Seeking Alpha

Larry Swedroe

 
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  • Do Rising Rates Spell Doom For REITs?
    Thu, Jul. 10 IYR, VNQ, DRN 44 Comments

    Summary

    • Much of the conventional wisdom on investing is simply wrong. Investors shouldn’t automatically accept such “wisdom” as fact, but ask for the evidence supporting it.
    • All information is not “value relevant” information.
    • If rising rates reflect strong economic growth, the expected returns to REIT investments might also be good. This could be a reflection of stronger demand or a falling risk premium.
  • The Long And Short Of The Low-Volatility Anomaly
    Tue, Jul. 8 SPLV, USMV, EEMV 6 Comments

    Summary

    • Much, if not most, of the low-volatility anomaly can be explained by the poor performance of high-volatility stocks, not the outperformance of low-volatility stocks.
    • Excess returns from long low-volatility and short high-volatility portfolios have a limited lifespan. After that, excess returns are largely subsumed by high transaction costs.
    • Study: Among high-volatility stocks, those with low short interest actually experience extraordinary positive returns.
  • Does Taking Corporate Credit Risk Add Value?
    Thu, Jul. 3 AGG 15 Comments

    Summary

    • Don’t be tempted by higher yields because there are more efficient ways to take on risk.
    • The lower a bond’s credit rating, the higher its correlation with equities. It’s essentially equity risk in disguise.
    • Higher-yielding bonds don’t make the most effective diversifiers, and they tend to make worst-case losses even worse.
  • Do Lower Investment-Grade Municipal Bonds Add Value?
    Mon, Jun. 30 MUNI 16 Comments

    Summary

    • Investors who need better returns than high-quality bonds will provide should adjust their portfolio’s equity allocation, not stretch for yield.
    • Credit risk in lower-rated bonds is mostly equity risk in disguise.
    • Building an individual bond portfolio allows investors to avoid mutual fund fees while tailoring credit and term risk to their specific situation.
  • Why We Love Premium Bonds And You Should Too
    Thu, Jun. 26 23 Comments

    Summary

    • The higher annual interest payments received for premium bonds offset the amortization of the premium paid for them.
    • Higher coupon premium bonds are less sensitive to the negative effect of rising interest rates.
    • Purchasing premium bonds allows investors to avoid onerous tax implications created by buying discount bonds.
  • The Role Of Credit Risk In Exchange-Traded Notes
    Tue, Jun. 24 6 Comments

    Summary

    • Comparatively little attention has been paid to the role of counterparty risk in exchange-traded notes.
    • Study: Based on real market quotes, there is no evidence that investors are pricing for substantial credit risk in ETNs.
    • Investors should be sure to examine not only an ETN's expense ratio, but also the implied cost of its credit risk.
  • Decreasing Returns To Scale In Actively Managed Mutual Funds
    Thu, Jun. 19 8 Comments

    Summary

    • The past performance of active managers is no predictor of their future performance.
    • Study: Decreasing economies to scale can explain the lack of persistence in performance among active managers.
    • Fund managers have become more skillful over time, but this higher skill level has not been translated into better performance.
  • The Hurdles Are Getting Higher For Active Management
    Tue, Jun. 17 26 Comments

    Summary

    • For active managers to be successful, they must have victims they can exploit. These victims are likely to be individual investors.
    • Passive investors receive benefits from the role active managers play in making financial markets efficient without paying the costs.
    • For individual investors who recognize that active management is a loser’s game, all the trends are favorable.
  • Do Day Traders Evidence Skill?
    Fri, Jun. 13 SPY, IVV, VOO 125 Comments

    Summary

    • On average, individual investors lose money from trading. Not all of those losses can be explained by trading costs.
    • Even the most skilled investors have a hard time generating alpha (risk-adjusted excess returns) after all expenses are accounted for.
    • Study: Less than 1 percent of day traders on the Taiwan Stock Exchange are able to outperform consistently.
  • Does Private Equity Deliver Alpha
    Wed, Jun. 11 12 Comments

    Summary

    • Private equity (PE) has grown tremendously over the past 30 years.
    • Growth is a result of American pension funds searching for alternatives to public equity markets.
    • Private equity doesn’t provide risk adjusted returns.
  • Has The Realized Equity Premium Been Shrinking?
    Editors' Pick • Wed, Jun. 4 30 Comments

