AGNOSTIC Papers

AgPa #43: Buffett’s Alpha

Buffett’s Alpha (2018)
Andrea Frazzini, David Kabiller, Lasse Heje Pedersen
Financial Analysts Journal 74(4), URL

In this week’s AGNOSTIC Paper, the authors use the major factor premiums to examine one of the best long-term investment track records in the world – Warren Buffett and Berkshire Hathaway. The latest annual report just came out a few days ago and (as usual) summarizes Berkshire’s performance on the first page. From 1965 to 2022, Berkshire returned 19.8% per year versus 9.9% for the S&P 500. That’s a 24,708% cumulative return for the S&P 500, and an unbelievable 3,787,464% return for Berkshire. There are some investors who achieved even better results over shorter time periods. But to the best of my knowledge, there is no 58-year track record that is even remotely comparable to Buffett.

  • How good is Berkshire? Damn good…
  • The Buffett Style: cheap stocks with high-quality and low-risk
  • Don’t practice what you preach – Buffett’s Leverage…
  • Systematizing Buffett and Berkshire

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AgPa #42: Global Factors since 1800

Global factor premiums (2021)
Guido Baltussen, Laurens Swinkels, Pim van Vliet
Journal of Financial Economics 124(3), 1128-1154, URL

This week’s AGNOSTIC Paper is another out-of-sample test of the major factors and goes even further back in time than the last one. The authors examine the major factor premiums among equity indices, government bond indices, currencies, and commodities in a sample that ranges from December 31, 1799 to December 31, 2016.

  • Momentum, Value, and Low-Risk “worked” globally, in different asset classes, and out-of-sample
  • There is little evidence for factor decay

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AgPa #41: US Factors before 1926

The Cross-Section of Stock Returns before CRSP (2023)
Guido Baltussen, Bart van Vliet, Pim van Vliet
SSRN Working Paper, URL

This week’s AGNOSTIC Paper is an unprecedented out-of-sample test of the four major factors (Momentum, Value, Low-Risk, Size). The authors construct a novel dataset of US stocks that reaches from 1866 to 1926. It therefore extends the extensively studied CRSP dataset by 60 years.

  • Momentum, Value, and Low-Risk were there before 1926
  • Factors weren’t stronger before 1926
  • Machine learning models find the same factors

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AgPa #40: Size Effect – Fact and Fiction

Fact, Fiction, and the Size Effect (2018)
Ron Alquist, Ronen Israel, Tobias Moskowitz
The Journal of Portfolio Management Fall 2018, 45 (1) 34-61, URL/AQR

After examining several Facts and Fictions around factor investing in general, momentum, value, and low-risk, this week’s AGNOSTIC Paper tackles the final anomaly. The size effect received a lot of attention in both academia and the investment industry, probably because it is one of the oldest documented anomalies. In this final paper of their Fact and Fictions series, the authors examine some myths around it.

  • Fiction: Size is the strongest documented factor
  • Fact: The size effect weakened since its discovery
  • Fiction: The size effect is robust across different measures
  • Fact: The size effect is strongly related to the January effect
  • Fiction: Size also works in international equity markets
  • Fact: Size does not work within other asset classes
  • Fact: Most of the size effect are micro cap stocks
  • Fact: Size is difficult to implement in real-world portfolios
  • Fiction: The size effect is more than just a liquidity effect
  • Fiction: There are economic theories for the size effect
  • Fiction: Size works because other factors are stronger among small cap stocks
  • Fact: There are reasons to overweight small caps even without the size effect
  • Fact and Fiction: The size effect is stronger when controlling for other factors
  • Fact: Size receives a lot of attention despite weak evidence

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AgPa #39: Low-Risk Investing – Fact and Fiction

Fact and Fiction about Low-Risk Investing (2020)
Ron Alquist, Andrea Frazzini, Antti Ilmanen, Lasse Heje Pedersen
The Journal of Portfolio Management Multi-Asset Special Issue 2020, 46 (6) 72-92, URL/AQR

After examining value and momentum, this week’s AGNOSTIC Paper examines some Fact and Fictions around defensive / low-risk investing. The defensive / low-risk factor captures various well-known effects like the low-volatility and Betting Against Beta effect, but also fundamental strategies like quality (a.k.a. the Quality Minus Junk factor).

