Are "Good Companies" Good Investments?
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- Опубликовано: 21 июн 2022
- At first glance, investing seems like it should be easy. Just buy shares in “good companies”, sit back, and profit. As easy as it sounds, that’s not how investing works, and the “good company is a good investment” fallacy is something that every investor needs to understand.
Referenced in this video:
Stocks of Admired Companies and Spurned Ones: papers.ssrn.com/sol3/papers.c...
Glamour Brands and Glamour Stocks: papers.ssrn.com/sol3/papers.c...
Investor Sentiment, Stock Characteristics, and Returns: jpm.pm-research.com/content/3...
Contrarian Investment, Extrapolation, and Risk: papers.ssrn.com/sol3/papers.c...
Valuation Bias and Limits to Nudges: jpm.pm-research.com/content/4...
Conditional Skewness in Asset Pricing Tests: chrome-extension://efaidnbmnnnibpcajpcglclefindmkaj/faculty.fuqua.duke.edu/~charv...
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I was worried. More than half video and no Fama and French paper? Finally, on min 7:49, I felt relieved!
Excellent and complete presentation
This leaves out what "quality" investors generally believe to be indicators of a "good company."
There's a guy on Twitter that assessed ROIC much like these very general assessments. He, of course, concludes that high ROIC doesn't predict outperformance.
I asked him to do the experiment again, and test for only those companies in industries that don't have abnormally high ROIC to begin with (as many pharmaceutical companies do) and select for those with ROIC that is the highest in that selected industry.
So exclude industries that just have high ROIC by default and include only those with outsized ROIC.
Thank you i really enjoyed your video! :D Thanks for the real research based info :D
It's again an awesome video, Ben!
Kind regards from Munich, Germany.
What a treat 😍! A Ben Felix video!
Great job Ben!
There is a great Credit Suisse paper that analyzed the returns of stocks; the conclusion was that as time goes by ( longo term ), the relevance of the return was determined more by the growth of the EPS than the P/E that you paid, this basically is an argument that investors use to say that buying business that have significant MOAT and are nown as great business, are a great long term buy and hold. ( THAT DOES NOT MEAN YOU´LL DO FINE IF YOU BUY AT ANY PRICE )
Do you have the title of the paper Lucas ? I'm surprised/interested because I know that expected stock returns are made up of starting dividend yield plus earnings growth (aka Gordon's law), and my understanding is that earnings growth has averaged about 1-2% (real) since 1900. The majority of stock returns come from dividends, which are driven by the initial price that you pay.
Love this video! This is exactly why the whole finance youtube niche makes no sense. RUclips incentivizes creators to talk about popular companies (the ones with high search volume) but those are the exact companies you pay a higher premium for because most investors already want to own them. If you try to cover more unpopular companies, nobody watches the video in the first place, even though that's exactly what you'd want to find as an investor.
Cheers Alex
This suggests a series of videos titled "Is XYZ a good buy?" and the answer is "NO! It is a popular company, with a lot of emotional investors influenced by the brand and not fundamentals."
I don't see popularity or brand value as a definition of a "good company." I'd be more curious about how companies with strong financial metrics perform over time. Things like high ROE or free cash flow growth would be more interesting to examine.
It’s very simple. High ROIC investments beat the market over long periods of time.
The concept discussed in this video is built around the idea that people tend to invest in specific names they know rather than investing in stocks they never heard of that align with specific characteristics or financial metrics.
@@user-sc6td1wf7n could you please give us some sources on that rather massive claim?
Is popularity of a stock the only or the main component of momentum? How long can momentum last? When does momentum lead into bubbles if such event happens? Sorry for asking too much but I’m new to this and it is fascinating.
Really churning out the great content now Ben! Thanks again 👍
At a faster rate I should say, it’s always been quality !
Very interesting video with a ton of information. I really like that data is central to your analysis. More people need to about this channel.
Hi Ben, great video! Could you make a video about the effects of aging population on future long term stock returns?
Very interesting information. Thank you.
