Every summer I look forward to the annual “blogger wisdom” week over at Abnormal Returns. I’ve been participating for a few years now and each year I am impressed by both Tadas’ questions and the thoughtful answers from my fellow respondents. Below are all of this year’s questions alongside my response to each and what I felt was the best response(s) from the rest of the field. Links to each post in full will be provided as well.
Question: Is value investing dead? Seriously, it’s been quite some time since it had any meaningful outperformance. Josh made the case that maybe the world has fundamentally changed. Or is this just the kind of talk you hear at a turning point?
I don’t think so. While this is certainly an historical rough patch for value investing, it is not unprecedented. There have been tough times for value before and there will be tough times again in the future. As Corey Hoffstein would say, “No pain, no premium.”
Value works because, at extremes, markets tend to overreact. Investors get too excited over glamour stocks and too despondent about cheap stocks. Human nature is pretty sticky over time.
If anything, this past decade has been a helpful reminder that no factor is guaranteed even over long stretches of time and that these historical premiums have been earned, not handed out.
Best of the Rest:
No. Buying a dollar for 70 cents will continue to be a good idea.
Value’s mom, Mrs. Market, is pregnant. She’s going to have the baby, and value investing will be born again. She doesn’t know her gestation period, but one of these days, months, or years, her water will break.
Value will emerge for the reasons it hasn’t worked for ten years, and not for the reasons we thought it worked before Fama-French. It didn’t work before because value stocks were riskier. They aren’t. It worked before because investors got overly excited by growthy, glamourous names which are fun to talk about to our friends. That created overpricing, and opportunity for value investors. For like 80 years.
But when an avalanche of cash is dropped from helicopters around the world, without inflation, and when interest rates effectively go to zero, creating limits to arbitrage, value investing, per se, just can’t work. Consequently, the long-duration, high-multiple, high-quality names got to go on a factor vacation.
The holiday may end tomorrow, and it may last for another ten years.
But it won’t last forever.
Question: Traditional active management is dying a slow, painful death. Is the introduction of non-transparent, active ETFs a potential turning point or simply a finger in the dike of an unstoppable trend?
I don’t think the structure itself represents any sort of turning point for traditional active management. People haven’t been leaving active equity funds in droves because they can’t trade their mutual funds intraday. The tax efficiencies gained from the new structure are a plus, but I don’t think that moves the needle enough. The evidence against active has been pretty damning even before taking taxes into account. Now, if this structure can be paired with much more reasonable fees and truly active, non-closet indexing approaches to discretionary stock picking then maybe – just maybe – there’s a chance. But I won’t hold my breath. And even if the odds for active improved, that still doesn’t make any of us likelier to identify the winners in advance.
Best of the Rest:
I think you said it perfectly. A slow painful death. This death will in my estimation continue for the rest of our careers. Active management outflows are probably permanent, but there are so many dollars there that it will take decades for this to run its course. And I think that eventually the gushing of outflows will slowdown and it will arrive at a steady state. I have no opinion on when or how that happens.
I think the problem with traditional active management is that ETFs and quant are replicating what they do in a far cheaper and more tax efficient way. My guess is that traditional active management will be around for a long time as it seems in every field that has undergone a quant revolution (i.e., chess, diagnostic medicine, etc.) that humans + computer is better than either individually. Once the active management industry shrinks and re-tools to be a compliment to a more quant process that active management will thrive again.
Question: I am intrigued by the idea of the Long-Term Stock Exchange. Do you think it has the potential to open up the capital markets in new and meaningful ways? Or is the LTSE up against entrenched interests who simply too powerful?
I can’t say that I know enough about the LTSE to feel strongly one way or another about it. On one hand, I do agree that short-termism can be a problem on Wall Street. On the other hand, we have also seen CEOs and founders achieve success under the current system by cultivating a long-term narrative around their vision that investors can coalesce around.