  • Fact: Low-risk securities generate risk-adjusted outperformance
  • Fiction: The low-risk premium is weaker than other factors
  • Fact: Low-risk strategies worked out-of-sample
  • Fiction: Low-risk profits come from industry bets
  • Fact: Low-risk investing worked across geographies and asset classes
  • Fiction: Low-risk investing doesn’t work because the CAPM is dead
  • Fact: There is economic theory behind the low-risk premium
  • Fiction: Low-risk investing does not survive trading costs
  • Fact: Low-risk investing can lose money in bear markets
  • Fiction: Low-risk factors became too expensive

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AgPa #38: Value Investing – Fact and Fiction

Fact, Fiction, and Value Investing (2015)
Clifford Asness, Andrea Frazzini, Ronen Israel, Tobias Moskowitz
The Journal of Portfolio Management Fall 2015, 42(1) 34-52, URL/AQR

After busting some myths around momentum, this week’s AGNOSTIC Paper is the sequel for value investing. The authors, the same AQR crew as last week, present several Facts and Fictions around value investing which is actually one of the oldest investment styles out there.

  • Fiction: Value investing requires concentrated portfolios
  • Fiction: Value has low turnover and is thus passive
  • Fact: Fundamental indexing is similar to systematic value investing
  • Fact: Profitability signals improve value investing
  • Fiction: Value is redundant in modern factor models
  • Fact: Value also works in other asset classes
  • Fact: Value is best measured by a composite of signals
  • Fact: Value is quite weak among large caps
  • Fiction: The value premium should disappear because there are no plausible explanations

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AgPa #37: Momentum Investing – Fact and Fiction

Fact, Fiction, and Momentum Investing (2014)
Clifford Asness, Andrea Frazzini, Ronen Israel, Tobias Moskowitz
The Journal of Portfolio Management Special 40th Anniversary Issue 2014, 40(5) 75-92, URL/AQR

After examining the general Facts and Fictions about factor investing, this week’s AGNOSTIC Paper examines momentum in more detail. Specifically, the authors combat 10 misleading myths about momentum…

  • Myth 1: Momentum returns are economically not meaningful
  • Myth 2: Long-only investors cannot capture momentum
  • Myth 3: Momentum is much stronger among small-caps
  • Myth 4: Momentum does not survive trading costs
  • Myth 5: Momentum produces a huge tax bill
  • Myth 6: Momentum is better as a screen than as a factor
  • Myth 7: Momentum returns should disappear in the future
  • Myth 8: Momentum is too volatile to rely on
  • Myth 9: Different momentum measures lead to different results
  • Myth 10: There is no theory behind momentum

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AgPa #36: Factor Investing – Fact and Fiction

Fact, Fiction, and Factor Investing (2023)
Michele Aghassi, Cliff Asness, Charles Fattouche, Tobias J. Moskowitz
The Journal of Portfolio Management Quantitative Special Issue 2023, URL

Whenever AQR writes about systematic investing, it’s (in my opinion) time to listen. This one is a very good overview about factor investing. Given that this is the intellectual basis of many things I do here on the website, it perfectly fits to the series.

  • Fiction: Factor investing is just data-mining
  • Fact: Factors are risky
  • Fiction: Factor diversification doesn’t work
  • Fact: Factors work in different market regimes
  • Fiction: Factors don’t work anymore
  • Fact: Factors were and are not crowded
  • Fiction: Everyone should (and can) invest in factors
  • Fact: Factor discipline beats factor timing
  • Fact: Sticking with factors is often difficult

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AgPa #35: Rethinking Active Management

Measuring skill in the mutual fund industry (2015)
Jonathan B. Berk, Jules H. van Binsbergen
Journal of Financial Economics 118(1), 1-20, URL/SSRN

From several of my earlier articles you may (correctly!) gained the impression that I am somewhat skeptical about the value-add of most (not all!) active fund managers. However, an excellent episode of the Rational Reminder Podcast featuring Jonathan Berk and Jules van Binsbergen convinced me of another perspective. This week’s AGNOSTIC Paper summarizes their work…

  • Alpha and outperformance alone do not measure skill
  • The average active manager added value – $3.2M per year
  • Investors identify and reward value-adding active managers
  • Active managers still overcharge – net alphas are negative

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AgPa #34: Inefficient Christmas Gifts

The Deadweight Loss of Christmas (1993)
Joel Waldfogel
The American Economic Review 83(5), 1328-1336, URL

Welcome to the Christmas edition! As a rare exception, this AGNOSTIC Paper is not about finance and investing. Instead, we will look at the economics of Christmas gifts…

  • Many non-cash gifts are economically inefficient
  • The deadweight loss of Christmas is in the billions

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