Hi, Just wanted to say i really like your video's and your style. No stupid trash stock pushing, course selling or clickbait titles. Just substance, informative, wel narrated, clean and great quality video's without any flashy distractions from the content. Its a breath of fresh air :). Thanks & keep it up.
Thanks to Ben I've held VT, VWRL, and a few small cap value ETFs, and it's been that way for over a year.
Sorry to hear that
I see a Ben Felix video and I upvote.
Good video, as always. However, the voice is too low in volume compared to everything else.
I'm a bit confused about how any of these growth stocks are considered good companies... When I think of good companies I guess I tend to think more of things like consumer defensives, which haven't been fashionable so some of them have trended towards value.
A good company is something that is priced as a safe investment.
The concept discussed in this video is built around the idea that people tend to invest in specific names they know rather than investing in stocks they never heard of that align with specific characteristics or financial metrics.
@@DanFFA too bad then that he picked a completely misleading title for the video. I came wanting to learn about investing in good companies, and immediately all the discussion is about investing in popular companies. Literally two completely different things.
@@theWebWizrd Well I gave you a setting where there's two opposing sides. If the popular companies are on the bad side where does that lead you?
@@DanFFA The discussion in the video (which, I agree, is mostly a concept of most-known stocks versus lesser known stocks) is completely orthogonal to a discussion on what makes a 'good company'.
Very well-known and popular companies can be bad companies from a cash flow perspective (Uber comes to mind, at least historically, and airlines) and they can be truly exceptional companies (Coca Cola, Apple etc).
Lesser known stocks can be bad (neverending list of nonprofitable small cap stocks) and they can be exceptional (let's settle with an example like ASML, which a consumer would never interface with).
I would guess that part of the disconnect is that Ben is such a hardcore EMT-guy, so he thinks a company being expensive means it must be good and vice versa. Because if you don't believe that the price accurately reflects all possible public knowledge of how 'good' the company is then you don't believe in EMT.
Thank you Ben for these videos. Where can I find the Morningstar Economic Moat ratings? I assume that it's not free.
Wʜᴀsᴀᴘᴘ ᴍᴇ^^^👆
I love when Ben always challenge your feeling of security and changes it into insecurity.
I love you!
Great video as always, but the outro music was too loud.
Great content as always 👌
Terry Smith should here this.
sweet
Well done, sir. You are a master-explainer of complex ideas.
Thank you for your work Ben!
When I see Ben's new video, I know that I'll learn something with its evidences and paper references.
Audio needs up.
Excellent advice, agent 47.
I feel like this channel has been moving towards the conclusion of this video since the very beginning, and those of us who watched all the videos saw it coming from a mile away.
Great video, as always. Thanks, Ben
Agreed , tldr: etf with Low fees .
In the episode with the plain bagel, you say that you're technically active investing since you tilt towards higher expected earning stocks. My understanding from your videos is that those are small cap value, but if the market is efficient why would higher expected earning stocks exist? Does increasing allocation in these sectors increase risk? Right now I'm 100% XEQT, would say 5-10% allocation into one of these ETFs, eg. DFSV, something you recommend to retail investors? I know you've touched on this a lot in your videos but I would love a dedicated video on this
I recommend his video ‘five factor investing with etfs’
@@739jep thank you very much for recommending this video. I cannot thank you enough as it has answered a lot of questions I have. So, to my understanding his ETF that he shows near the end that is included in his paper has more volatility and thus higher risk adjusted returns in the long run, thus it is (likely) better than xeqt in the long term? My plan now is to hold xeqt and some avuv + advdv on the side in single digit % allocations
@@Nasdel I would say that they have higher expected returns , but not higher risk adjusted returns. Size , value , profitability, market and investment are ‘risk factors’. The reason for the higher expected return is the higher risk. So to increase exposure to those types of stocks you may want to consider your own tolerance towards risk.
Some people argue index funds are bad because they have all the "bad companies," implying they can somehow avoid all the bad companies by actively managing their portfolio.
Joel Greenblatt's magic formula is based on investing in high-quality companies even and Warren Buffett prefers investing in high-quality companies.
So, you are saying that magic formula will not work?
