Objective research to aid investing decisions

Value Investing Strategy (Strategy Overview)

Allocations for December 2021 (Final)
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Momentum Investing Strategy (Strategy Overview)

Allocations for December 2021 (Final)
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Value Premium

Is there a reliable benefit from conventional value investing (based on the book-to-market value ratio)? these blog entries relate to the value premium.

Institutional Trading, Returns and Strength of Anomalies

Are there exploitable differences in returns for stocks with heavy versus light institutional trading activity? In his March 2008 paper entitled “Trader Composition and the Cross-Section of Stock Returns”, Tao Shu analyzes the impact of institutional trading activity on the returns of individual stocks and on the strength of the momentum effect, post earnings-announcement drift (PEAD), the value premium and the investment effect. He calculates institutional trading activity at a quarterly frequency by dividing the aggregate absolute change in reported institutional holdings of a stock by the contemporaneous total quarterly trading volume for the stock. Using holdings data as reported via SEC Form 13F and associated stock trading volume and return data for the period 1980-2005, he concludes that: Keep Reading

The Behavioral Asset Pricing Model

Do investors price stocks based mostly on rational analysis or feelings? In their February 2008 paper entitled “Affect in a Behavioral Asset Pricing Model”, Meir Statman, Kenneth Fisher and Deniz Anginer use survey results to investigate both the objective and subjective (perceived) connections between risk and return. Using results of: (1) the 1982-2006 annual Fortune surveys of senior executives, directors and security analysts regarding the long-term investment value of companies; and (2) May and July 2007 surveys of high-net worth clients of a large investment firm, they conclude that: Keep Reading

Fama and French Dissect Anomalies

Which stock return anomalies are trustworthy, and which are not? In the June 2007 draft of their paper entitled “Dissecting Anomalies”, Eugene Fama and Kenneth French apply both sorts and regressions to examine the robustness of the momentum, net stock issuance, accruals, profitability and asset growth anomalies. They note that sorts on an anomaly variable offer a simple picture of how average returns vary, but microcaps (a few big stocks) can dominate the performance of a sort-based equal-weighted (value-weighted) hedge portfolio. In addition, sorts are ill-suited to determinations of: (1) the exact relationship between an anomaly variable and returns, and (2) relationships among anomalies. They note also that extreme behavior by microcaps and outliers generally can distort inference from regressions. Using a robust set of firm data for a broad set of U.S. stocks allocated to three size groups (microcap, small and big) over the period 1963-2005, they conclude that: Keep Reading

Combined Value-Momentum Tactical Asset Class Allocation

Are value and momentum anomalies reliably present across international asset classes? If so, can investors exploit them to generate abnormal returns? In the December 2007 version of their paper entitled “Global Tactical Cross-Asset Allocation: Applying Value and Momentum Across Asset Classes”, David Blitz and Pim van Vliet examine global tactical asset allocation strategies across a broad range of asset classes based on both value (asset yield or earnings yield) and momentum (both short-term and long-term). These strategies weight asset classes according to volatility, with higher (lower) weights assigned to classes with lower (higher) volatilities. Using price and yield data for 12 international asset classes spanning January 1985 through September 2007, they conclude that: Keep Reading

Growth Versus Value and the Yield Curve

A reader inquires: “Ken Fisher did a statistical study in his book, The Only Three Questions That Count: Investing by Knowing What Others Don’t, which states that growth (value) is in favor when the yield curve flattens (steepens). Any truth to this?” To test this hypothesis, we compare the performances of paired growth and value indexes/funds as the spread between the yields on the 10-year Treasury Note (T-note) and the 90-day Treasury Bill (T-bill) varies. Using monthly and quarterly adjusted (for dividends) return data for a pair of growth-value indexes and a pair of growth-value mutual funds, along with contemporaneous T-note and T-bill yield data, we find that: Keep Reading

Growth Versus Value and Interest Rates

In his 2007 book The Little Book That Makes You Rich: A Proven Market-Beating Formula for Growth Investing, expert Louis Navellier hypothesizes that growth (value) stocks tend to do relatively better when interest rates are rising (falling). Growth stocks benefit from the economic expansions associated with rising rates. Value stocks benefit from refinancing opportunities as interest rates fall. To test this hypothesis, we compare the performances of paired growth and value indexes/funds as interest rates, proxied by the 10-year Treasury Note (T-note) yield, vary. Using monthly and quarterly adjusted (for dividends) return data for a pair of growth-value indexes and a pair of growth-value mutual funds, along with contemporaneous T-note yield data, we find that: Keep Reading

Australian Stock Market Anomalies

Are anomalies observed with varying and changing levels of confidence among U.S. stocks, such as the size effect and the value premium, evident among stocks of other countries? In their recent paper entitled “Anomalies and Stock Returns: Australian Evidence”, Philip Gharghori, Ronald Lee and Madhu Veeraraghavan test for the existence among Australian stocks of a size effect, book-to-market effect, earnings-to-price (E/P) effect, cash flow-to-price (C/P) effect, leverage (debt-to-equity) effect and liquidity (share turnover) effect. Using stock price data for 1/92-12/05 and associated accounting data for 1/92-12/04, they conclude that: Keep Reading

Multi-year Reversals for Past Winners and Losers

Are multi-year runs of bad (good) performance by individual stocks indicative of future returns? In other words, does the long-run behavior of stocks on average persist, reverse or fade to random? In their October 2006 paper entitled “Return Reversal in UK Shares”, Glen Arnold and Rose Baker examine the magnitude, persistence and source of reversals for UK stock returns. Using monthly total return and associated fundamentals data for stocks listed on the London Stock Exchange over the prior five calendar years during 1975-2002 (48 years), they find that: Keep Reading

Using Firm Productivity Measures to Enhance Stock Returns

Investors ought to reward a company that employs capital productively. One measure of firm productivity is return on invested capital (ROIC), the ratio of operating income to invested capital (debt plus equity minus cash from the balance sheet). Do stocks of high-ROIC firms outperform those of low-ROIC firms? In their June 2007 paper entitled “The Productivity Premium in Equity Returns”, David Brown and Bradford Rowe examine the relationship between ROIC and stock returns for both value stocks and growth stocks. They define value (growth) companies as those with high (low) CTEV, the ratio of invested capital (book value of equity plus debt minus cash) to enterprise value (market value of equity plus debt minus cash). Using monthly stock price data and contemporaneously available accounting fundamentals for the 1,000 largest U.S. companies during 1970-2005, they conclude that: Keep Reading

Value Versus Growth Among Large European Firms

Does value beat growth among the stocks of large European firms? In their May 2007 paper entitled “Style Migration in the European Markets”, Antti Pirjetä and Vesa Puttonen compare the performances of simple value and growth styles against MSCI Europe as a benchmark index. They employ a market value-book value ratio (P/BV) to define four style portfolios formed at the end of 2001 and held for five years: (1) median value, consisting of companies with P/BV below the median; (2) median growth, consisting of companies with P/BV above the median; (3) 30-70 value, consisting of companies with P/BV in the bottom 30%; and, (4) 30-70 growth, consisting of companies with P/BV in the top 30%. Using stock return and accounting data for more than 500 of the largest European firms over the period 2001-2006, they conclude that: Keep Reading

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