I have never really fully understood what "style" or "factor" investing even mean. I view "growth", "momentum", and "value" investing as different *approaches* with lots of identified historic drivers for periods of sustained under/outperformance. Similarly, there are demonstrated reasons as to why small-cap stock investing approaches should outperform over the long haul.
However, over the past 20-plus years, both value *and* small-cap investing have taken on quasi-religious faith characteristics similar to what came to be known amongst the Millerite (no relation!) religious movement as "The Great Disappointment" https://en.wikipedia.org/wiki/Great_Disappointment . A more secular comparison might be "Waiting for Godot" https://en.wikipedia.org/wiki/Waiting_for_Godot .
In addition, my highly unscientific observation is that geographic rotation isn't really a feasable investment approach, as much of any arbitragible differences appears to be eclipsed by currency fluctuations and a paucity of investment options in certain markets due to liquidity and capital constraints. "Hey, I've identified a great relative valuation discontinuity opportunity in Country X!" "Well, let's hope it's not Taiwan, or Korea, or mainland A-shares China, or South America, or India (my son recently tried to buy local Rupee-denominated shares an Indian stock, and his broker couldn't even place the order). Not to be a wag, but the UK in particular has screened as relatively attractive for the past decade-plus! Then you find yourself right back to the same old developed markets with high liquidity and stable currencies.
That sort of leaves stock-picking from a universe of large-cap growth (a.k.a. megacap tech/Magnificent Seven) stocks in developed markets as the only thing professionals realistically do to keep performing ... and more importantly, enable one to look busy enough to keep one's job. As for individuals, cash yields nothing, bonds appear broken, and no one has time for stock picking because they're too busy lawyering or dentisting or whatever it is they work hard at all day, so Vanguard Index 500 ETF at an expense ratio of 0.03% it is ... and for well over a quarter century that's been the right thing to do!
I agree with you that you may wait a long time for the Small Cap to rise, and it never does. Not for me.
Identity of how to screen in ‘Quality’ and ‘Value’ for your given stock. If you Google search for “investment analysis”, “equity investment factors” “Value factor for stock” etc, then read articles etc, you can pick up how to test factors eg for Quality growth in Revenue and Earnings for last 5 years, low or no Debt, increasing Operation Earnings, etc.
It takes a lot of time to understand what matters should be used to test a stock: years of reading and thinking; but it can give you an edge over the success of the index and fund managers.
Good ….. not luck but good successful stock picking,
Thanks. I was being a bit hyperbolic; I understand what the factors are, but I never fully grasped how one could turn them into viable investment strategies. Would that be running, say, a screen for "all stocks growing earnings over 20% per year for the past five years" or "all stocks with a P/E < 10x", or "all stocks where the y-y change in the incremental EBITDA margin is positive", etc.? It seems that these would all be so backward-looking and/or obvious that any discontinuities in valuation would quickly be arbitraged out. As opposed to identifying in 2005 that "Apple Computer is about to introduce a mobile telephone that everyone will want, and Nokia's market share will go from 40% to zero".
Thanks - this is the first I read about a causal relationship between factors and the macro environment. For those who are interested in factor momentum, here are two links:
but how to properly assess the macro regime we are at, and most importantly, how long it will continue and which new regime it will regime into? I found a lot of macro analysts making investment mistakes because of macro trading, by evaluating wrongly what regime we´re at and what would happen next. A lot of macro investor thought we were heading into a recession in US in 2023 and were wrong, many thought that the soft landing was probably not gonna happen, and here we are somewhat close to it. So my question is how do we use macro to our benefit? This has been the hardest principle to add to my investing system. Is there any book or paper that has good guidance on that?
Otherwise, I agree that macro investing isn’t easy, but after 20+ years I find it still easier than stock picking. But maybe I am doing something that most macro guys don’t. For example, I was mystified throughout 2023 why people were so bearish. It was clear to me that declining bond yields and inflation would give stock markets a major boost.
Btw, when you do listen to macro investors, never EVER follow the advice of economists. Always focus on strategists. Strategists are wrong more often than they are right, but in my entire career I have found that economists are absolutely useless as investors because they only think about the economy and never how the market interprets the data, which makes all the difference.
As an economist, i understand. My macro college teachers were kind of arrogant, and i always thought what does any of those simplified models with thousands of unrealistic assumptions have to do with reality. That´s why i like more some niche areas that seems more rigorous like causal analysis in public policies and econometrics, and development econ. Macroeconomics, i think is in a pre-scientific state and the why macroeconomists fail so often. Anyway, even when i was looking into non-economists macro analysis they seemed to fail somewhat regularly as well, and that´s why i kind of let go of macro for investments for a while, but i´ll definitely take a look on your book! thanks for the advices
From this I gather that, if you have on your Watch List a stock which you have approved on Quality & Value etc, then for TIMING of purchase you look at Momentum ‘tests’ before you pull the trigger - looking at matters such as JK mentions.
