Stocks

AgPa #47: Equity Factors without Shorting

When Equity Factors Drop Their Shorts (2020)
David Blitz, Guido Baltussen, Pim van Vliet
Financial Analysts Journal, 76(4), URL

This week’s AGNOSTIC Paper examines the important issue of performance contributions from the long and short legs of the major factor premiums. In English: can we profitably invest in factors without shorting a large number of stocks?

  • The long-legs of factors are more important than the short-legs
  • The same pattern holds in international markets

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AgPa #46: Transaction Costs and Capacities of Factor Strategies

Transaction Costs of Factor-Investing Strategies (2019)
Feifei Li, Tzee-Man Chow, Alex Pickard, Yadwinder Garg
Financial Analysts Journal 75(2), 47-61, URL

In this week’s AGNOSTIC paper, the authors develop a transaction cost model and use it to estimate the capacity of the major factors. There are many ways to define capacity in more detail, but the general idea is quite simple. It is the amount of money you can invest in a profitable strategy before you move prices too much and lose your advantage. Unfortunately, what theoretically sounds simple and intuitive is actually quite difficult to estimate in practice…

  • Implementation costs depend on tilt, turnover, and execution speed
  • Capacities of factors for a maximum cost of 0.5% per year
  • There is not yet a consensus on factor capacities

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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 #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 #32: Agnostic Fundamental Analysis (3/3)

Boosting agnostic fundamental analysis: Using machine learning to identify mispricing in European stock markets (2022)
Matthias X.Hanauer, Marina Kononova, Marc Steffen Rapp
Finance Research Letters 48, URL/SSRN

The third and final post about agnostic fundamental analysis. This week’s AGNOSTIC Paper challenges the simple linear methodology and introduces vastly improved valuation models…

  • More sophisticated valuation models yielded better performance
  • Different models emphasize different fundamental variables

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AgPa #31: Agnostic Fundamental Analysis (2/3)

Global market inefficiencies (2021)
Söhnke M. Bartram, Mark Grinblatt
Journal of Financial Economics 139(1), 234-259, URL/SSRN

The second AGNOSTIC Paper on agnostic fundamental analysis. This one is the international out-of-sample test where the authors apply their methodology to stock markets around the world. The results point in the same direction and suggest robust out-of-sample evidence…

  • Undervalued stocks outperformed overvalued stocks – also globally
  • Agnostic fundamental analysis yielded significant alpha – globally and against up to 80 factors
  • Agnostic fundamental analysis remains profitable after transaction costs
  • The degree of market efficiency differs around the world

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AgPa #30: Agnostic Fundamental Analysis (1/3)

Agnostic fundamental analysis works (2018)
Söhnke M. Bartram, Mark Grinblatt
Journal of Financial Economics 128(1), 125-147, URL/SSRN

This week’s AGNOSTIC Paper tackles a very basic question: Does fundamental analysis work? For that purpose, the authors introduce an agnostic valuation model that explains the market capitalization of companies by their most recent fundamentals. A strategy that bets on the convergence of prices and estimated “fair” values generated strong profits between 1987 and 2012…

  • Undervalued stocks outperformed overvalued stocks by about 0.5% per month
  • Agnostic fundamental analysis yielded significant alpha

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SA #1: MSCI – Even Quality Can Become Too Expensive

MSCI: Even Quality Can Become Too Expensive
November 9, 2022

Summary

  • On October 25, MSCI reported quite strong 9M numbers and, for the moment, defended its high multiples (LTM P/E about 44).
  • In this article, I focus on a high-level valuation of MSCI to decide if it’s worth analyzing the stock in more detail.
  • Using a standard DCF-WACC model, market data for interest rates, and reasonable estimates for future fundamentals suggests massive overvaluation (theoretical downside of 54%).
  • The result is very similar when comparing MSCI to common valuation multiples of a peer group. Depending on the multiple, the company trades at a premium of up to 60%.
  • MSCI is undeniably a very high-quality company. But at the current levels, the company just appears way too expensive. So I am not yet interested.


Read the Full Article on Seeking Alpha

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AgPa #29: Cost-Mitigation Techniques

Comparing Cost-Mitigation Techniques (2019)
Robert Novy-Marx, Mihail Velikov
Financial Analysts Journal 75(1), 85-102, URL/SSRN

This week’s AGNOSTIC Paper examines three techniques to mitigate trading costs of systematic equity strategies and compares them by after-cost performance. The empirical evidence clearly speaks for the application of more sophisticated trading rules (Technique #3)…

  • Trading costs decreased but are still important
  • Technique #1: focus on “cheap-to-trade” securities
  • Technique #2: rebalance less frequently
  • Technique #3: create better trading rules
  • Value- versus equal-weighted portfolios

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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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