Great video, perhaps a follow-up: Are "Bad" companies a good investment? Low name recognition, low public perception, sell harmful products (eg. cigarettes), etc. I'd be curious to see the results.
I wonder if "unknown" may be better than "bad"? Low name recognition is not the same as passionate negative name recognition. Even with a low price and decent future cash flow, negative sentiment may still depress future returns. RC Cola is an example. They're leading product was a diet soda featuring cyclamates, and when the cancer scare over cyclamates happened, RC Cola's business was significantly damaged and never recovered.
Roaring Kitty intensifies.....
Patrick Boyle said he found that vice stocks (guns, alcohol, tobacco, gambling) have beat the market overall because many people refuse to touch them. However, the counter-argument is those stocks see increased regulatory risk because they're vice stocks, hence the higher expected returns when all is well.
I think the key is low price relative to profitability regardless of overall public sentiment.
Ben you are doing a great job. These are surely the best researched investment videos available on RUclips. Not based on opinion rather empirical research. Thanks a lot.
Can you make a video on when to book some profit in index funds and reinvest once market enters bear mode.
Wʜᴀsᴀᴘᴘ ᴍᴇ^^^👆
One sure thing Ben: investing time on your videos is always a good investment.
@2:15 some of the sources given throughout the video have "&". Perhaps code that came through the software?
Another nice video.
Lol at the dig at ark.
Amen 👍It's surprising how meticulous people are about prices in daily life, but not so much when it comes investing.
Joe Investor: "Should I buy company X at $200/share?"
Actual Investor: "I don't know. For starters, what's the market cap?"
Joe Investor: "What's that?"
But if investors are reasonably confident that the $200 stock is likely already priced fairly gives its expected future cashflows and perceived risk, why bother asking the question ? Maybe "actual investor" thinks they're being smart but are really wasting their time on fruitless DCF analysis.
@@chrisf1600 If Joe Investor has assessed all relevant metrics on a per share basis, then he may be partially forgiven for his shortcut, but only partially. Size is tremendously important, and not knowing the market cap of your investment is a recipe for disaster.
side note: "expected future cashflows" and "DCF analysis" are essentially doing the same thing as long as some form of "present value" is implied in the former.
Great video, well documented and clearly explained but... there is a 200 dB difference bewteen speaker's voice and closing music that punches a hole in listener's ears...
I've recently been binge watching your videos, and you have absolutely amazing content! There is something that has been bugging me that might be a good future video topic. You've spoken frequently about the HML value premium leading to higher average returns, but the available value or small value indexes like VVIAX or VIOV, which I believe select stocks that are high value but low growth, which seem to be two separate dimensions. If anything, growth seems to be roughly analogous to momentum, meaning holding these indexes might give exposure to the value premium, while giving negative exposure to the momentum premium. Is there a way for retail investors to access pure value exposure?
Momentum and growth are different factors. Value is short growth by definition. You’re right though that value will naturally load negatively on momentum since a value portfolio is typically buying stocks that have recently done poorly. Systematic value funds from companies like Dimensional and Avantis take momentum into account on implementation.
Same reason not to consentrate in the US
Great Video,
If a good company has very low trading volumes, liquidity risk may also be a factor to consider.
After watching enough of these videos, I now can predict the conclusion of new videos without having to watch them. I guess that means I've actually learned something :)
Wonderful analysis. Unfortunately I assume the message will be lost on the stock pickers to whom it applies the most. Try talking people out of a 100% Tesla portfolio who think Elon is god’s greatest gift to humanity 😂
When you mentioned lottery stocks with high probability of low profit and low probability of really high profit I was like, “soooo you’re talking about biotech…”
1:47 This seems more like cherry-picking to me. I would suggest that good companies from an investor perspective are companies with high profitability / quality with high returns on their investments which actually produced great investor returns.
My dude , he was literally listing many possible ways to ‘measure’ what investors perceive to be a ‘good company’.
He contradicted nothing.
The whole point to begin with is that there is no objective way to determine what a good company is , and that everyone has their own definitions , hence why there are many ways to attempt to measure it.
