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Archive for the ‘Behavioral economics’ Category

How To Beat Most Active Managers: A Performance Analysis of Fundamental Indexation With Different Price Ratios

Posted in Behavioral economics, Quantitative investment, Stocks, Strategy, tagged , , on May 21, 2012 | 1 Comment »

The rationale for a value-weighted index can be paraphrased as follows: Most investors, pro’s included, can’t beat the index. Therefore, buying an index fund is better than messing it up yourself or getting an active manager to mess it up for you. If you’re going to buy an index, you might as well buy the best one. An index based on the market capitalization-weighted [...]

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Chart of Equal-Weight S&P500 Index vs Market Capitalization-Weight Index

Posted in About, Behavioral economics, Stocks, Strategy, tagged , , , on May 18, 2012 | Leave a Comment »

It’s a year old, but it’s still sweet. A chart from Tom Brakke’s Research Puzzle pix comparing the performance of the S&P500 and its equal weight counterpart from 2000 to March 2011: Tom thinks the phenomenon might reverse: At some point, however, this trade will flip back in a major way and the market-weighted indexes will [...]

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Why Does an Equal-Weighted Portfolio Outperform Market Capitalization- and Price-Weighted Portfolios?

Posted in About, Behavioral economics, Contrarian investment, Stocks, tagged , on May 17, 2012 | 1 Comment »

Yesterday I took a look at the different ways of structuring an index suggested by Joel Greenblatt. Greenblatt finds that an equal-weight portfolio far outperforms a market capitalization weight portfolio. And for good reason. Greenblatt says that market cap weighted indexes suffer from a systematic flaw – they increase the amount they own of a particular [...]

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Equal Weight and Fundamental Indexing Beats The Market

Posted in About, Behavioral economics, Quantitative investment, Stocks, Strategy, Value Investment, tagged , , , on May 16, 2012 | 3 Comments »

Joel Greenblatt’s rationale for a value-weighted index can be paraphrased as follows: Most investors, pro’s included, can’t beat the index. Therefore, buying an index fund is better than messing it up yourself or getting an active manager to mess it up for you. If you’re going to buy an index, you might as well buy the best one. An index based [...]

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Value-Weighted Indexing: The Problem with Active Management

Posted in Behavioral economics, Stocks, Value Investment, tagged , on May 15, 2012 | 4 Comments »

Joel Greenblatt’s rationale for a value-weighted index can be paraphrased as follows: Most investors, pro’s included, can’t beat the index. Therefore, buying an index fund is better than messing it up yourself or getting an active manager to mess it up for you. If you’re going to buy an index, you might as well buy the best one. An index based [...]

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Joel Greenblatt’s solution to value investors’ behavioral errors

Posted in About, Behavioral economics, Quantitative investment, Stocks, Strategy, tagged , , on May 14, 2012 | 2 Comments »

Last week I looked at James Montier’s 2006 paper The Little Note That Beats The Market and his view that investors would struggle to implement the Magic Formula strategy for behavioral reasons, a view borne out by Greenblatt’s own research. This is not a criticism of the strategy, which is tractable and implementable, but an observation on how pernicious our [...]

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James Montier on why investors struggle to follow the Magic Formula: Cognitive Biases and Behavioral Errors

Posted in About, Behavioral economics, Enterprise Multiple, Enterprise Value, Stocks, Strategy, tagged , , , on May 8, 2012 | Leave a Comment »

In his 2006 paper, “The Little Note That Beats the Markets” James Montier backtested the Magic Formula and found that it supported the claim in the “Little Book That Beats The Market” that the Magic Formula does in fact beat the market: The results certainly support the notions put forward in the Little Book. In all [...]

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How to beat The Little Book That Beats The Market: An analysis of the Magic Formula

Posted in About, Behavioral economics, Enterprise Multiple, Stocks, Strategy, Warren Buffett, tagged , , , , , , , on May 7, 2012 | 9 Comments »

Since Joel Greenblatt’s introduction of the Magic Formula in the 2006 book “The Little Book That Beats The Market,” researchers have conducted a number of studies on the strategy and found it to be a market beater, both domestically and abroad. Greenblatt claims returns in the order of 30.8 percent per year against a market [...]

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Short your national stock market

Posted in Behavioral economics on July 6, 2011 | Leave a Comment »

Another one for the annals of behavioral finance. From Handbook of the Economics of Finance, Chapter 18, A Survey Of Behavioral Finance by Nicholas BARBERIS, and Richard THALER, University of Chicago: 7.1 Insufficient diversification A large body of evidence suggests that investors diversify their portfolio holdings much less than is recommended by normative models of portfolio choice. First, investors exhibit a [...]

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Michael Mauboussin on WealthTrack

Posted in About, Behavioral economics, Contrarian investment, Value Investment, tagged , , on June 28, 2011 | 3 Comments »

Michael Mauboussin appeared Friday on Consuelo Mack’s WealthTrack to discuss several of the ideas in his excellent book, Think Twice. Particularly compelling is his story about Triple Crown prospect Big Brown and the advantage of the “outside view” – the statistical one – over the “inside view” – the specific, anecdotal one (excerpted from the book): June 7, 2008 was a [...]

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