    Summary

    • Claude Erb has done a series of papers in which he examines the various premiums — size, value, momentum, and beta.
    • His most recent one focused specifically on the equity risk premium.
    • While it’s certainly possible that the equity risk premium could revert to its historical mean, mean reversion of valuations is far from a certainty.
  • Has The Small-Cap Premium Collapsed?
    Tue, Jun. 3 IWM, TZA, TNA 11 Comments

    Summary

    • Over the last five years, the dramatic outperformance of U.S. small-cap stocks has the media warning investors about their future performance.
    • Most of the outperformance of small caps is due to the very large outperformance of a very small number of small-cap stocks that are no longer small cap.
    • Small-cap premium has come down a bit, but there’s no evidence of small caps being highly overvalued.
  • Is Cohen & Steers Really The King Of REITS?
    Fri, May. 30 16 Comments

    Summary

    • Recent article inspired a review of historical records to see if Cohen & Steers should be considered a "master of the universe".
    • Compared two Cohen & Steers domestic real estate funds against Vanguard's REIT.
    • The results indicate that, perhaps, Cohen & Steers should abdicate the throne.
  • Do Dividends Lower Stock Prices? Part II
    Wed, May. 28 534 Comments

    Summary

    • Some investors have a hard time accepting that when a company pays a dividend, the payment results in a permanent, relatively lower price.
    • As long as a company earns more than it pays out in dividends, the stock price will eventually increase to above the price it was before the dividend was paid.
    • If you believe dividends don’t lower the price by the amount of the dividend, you also must believe that not paying them would not raise the price.
  • Myths About Momentum: Part II
    Wed, May. 21 PDP, PIE, DWAS 12 Comments

    Summary

    • When momentum experiences occasional crashes, it’s the short side that causes the losses.
    • It’s also important to understand that all premiums are volatile, with their volatility being a multiple of the premium itself.
    • In bear markets, forced selling by margin calls can lead to momentum, as can short squeezes in bull markets.
  • Myths About Momentum: Part I
    Tue, May. 20 PDP, PIE, DWAS 33 Comments

    Summary

    • A new paper discusses the facts and the myths surrounding the momentum factor.
    • The momentum premium has been evident in U.S. equity data for over 200 years.
    • The momentum premium has been both persistent over time and pervasive across countries, geographic regions, and asset classes.
  • Is Momentum Overgrazed?
    Thu, May. 15 PDP, PIE, DWAS Comment!

    Summary

    • Claude Erb has also explored at the question of the momentum premium being overgrazed.
    • Erb explains that while the large-cap momentum premium has declined, it’s still well above the equity risk premium.
    • Erb concludes that relative to other equity market opportunities, momentum does not appear to be overgrazed.
  • Is The Stock Market 'Overgrazed'?
    Tue, May. 13 72 Comments

    Summary

    • A new paper by Claude Erb notes that over time the beta, size and value premiums have all declined.
    • The paper questions whether or not the trades are too crowded with investors demanding too much from a limited supply.
    • Erb notes that there is no way to know if markets have been “overgrazed” — though declining trends at least raise the suspicion that they have been.
  • Should You Include International Bonds In Your Portfolio? - Part II
    Fri, May. 9 BNDX, BWX, BWZ 29 Comments

    Summary

    • Vanguard found that with appropriate hedging of currency risk, investment in the broad international bond market can be less volatile than an investment in the broad U.S. bond market.
    • They also noted that the volatility of currencies can overwhelm any diversification benefit that international bonds may bring to a diversified portfolio.
    • Diversification of risk is an extremely important part of a prudent strategy.
  • Should You Include International Bonds In Your Portfolio? - Part I
    Thu, May. 8 BWX, BNDX, IGOV 15 Comments

    Summary

    • There are two main types of fixed income risks that investors should consider diversifying: credit and interest rate.
    • U.S. investors can eliminate the need for diversification of credit risk by limiting their holdings to those that carry the full faith and credit of the U.S. government.
    • When limiting holdings to U.S. government credits, in terms of credit risk, international diversification doesn't provide any benefit.
  • Should People Listen To John Hussman's Forecasts?
    Tue, May. 6 100 Comments

    Summary

    • Stock forecasters are just a part of the market noise investors should ignore.
    • One of the biggest problems with forecasts is that many present a well-thought-out case, providing insightful analysis, often accompanied by interesting charts.
    • Forecasters aren’t telling you anything that other sophisticated investors (such as pension plans, hedge funds, mutual funds) are unaware of.
  • May, The Silly Season, Is Upon Us
    Thu, May. 1 DIA, SPY, QQQ 8 Comments

