanced conference, we talked through a framework for thinking about home country bias, and we explored whether or not an RRSP account can get too big.
+ Preparing for the Recession
On average, stock returns during US recessions have been negative for a globally diversified Canadian investor. Nobody wants to lose money, so it is common to wonder what can be done to avoid the potentially negative stock returns that often come with a recession.
+ Is Investing Risky?
It is common to think about risk in terms of total loss. You invest your money in a stock, things turn sour, and your money is gone. This can happen when you invest in a single stock, but when you properly diversify your investments it is much less likely.
We hope that you found our newsletter useful and informative.
Cameron & Ben