The point still stands , a good company does not equal a good investment. How the market prices in the ‘goodness’ of the company matters to returns. If a good company is priced as if it is a good company why should investors expect a higher return simply because it’s a good company?
@@739jep No, he was not looking at many ways to measure if a company is good. He was just looking at variables that explain low expected returns, which supposedly could define what a good company is.
@@739jep Alright, sure, the point still stands. A good company does not necessarily equal a good or bad investment. Similarly, a bad company does not automatically equal a good or bad investment. A mediocre company also does not guarantee mediocre, good or bad returns because you could technically define "good" or "bad" in all kinds of ways. Thanks for this information.
@@hanst7218 yes exactly right. Id even go so far as to say the difficulty in defining whether a company is good or bad is irrelevant , because even if we were to have a concrete definition the information about whether a company is good or bad is information that is likely priced in already.
Your second reply is basically the main message to gain from the video. A good/bad company is not necessarily a good/bad investment.
I think it’s even called the ‘Good Company : Good investment fallacy’ but maybe it has another name.
8:44 "Sinking fast and slow" by Daniel Kahneman 😆😆😆
great content thanks
Thanks Ben for this video. What about volatility? This also should be taken into account.
I remember learning about "reversion to the mean", and it really opened my eyes to a lot of decision making we do. It also speaks to my pessimistic side -- things seem good? just wait :)
Ending music bit too loud compared to rest of the video. good video btw!
I just stick with VT.
your outro music is way too loud!
I think it’s more the main video is too quiet
it is not the intro, but the speaking audio too low...
Hahahaha what?? You must just be too slow to understand. You see, this man is well spoken and enunciates clearly. He is also white. You must be mistaken and uneducated, please pay him now to manage your assets for a fat percentage.
Strategies that could work to buy good companies (variously defined) and beat the market on a risk adjusted basis are those by Greenblatt, Carlisle, Piotroski and others. Value Superinvestor cloning strategies, too. And many other similar value investing approaches.
Please sync the volume of your videos. Your outro gave me a heart attack whahaa. Thanks for the awesome video again!
Hi Ben. Thank you for this video. If we consider the S&P500 as a collection of "good companies", how would you explain the better performance of that indice over several decades compared to the market in its whole? Thank you in advance for the answer.
Just like how you explain Japan 1970 to 1989
Ben has a video on s&p500 on this cha nel, where he answers this question
@@isaacongzy yeah s&p 500 underperformed total market from 2000 to 2010, it wouldn't surprise me if s&p 500 underperforms in the next decades
I answered this question in a video ruclips.net/video/RR7e1Y-HJxQ/видео.html
I would consider a good company by looking at the ROIC (I want this to be high) and growing earnings (doesn't need to be super high but should be growing at a good rate). Past data shows a my type of a good company has outperformed. Its not that simple tho, I also look at the type of industry so I will avoid cyclical companies like oil and gas and bank's and I also want a company with a high margin so it could protect its self from stuff like inflation
Once I first heard about this topic it was a headscratcher but the more I think of it the more sense it makes. Why should I be awarded for holding the things everybody wants to hold? An effecient market shouldn't price things in this way and of course it doesn't. Thanks for the video Ben!
8:43 buuuurn
Good video, although I suspected the answer from the title.
A key nuance that often get left out in this fallacy is that an active manager must first correctly price the great company. In other word, investing in great companies is fine if you get there first
But this isn't predetermined. There are many companies that seem great early on, but fail anyway. This happened with e-commerce in the early 2000s. Many companies seemed promising, but only a small minority still exist. Trying to figure which will be successful is mostly just guesswork.
@@alankoslowski9473 That could happen to any stocks. Bad stocks that commands a high discount becomes worse and gets a higher discount all the way to infinity.
If price isn't useful in signaling future cashflow, then there shouldn't be an equity or value premium. Active managers are required for passive investing to work. Someone has to be setting the price,
@@tiendoan1333 True, but there are significantly more active managers than necessary. There are also degrees of active management.
