Quality Investing

AgPa #52: Happier Employees, Better Returns?

Employee Satisfaction and Long-Run Stock Returns, 1984–2020 (2022)
Hamid Boustanifar, Young Dae Kang
Financial Analysts Journal 78(3), URL/SSRN

A common sales-pitch of ESG strategies is the idea that those strategies not only do good for the planet and other stakeholders, but also generate higher returns. I am generally skeptic about this, but there are studies showing that certain ESG variables historically indeed predicted higher returns. A prominent example for this is the paper on employee satisfaction by Alex Edmans (2011). This week’s AGNOSTIC Paper is an out-of-sample test of this study with somewhat more thorough testing.

  • “Best Companies” outperformed several benchmarks
  • “Best Companies” outperformed during crises and out-of-sample
  • Quality and Low-Risk factors explain some of the premium on “Best Companies”

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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 #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 #28: “Not Selling” of Insiders

Is “Not Trading” Informative? Evidence from Corporate Insiders’ Portfolios (2022)
Luke DeVault, Scott Cederburg, Kainan Wang
Financial Analysts Journal 78(1), 79-100, URL/SSRN

Transactions of insiders are usually a useful source of information when evaluating a stock. Insiders typically have a good understanding of the underlying business and buys are therefore often considered as positive signal. On the other hand, insider sales are not necessarily negative. There are many non-informative reasons to cash out. Maybe the insider needs some cash for personal expenditures or just wants to diversify his assets. This week’s AGNOSTIC Paper challenges this asymmetry and creatively shows that even those transactions convey important information…

  • “Not sold” stocks from insider portfolios outperformed
  • A portfolio of “not sold” stocks easily beat the US market
  • “Not sold” stocks with momentum are even better
  • Corporate insiders know more than institutional investors

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Report Analytics USA #2

This post contains a lot of unsexy calculations and is fairly technical. But (in my opinion) there are some very interesting results. Not just for my particular strategy but for everyone who is active on Wikifolio.

First. Overall and especially after costs, my two Wikifolios weren’t a good alternative to a standard ETF on the S&P 500 index (from inception to March 11, 2022). To my defense, however, I stressed several times that the two Wikifolios are just a real-world test of my master thesis and I never marketed them as investments.

Second. I still believe that Wikifolio is a great platform to test strategies like mine, but it is not perfect. There are annoying technical issues, pretty high fees, and significant indirect trading costs. Depending on the liquidity of the stock, bid-ask-spreads and/or unfavorable FX rates amount to 40-80 basis points per transaction on average.

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Report Analytics USA #1

This is the start of an ongoing series intended to share updates, insights, and backgrounds on the Report Analytics USA portfolios. To start with, I present the methodology that I currently use to implement the live portfolios on Wikifolio.

Heart of the process is a stock selection based on copy-paste of the most recently published annual and quarterly reports. I further divide this selection by market capitalization to create a “Large” and “Small” version of the Report Analytics USA portfolios.

All of this is just a starting point and I conclude this post with a roadmap of ideas to improve the strategy.

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#2: Copy-Paste Outperformance

Every year, US companies must publish three quarterly and one annual report. Preparing those reports, however, is a lot of effort, does not improve operations, and reveals information to competitors.

How to deal with this? Correct, spend the time to create one comprehensive template and reuse it as long as possible. In an excellent research paper titled “Lazy Prices” (2020), the authors show that US companies are no exception from this: many annual and quarterly reports are basically just updated copies from the previous year.

What does this mean for investors? Since most of the report is just copy-paste, they should rather focus on differences between the current and previous report (for example, new paragraphs). It turns out that such changes are indeed very important: quantitative measures for report copy-paste predict future stock returns and help to achieve outperformance vs. common US indices.


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