RIP Book Value?

If you’re familiar with factor investing, you’re likely aware that value investing, particularly in the U.S. market, has had a challenging stretch over the last 10 years. If you dig deeper into the darker recesses of factor investing nerdery, you’ll also find that the validity of book value — one of the traditional measures of quantitative value — as a measure of a company’s intrinsic value is under assault. The basic claim is that intangible assets (research and development expenses, brand name, intellectual capital, etc.) have become such a large fraction of intrinsic value for many companies that book value, which doesn’t generally account for intangible > SEE MORE

Emerging Markets Need Time

The April 26, 2019 column by John Rekenthaler, vice president of research at Morningstar, called the experiment of investing in emerging markets a failure. He drew this conclusion after presenting the following evidence.

He began by showing the correlation between the Vanguard Emerging Markets Stock Index (VEIEX) and the S&P 500 Index over the last 25 years was a fairly low 0.25, demonstrating that, “On paper, emerging-markets stock funds did do some zigging while U.S. equities zagged.”

However, he then noted that it was “useless diversification. The only two times during the GREAT BULL MARKET (the results warrant the capitalization) in which U.S. equity investors needed protection was the New Era technology-stock meltdown and, of course, 2008. Emerging-markets stocks dropped 25% during the first instance—better than the S&P > SEE MORE

Does Money Buy Happiness?

There’s a cliché that money can’t buy happiness. Is that true? Thanks to research from Nobel Prize-winning economist Daniel Kahneman and Angus Deaton, authors of the 2010 study “High Income Improves Evaluation of Life But Not Emotional Well-Being,” we can answer the question: It does—to a point. Kahneman and Deaton found that happiness tends to increase along with income up to about $75,000 a year.

They found that the lower a person’s annual income falls below that benchmark, the unhappier he or she feels—having to worry about putting food on the table, providing decent shelter, and having access to good > SEE MORE

Hedge Fund Performance Update: Q1, 2019

Hedge funds entered this year coming off their 10th straight year of trailing the return of the S&P 500 Index. And as you can see in the following table, over the 10-year period ending 2018, they underperformed every single major equity asset class by wide margins. They also outperformed virtually riskless one-year Treasuries by less than 1%, and underperformed intermediate and long-term Treasuries. > SEE MORE

Peers Can Change Financial Behavior

Behavioral finance is the study of human behavior. There is extensive literature on how that behavior leads to investment errors, including the mispricing of assets. This is one reason Princeton psychology professor Daniel Kahneman was awarded the Nobel Memorial Prize in Economic Sciences in 2002.

The field also provides us with other important insights from which behavioralists have learned ways to change behaviors for the better. For example, in their book “Nudge,” Richard Thaler and Cass Sunstein described the following real-life experiment in tax compliance. > SEE MORE