Great explainer video. A nitpick: I thought "invest in what you know" meant invest in companies operating in sectors in which you have professional experience and understand deeply the business model. Rather than it meaning invest in names you've heard of.
I went to say this same thing
A nit to your nit, here is Lynch from One Up on Wall Street:
_I talk to hundreds of companies a year and spend hour after hour in heady powwows with CEOs, financial analysts, and my colleagues in the mutual-fund business, _*_*but I stumble onto the big winners in extracurricular situations, the same way you could: Taco Bell, I was impressed with the burrito on a trip to California; La Quinta Motor Inns, somebody at the rival Holiday Inn told me about it; Volvo, my family and friends drive this car; Apple Computer, my kids had one at home and then the systems manager bought several for the office; Service Corporation International, a Fidelity electronics analyst (who had nothing to do with funeral homes, so this wasn’t his field) found on a trip to Texas; Dunkin’ Donuts, I loved the coffee; and recently the revamped Pier 1 Imports, recommended by my wife. In fact, Carolyn is one of my best sources.*_*_ She’s the one who discovered L’eggs. L’eggs is the perfect example of the power of common knowledge. It turned out to be one of the two most successful consumer products of the seventies. In the early part of that decade, before I took over Fidelity Magellan, I was working as a securities analyst at the firm. I knew the textile business from having traveled the country visiting textile plants, calculating profit margins, price/earnings ratios, and the esoterica of warps and woofs. But none of this information was as valuable as Carolyn’s. I didn’t find L’eggs in my research, she found it by going to the grocery store._
I'm a military historian. I'm better at picking defense contractor stocks and identifying geopolitical risks than most people. That's what they mean when they say invest in what you know.
Do you think it's a good idea for someone working in tech to overweight his portfolio to tech? What about an oil & gas worker overweighting energy stocks? A realtor only holding real estate? Can you spot the potential danger in having your earnings and investments tied up in a single sector? This is likely to be even riskier than just buying shares in a bunch of "good" companies that you know and use every day (Colgate, Coke, Apple, etc.).
@@RobbEngen Who said anything about overweighting a sector?
Dear Ben: Have you ever considered doing a video on stock frauds? By definition a total market index will contain them, and the most recent case of IonQ they took advantage how no one understands quantum physics to claim to possess a magical device.
Audio balance is not great, kinda blasts your eardrums at the end. Content wise, great as usual.
Wouldn't this imply small and midcap stocks should consistently outperform since the majority of large caps are well heard of?
It could imply that. It is true that there is a monotonic relationship between returns and company size where smaller companies have higher returns.
Higher returns, higher risk, so about even risk-adjusted return, unless you also include other factors like value, since e.g. small cap growth performs badly - so a common combination is small cap value, which does have better risk-adjusted returns.
volume too low
It is not clear to me if you are talking about popular companies or good companies. You seem to equate the two. Where as it seems to me there is a difference. When Buffet has advised buying good companies he did not mean popular companies. A companies popularity can change at any time with market sentiment. If your suggestion is to just load up on value stocks, that will not work. Many times there are good reasons for a company to be placed in the value category.
Having broad exposure to the value factor is perfectly reasonable and rational. Picking individual stocks on the basis of value is not - but that’s not what he’s advocating for.
He did say that it’s difficult to answer the question ‘are good companies good investment’ because everyone has different definitions as to what a good company is. We need to know what people mean by ‘Good company’ otherwise the proposition is non falsifiable making it useless.
Regardless , it all comes back to price anyways , if a ‘good company’ is priced as if it were a ‘good company’ then the investor has no logical reason to expect alpha. For the phrase ‘a good company is a good investment’ you would have to assume the market is systematically undervaluing ‘good companies.’
The definition of good company here is safe investment. Low chance of major fraud, long chance of management doing something stupid, and low chance of a random event breaking them.
So really it depends on how you define a good company. If by good you mean reputable name and generally respected and known, then no, the returns aren't superior. If by good you mean good fundamentals and overlooked and undervalued, then yes, the returns should be superior.