I have never really fully understood what "style" or "factor" investing even mean. I view "growth", "momentum", and "value" investing as different *approaches* with lots of identified historic drivers for periods of sustained under/outperformance. Similarly, there are demonstrated reasons as to why small-cap stock investing approaches should outperform over the long haul.
However, over the past 20-plus years, both value *and* small-cap investing have taken on quasi-religious faith characteristics similar to what came to be known amongst the Millerite (no relation!) religious movement as "The Great Disappointment" https://en.wikipedia.org/wiki/Great_Disappointment . A more secular comparison might be "Waiting for Godot" https://en.wikipedia.org/wiki/Waiting_for_Godot .
In addition, my highly unscientific observation is that geographic rotation isn't really a feasable investment approach, as much of any arbitragible differences appears to be eclipsed by currency fluctuations and a paucity of investment options in certain markets due to liquidity and capital constraints. "Hey, I've identified a great relative valuation discontinuity opportunity in Country X!" "Well, let's hope it's not Taiwan, or Korea, or mainland A-shares China, or South America, or India (my son recently tried to buy local Rupee-denominated shares an Indian stock, and his broker couldn't even place the order). Not to be a wag, but the UK in particular has screened as relatively attractive for the past decade-plus! Then you find yourself right back to the same old developed markets with high liquidity and stable currencies.
That sort of leaves stock-picking from a universe of large-cap growth (a.k.a. megacap tech/Magnificent Seven) stocks in developed markets as the only thing professionals realistically do to keep performing ... and more importantly, enable one to look busy enough to keep one's job. As for individuals, cash yields nothing, bonds appear broken, and no one has time for stock picking because they're too busy lawyering or dentisting or whatever it is they work hard at all day, so Vanguard Index 500 ETF at an expense ratio of 0.03% it is ... and for well over a quarter century that's been the right thing to do!
I agree with you that you may wait a long time for the Small Cap to rise, and it never does. Not for me.
Identity of how to screen in ‘Quality’ and ‘Value’ for your given stock. If you Google search for “investment analysis”, “equity investment factors” “Value factor for stock” etc, then read articles etc, you can pick up how to test factors eg for Quality growth in Revenue and Earnings for last 5 years, low or no Debt, increasing Operation Earnings, etc.
It takes a lot of time to understand what matters should be used to test a stock: years of reading and thinking; but it can give you an edge over the success of the index and fund managers.
Good ….. not luck but good successful stock picking,
Thanks. I was being a bit hyperbolic; I understand what the factors are, but I never fully grasped how one could turn them into viable investment strategies. Would that be running, say, a screen for "all stocks growing earnings over 20% per year for the past five years" or "all stocks with a P/E < 10x", or "all stocks where the y-y change in the incremental EBITDA margin is positive", etc.? It seems that these would all be so backward-looking and/or obvious that any discontinuities in valuation would quickly be arbitraged out. As opposed to identifying in 2005 that "Apple Computer is about to introduce a mobile telephone that everyone will want, and Nokia's market share will go from 40% to zero".
Thanks - this is the first I read about a causal relationship between factors and the macro environment. For those who are interested in factor momentum, here are two links:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3300728
and
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3116974
but how to properly assess the macro regime we are at, and most importantly, how long it will continue and which new regime it will regime into? I found a lot of macro analysts making investment mistakes because of macro trading, by evaluating wrongly what regime we´re at and what would happen next. A lot of macro investor thought we were heading into a recession in US in 2023 and were wrong, many thought that the soft landing was probably not gonna happen, and here we are somewhat close to it. So my question is how do we use macro to our benefit? This has been the hardest principle to add to my investing system. Is there any book or paper that has good guidance on that?
At the risk of sounding corny, try my book: https://www.harriman-house.com/7mistakesinvestor
Especially chapters 7 and 8.
Otherwise, I agree that macro investing isn’t easy, but after 20+ years I find it still easier than stock picking. But maybe I am doing something that most macro guys don’t. For example, I was mystified throughout 2023 why people were so bearish. It was clear to me that declining bond yields and inflation would give stock markets a major boost.
Btw, when you do listen to macro investors, never EVER follow the advice of economists. Always focus on strategists. Strategists are wrong more often than they are right, but in my entire career I have found that economists are absolutely useless as investors because they only think about the economy and never how the market interprets the data, which makes all the difference.
As an economist, i understand. My macro college teachers were kind of arrogant, and i always thought what does any of those simplified models with thousands of unrealistic assumptions have to do with reality. That´s why i like more some niche areas that seems more rigorous like causal analysis in public policies and econometrics, and development econ. Macroeconomics, i think is in a pre-scientific state and the why macroeconomists fail so often. Anyway, even when i was looking into non-economists macro analysis they seemed to fail somewhat regularly as well, and that´s why i kind of let go of macro for investments for a while, but i´ll definitely take a look on your book! thanks for the advices
Agree avoid Economists; although their ideas - placed on hard statistics reported - can help with your overview of Timing of purchase.
From this I gather that, if you have on your Watch List a stock which you have approved on Quality & Value etc, then for TIMING of purchase you look at Momentum ‘tests’ before you pull the trigger - looking at matters such as JK mentions.