Warren Buffett, SNP, Alcan discussed on The Meb Faber Show


Are pretty efficient. One receives they hire reward for taking on additional risk to extent that stocks are. Riskier than bonds in the future. We one could reasonably expect and demand a higher rate of return in an efficient Mark, thus equity investors should generally continued to trust the process. If the goal is a higher rate of return while you also do have to accept volatility. But what if one not only wanted to invest in stocks, but you wanna be like Warren Buffett and try to beat the stock market Alcan you go about trying to achieve this goal weeks? This so example too of reasonable processes is trying to beat the benchmark. So once one decides to invest in stocks are true approaches invest passively in the market cap weighted portfolio or Secondly attempt to beat the benchmark, Jeff invest passively, this can be done very cheaply using mutual funds and ETS the charge, very low management fees to almost Eur nowadays for those that attempt a strategy to beat the benchmark, they can do this. However, in two ways you can make your own stock selection or you can use ETS or mutual funds that have some strategy, but the goal here is actually pretty simple invest in stocks, while attempting to beat the bench now given that this is the goal is there a process, our second step that we can follow in an attempt to be the benchmark. So we're going to start with the assumption, which I think is accurate that just randomly picking stocks is a bad idea. So at that baseline is. Let's turn to the evidence in the past what systematic strategies have been shown to work. So after reading the journals in the nineteen nineties, you can come away with the conclusion that a few strategies worked in the past I is value investing, which is purchasing stocks that are cheaper on some measure, such as the price of the stock divided by its earnings, the P E ratio. The second is momentum investing purchasing stocks that had done the best over the past year, while exent winning Zam, the total return over the past year. This is standard momentum portfolio, then you say okay peers to work. What is the actual evidence? And again, I'm gonna plot the returns to top and bottom Dessel, sorted on value or momentum from nineteen twenty seven to twenty seventeen. This date is taken from Ken French's website. And so we're going to look at five four folios the market, just S and P five hundred value, which are the cheap stocks rebound annually growth. Which are the expensive stocks. Rebalance Danieli, the fourth and fifth portfolios are high and Lohman high momentum is basically the top Dessel affirms ranked every month on the past, total returns over the past twelve months in ignoring last month low momentum. These are the losing socks. They had the worst returns over the past year and what you notice is over this ninety year time period. Nineteen twenty seven to twenty seventeen. You see that the SNP returned..

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