But good fundamentals mean cheap prices and cheap prices are there because the companies suck. Tobias Carslisle defines good companies as "High Return on invested capital" and by this definition the worst businesses have the cheapest prices (which you would expect) and the best returns.
A couple years ago Ben mentioned Darling Ingredients. They're a food processing and additive company. Not exactly an exciting business, but they've had high returns over the last decade.
8:38 Stop it Ben, she's already dead!
Can you make a video about covered-call etfs
Can you a video on mid cap stocks? Do they have the size factor like small vs large? Is mid cap growth undesirable like small cap growth?
volume on this vid is super low
The real question is what makes a good company because it sure as heck isn’t just a product or brand name if the balance sheet is dismal. However, one can look to good companies first on their search take AAPL. If you use all their products then you sure as heck should have the confidence to invest into them…
Did you just say “a good product doesn’t guarantee a good company” then say “if you use AAPL products you should invest in AAPL”?
To me, a good company is a quality company (defined by its profitability, growth etc.). And since a quality-minus-junk factor portfolio earns significant risk-adjusted returns in multiple countries, I think it's fair to say that good companies are generally good investments.
While I agree with you, the point I wanted to make here is that the casual assessment of "good" companies that many investors make does not lead to good investment outcomes. Applying a quant screen to assess expected returns is not what most people are doing.
Great video, Ben! Just one thing: since quality is a well-documented investment factor, wouldn't it be misleading to use the term "good companies" instead of "popular companies"? One may interpret a good business as a popular one, but there is also the possible quality interpretation, that is, good companies are those with a certain business criteria being met (usually regarding profitability metrics) even if they are not the most popular ones.
Thanks for all the great content!
Of course. But then the headline wouldn't have been as funny.
That's exactly what I was thinking. A name only goes so far. In the end, after holding something for decades, what matters most is not a name. Even the biggest can go bankrupt
@Thinks Nothing 'quality' is an amalgamation of profitability and investment (or conservatism).
@@mr.financial but typically not as quick as a smaller often more leveraged counterpart
I think it makes sense in that investors' opinions on what the "good companies" are is no doubt strongly determined by popularity. Therefore consider that Quality and goodness in this sense are not necessarily the same thing.
is this considered an "investible" factor? if value stock out perform growth is the value factor, would bad reputation give rise to reputation as a factor?
So does this mean Berkshire’s principle of “investing in good companies at a fair price rather than fair companies at good price” does not hold statistical evidence of outperformance?
No. Good companies at low / fair prices can be a great approach. It is attention to the price that matters most.
@@democrrrracymanifest Yeah. When I heard Buffett say "start with the A's" I knew I was only meant for index investing.
@@democrrrracymanifest Look at their multiples. A slow growth company at 30+ P/E is probably not a good idea.
The video says good stocks to mean well known and hyped up stocks. Buffet was referring to companies with good business models and fundamentals.
Great video, I watch your stuff and listen to the podcast. What's wrong with the audio? Your voice is quiet but the theme song is blaring
Yes a few people have mentioned that. Thanks.
So in other words, just VTSAX & chill.
VT actually
@@rexmundi273 I have some international exposure in my Roth IRA, but none in my taxable account.
Excellent job. Speaking of Peter lynch, you should do a video dissecting his alpha like you did with buffet. Would like to see how much it’s explained by factors and how much is statistically significant alpha
I appreciate your approach to teaching. I've been quite unsure about investing in this current market and at the same time I feel it's the best time to get started on the market, heard some guy speaking of making over $1.3m from a $300k capital since the pandemic and I'm driven to ask what skillet and strategy can generate such profit
400% result is pure luck. Nobody could teach you how to do it reliably. Otherwise, why should we talk about 10% annually of S&P500?
Have the market conditions changed Ben’s investment thesis as it pertains to index funds? In the environment we are in for the next several years, is a broad index still the best way to DCA on technical dips?
Does this depend on when you're buying though? Like let's say you spot a company that has a "moat" and has high brand recognition, but it's undervalued. Would that be particularly good investment since it's especially mis-priced?
Yes…
But are you sure it’s undervalued?
Why isn’t everyone else trying to buy it?