    Summary

    • The sell in May and go away strategy is just another in the long list of investment myths.
    • It is true that stocks have provided greater returns from November through April than they have from May through October.
    • It is also true that since 1926, there has still been an equity risk premium from May through October.
  • Do Dividends Lower Stock Prices?
    Wed, Apr. 30 222 Comments

    Summary

    • As long as a company earns more than it pays out in dividends, it’s likely that the stock price will eventually increase to above the price it was before the dividend was paid.
    • Dividends return the company’s capital to its shareholders, reducing the value of the company.
    • Dividends are not a free lunch.
  • The Efficient Market Hypothesis, Fact Or Fiction? Part 4
    Fri, Apr. 25 139 Comments

    Summary

    • Markets aren't perfectly efficient. They fail at all three forms (weak, semi-strong, and strong) of the EMH, and markets aren’t perfectly rational.
    • The EMH provides us with important insights into how competitive forces work in setting asset prices.
    • The EMH also guides investors to the strategy that’s most likely to allow them to achieve their financial goals.
  • The Efficient Market Hypothesis, Fact Or Fiction? Part 3
    Thu, Apr. 24 17 Comments

    Summary

    • Active investors make the market efficient by attempting to gain a competitive advantage in terms of information.
    • Competition among all the highly skilled competitors makes it very difficult to gain any competitive advantage.
    • The revolution in computer technology has allowed the testing of various strategies based on computation intensive research that wouldn’t have been possible until fairly recently.
  • The Efficient Market Hypothesis, Fact Or Fiction? Part 2
    Wed, Apr. 23 53 Comments

    Summary

    • Each year the SPIVA results are virtually the same — a large majority of active managers underperform their benchmarks.
    • Another demonstration of the failure of active management to generate alpha is to look at the returns of the two leading advisors to pension plans, SEI and Russell.
    • Academic studies have found that there is no persistence in pension plan performance beyond the randomly expected — past performance isn’t a reliable predictor of future performance.
  • The Efficient Market Hypothesis, Fact Or Fiction? Part 1
    Tue, Apr. 22 SPY, DIA, QQQ 30 Comments

    Summary

    • The efficient market hypothesis is a hypothesis that provides an important organizing principle that helps us understand how markets function and prices are set.
    • EMH asserts that financial markets are informationally efficient.
    • As anomalies have been uncovered, there’s mounting criticism of the EMH.
  • What Exactly Is Risk: Part II
    Fri, Apr. 18 SPY, SSO, SDS 43 Comments

    Summary

    • The expected return of a portfolio should never be considered as a single point, but instead, should be considered as a potential distribution of outcomes.
    • Tracking error, black swan and maverick risk are a few other ways to define the risk that investors and advisors face.
    • Standard deviation isn't the only risk investors and advisors should consider when developing a financial plan and investment policy statement.
  • What Exactly Is Risk?
    Thu, Apr. 17 83 Comments

    Summary

    • Not being able to precisely define risk is a problem for both advisors and investors.
    • A common definition for risk is standard deviation, or a measure of volatility.
    • Unfortunately, two investments with similar standard deviations can experience entirely different distribution of returns.
  • Confusing Familiarity With Safety: International Investing And Currency
    Tue, Apr. 15 EFA, VEA, IEFA 7 Comments

    Summary

    • Investors often don't properly diversify because they think international investing is risky. U.S. equities are mistakenly assumed to be the "safest."
    • Even if the U.S. is the safest, that does not mean investors should have all their eggs in one basket.
    • Financial economists recommend that investors add international assets to their portfolios, because they actually reduce risk.
  • Emerging Markets, Should They Be In Your Portfolio?
    Thu, Apr. 10 EEM, VWO, EDC 24 Comments

    Summary

    • From 2011-2013, the MSCI Emerging Markets Index about broke even, underperforming the S&P 500. Investors are once again fleeing.
    • Emerging equity markets have been more volatile than developed markets. However, volatility has been falling.
    • Current valuations suggest that emerging markets will provide higher returns than either the U.S. or other developed markets.
  • Portfolio Rebalancing: The Whys And The Hows
    Tue, Apr. 8 20 Comments

    Summary

    • Ideally, to eliminate style drift investors should rebalance daily. However, because the real world involves costs, investors should reduce, not eliminate, style drift to an acceptable level.
    • Investors should rebalance wherever there is sufficient cash to make the effort worthwhile, thus eliminating any tax issues and either eliminating or minimizing trading costs.
    • An investor’s investment policy statement (IPS) should include targeted asset allocations as well as minimums and maximums and a rebalancing table.