Whatever the outcome, they have a long, uphill battle ahead of them. Inertia is a powerful force in finance. The recent direct listings of Spotify and Slack are encouraging in the sense that they are large, well-known companies that were willing to challenge the status quo of traditional IPOs. If the LTSE can find a couple of unicorns willing to take the plunge with them, they just might have a shot.
Best of the Rest:
I believe an exchange created by VCs that increases the power of VCs through the limitation of shareholder rights and reduced activist involvement, yet pitched as something beneficial for investors and largely believed by the marketplace, is something you’d be unlikely to see when markets aren’t at an all-time high.
The idea of “short-termism” is a misunderstanding in my view. Any corporation that focuses too much on the short-term will lose market share to firms that think long-term. If the problem of modern capitalism is that today’s firms are too short-term oriented then we should all embrace that as that opens the door to new firms to come in and replace these firms. So, I say bring on the short-termism if that’s what is really happening. Let bad firms fail under their own misguided views. Of course, that’s not what’s really happening but it’s a convenient narrative for people who hate buybacks, executive pay and pretty much all things Wall Street.
Question: What have you learned in the past year (or so) that genuinely surprised you? Or said another way, what thing have you changed your mind about recently?
My Response: (note – the sarcasm is laid on pretty thick in this one)
So it turns out that trade wars aren’t good and easy to win ¯_(ツ)_/¯
Best of the Rest:
I’m starting to buy into the idea that interest rates will stay low for a long, long time. I’m not 100% — maybe like 70% — but if you had asked me a few years ago what the odds were that interest rates would eventually revert to, say, 5-7% in the next few years I’d say “99%.” Now I’m not so sure. And it has all kinds of implications on assets and valuations and business operations if that’s the case.
I was going to write a post about how intelligence doesn’t matter in investing, but then I read a working paper that made me think otherwise. It was tough because my post was basically done, but after reading the paper I had to re-write it. Intelligence does affects investment performance, but probably not in the way that you think it would.
Question: Hey, how’s your podcast doing? It seems that most bloggers if they don’t already have a podcast, have toyed with the idea. As a blogger how do you view podcasting? Does it supplant blogging, support it, or is it something different altogether?
It’s funny, if you would have asked me two years ago I would have told you there were too many finance and investing podcasts. Fast forward to today, and there have been some fantastic new additions that are now a part of my regular rotation from the likes of Corey Hoffstein, Tobias Carlisle, AQR, Christine Benz/Jeff Ptak, and Daniel Crosby.
I don’t have a podcast of my own – at least not yet – but I view it as a different medium altogether. Every form of content is competing for our ears and eyeballs, but I do feel that blogging and podcasts can co-exist and that certain topics and ideas thrive better in one versus the other.
Best of the Rest:
Not being a podcaster, I view them as kind of like “blogs on tape.” The content overlaps, and the main utility is the ability to multi-task while taking in the information.
I wonder what podcasting will do to the demand for books. Right now, the pod is kind of like a book tour for authors. But if the message can be delivered in that hour, maybe the book isn’t worth it?
Question: What has you jazzed? It could be a blog, podcast, movie, book, show, app or gadget, etc. Give us your enthusiastic endorsement(s).
The OSAM Research Partners Program. The latest byproduct of this initiative – a research paper from the pseudonymous Jesse Livermore called “The Earning Mirage” – damn near broke the internet when it was released. Well, maybe not the internet, but it damn near broke Finance Twitter! It clocks in at over 100 pages, but I assure you the entire thing is worth reading.
Something tells me this is just the tip of the iceberg of exciting things “in the lab” from Patrick and his team at O’Shaughnessy Asset Management…
Best of the Rest:
Jamie Catherwood and Nick Maggiulli, because they came out of the middle of nowhere and are now two of the top voices in finance. That shows the system is working. This is a meritocracy, and if you have good stuff to say it doesn’t matter how old you are or what your background is or how much experience you have — if it’s good, you’ll get noticed.