What do you know that the Market doesn’t?
Maybe it’s just a bigger risk that you don’t recognize…
Just take Bens other advice and buy into low cost index funds like the SP 500 index fund and avoid this headache all together..its less stress then trying to pick individual stocks anyway.
Isn't the S&P500 comprised mostly of good/popular companies? And isn't investing in the S&P500 index what you recommend to the casual investor?
No, buying into the total market is recommended for most investors.
Let's see if Tesla will be an exception ;)
Lol
AAPL.
Hey Ben, firstly I wanted to say I love your videos! secondly I’ve been checking out some portfolios on this website called portfolio charts and I’m curious what percentage range is reasonable for small cap value to total stock market eg. 75 tsm to 25 scv, 50/50 or even 35 tsm to 65 scv?
I actually didn’t see much diminishing returns for increasing the small cap value portion to be larger than the total stock market, should a purely small cap value portfolio be a good idea given that info?
There is no right answer. This is discussed often here community.rationalreminder.ca/
You re doing great job. You re Canadian and I think your content should reach out more francophones. I would recommend you to ask somebody to create subtitles (available in English) in French for your videos on RUclips. I m sure you could do that at low price and will add-up value.
I'm a little surprised valuations are so affected by popularity. But most importantly I think you are mistaken here and I assume there is research to back me up. When one invests in a "good" company they are more convinced in it and will hold it through hard times
I would love to know how to find such stocks
if there was a straight-forward way, everyone would be a millionaire, right?
On the other hand, profitable stocks have on average a higher performance than stocks with losses. The subject is quite complex.
Will there be a possibility that the most popular factors used in factor investing (low PB, low PE) will lead to mediocre performance for decades moving forward?
That’s always a possibility , same holds true for the market premium though.
It’s possible if enough people view it as a free lunch. But those people will get some pretty rude awakenings when the risk shows up.
@@BenFelixCSI Thanks for providing your thoughts on this. Happy to learn from you and great content so far!
Is'nt there a major sector bias? Basically, companies in B2B are almost unknown to the general population, while consumer staples or discretiionary companies are in everyone's shopping cart on a daily basis!
What does this mean for using broad-based equity index funds that are market-cap weighted? They are top heavy with "good companies" by popularity, as evidenced by their humungous market cap.
I feel as if there's a bit of odd dissonance in your advice sometimes. My perception is that you recommend people purchase low-cost diversified total market index funds, but then you will go and make videos about how certain categories of stocks have objective evidence indicating that they have underperformed. Of course, these two ideas aren't necessarily contradictory, but I think it would be worth mentioning why it still makes sense to be exposed to, for example, large cap equities, if you're going to make videos about how they tend to underperform the market. Whether it's diversification, past returns don't equal future results, etc. etc. I think it is good to mention these reasons so that people see the desired takeaway. Often I view these videos and my takeaway isn't "I should stop stock picking," it's "here's how I could better stock pick" haha.
One thing to bear in mind is that those advantages may well be because the samples are highly diversified.
i.e. the stocks in these 'high return groups' have an unacceptably high volatility (and/or bankruptcy probability) when bought as part of ~6 stock portfolio, but this is averaged out over very large sample sizes.
This is very much true of large-cap stocks at least; the probability of e.g. google going bankrupt is fairly close to zero; whereas the chance is much higher for small-cap stocks.
@@IamGrimalkin and even after diversifying away the idiosyncratic risk of individual stocks, there remains systematic risk from having concentrated exposure to risk factors, which may manifest as high short-term volatility relative to the market and/or long periods of underperformance.
@@davec3974
Yes, that's true.
But nevertheless, in a diversified portfolio, they show a higher Sharpe ratio, and that needs an explanation.
A higher risk as un-diversified individual stocks might be an explanation.
@@IamGrimalkin do they have a higher Sharpe ratio over the long-term? I gathered that the increase in returns was roughly proportional to the increase in risk. Though I guess it depends how exactly you measure risk.
@@IamGrimalkin ... perhaps under the EMH we'd expect that diversifying across risk factors increases the Sharpe Ratio?