6:50 why value stocks is riskier despite the margin of safety. For Fama Value stocks have some difficulties and hence why they have low P/B. He acknowledges that value stocks are good if you look at the fundamentals to market value but he argues that value stocks fundamentals look bad relative to book value. The argument between Fama and Value investors appears to be an interpretation and not the facts, which is already said by Richard Thaler during his interviews with Fama.
The World has Insightful Genius. Modern Portfolio = Free Stocks-Portfolio Free Portfolio = Free Equity Free Portfolio = Free Self-Built Investment Company
Does this still work when the global economy tanks due to a pandemic but mega cap corporations receive unlimited liquidity from the Fed while small businesses suffer and ultimately fail?
Eugene's seems to think that markets are efficient. He stated that the business which, according to his 3 factors, have a higher expected return are also riskier, meaning there's no better decision. This would make the market efficient only if the relation between risk and expected return is linear (otherwise a bit more risk could be associated with much more expected return)
They later revised to 5 factors, this is an older interview. Also, he believes it's a theory used to develop a MODEL, but agrees that it's almost impossible to test.
From what I know their starting assumption is that in an efficient market, maybe in a Walrasian system even, what factors influence stock returns. The joint hypothesis problem follows.
if value stocks outperform due to value companies being risky (bad quality stocks), then why does the profitability/quality factor exist? the profitability/quality factor dictates that highly profitable firms and firms of good quality outperform both stocks with low profitability as well as stocks of bad quality, the value factor and the profitability/quality factor contradicts each other.
I disagree with size being a risk factor, because if expected returns are explained by size (market cap= price*shares outstanding), and at the same time, price is explained by expected returns. As a result, this is actually simultaneous causality: X causes Y, and at the same time, Y causes X. So: - We cannot observe the ceteris paribus effect of size (X) on Returns (Y). - Returns and size are only observed when they are jointly in equilibrium (happen at the same time). Conclusion, size coefficients are biased, unless someone tells me what cross-sectional relationship (Risk) between individual assets that size proxy for?
Okay. I can help with that query of yours. BUT firstly you need to explain to me in a human language what you just said. Investing is a pretty simple ball game which is why I need you to explain in a child's language. "If you can't explain it to a 6-year old, you don't understand it yourself" - Albert Einstein.
If small cap has ''growth'' stock it's gonna perform badly. If your ETF has ''Small cap value'' you'll benefit on the long run. Small cap Value is the gem you're looking for.
Price is explained by expected returns, but expected returns are calculated as a function of the cost of capital. The cost of capital is determined by risk, which is explained by the aforementioned coefficients in the Fama-French model. That is, risk must first be determined through various factors (like in the Fama-French model, or CAPM model), then expected returns are calculated - with the final product being price discovery (market cap).
Price is not just explained by expected returns (Y), but also by the variance of the expected returns. X causes Y but Y doesnt cause X. Size proxies for the the cross-sectional risk of being more or less effected by market fluctuations and adverse events, and the ability to smoothen cash flows across a usually more diversified range of customers.
@@Felipe07121999 I guess if you already have a 100% stock portfolio and you want to increase risk, then sure - add some heavily cyclical value stocks that risk becoming obsolete. Otherwise I'd rather sacrifice bonds in exchange for market cap weighted equity index funds in order to increase my expected returns.
@@Bunjee77 you are choosing exposure to the market risk factor. The fact is that you can have a better risk adjusted return by exposing to these other systematic risks, it is more efficient to be exposed to these main factors in the long run than only one of them. But bro, do whatever you want with your money, just saying
@@Felipe07121999 I genuinely want to understand this better so if you could please try to explain what you just said in plainer English, that would be great. I'm not trying to be hostile
Uncertain business outcomes, essentially. Small caps tend to be growth or niche companies where their economic viability is unproven. Because their market cap is much lower than their large cap counterparts, they also have less interest from institutional buyers who may have ownership limitations (imagine you're a $10b fund that wants positions between 1-5% of the fund and to never own more than 10% of any company - you must screen out any stock below $1b market cap). Because of this lack of interest, they have liquidity problems which further depresses the price (the premise of the Pastor-Stambaugh model, which adds a liquidity premium to FF). Some of the companies will catch on and either grow to become midcaps or will be acquired for some premium, some will remain smallcaps due to small market size, and some of them will fail and shut down (actual bankruptcy is more rare, distressed assets are often acquired at a discount instead). Because of all this uncertainty, and because of their depressed initial valuation, they significantly outperform their stable large cap counterparts when they do succeed.
The beauty of the Fama-French papers is that they provide a way to organize pricing anomalies and used statistical evidence in a rather descriptive form. Are HML and SMB portfolio returns really explanations? As an economist, I would concur that it is not sufficient because it is not properly tied to firm and consummer behavior. However, it does narrow down the focus: instead of trying to explain a zoo of seemingly ubrelated facts, you have to say why on Earth HML and SMB should produce a roughly good description of cross-sections of average returns. It's a big improvement, to say the least.
Nunca he echo esto guiero aserlo pero no se como por eso e Perdido mucho dinero gue me an donado nuca he colectado ni un centavo como puedo aserlo no ay alguna oficinas gue me aguden nesicto
Ben felix brought me here
Same here.
@@erickcarlson9245 we're on the same boat, low cost, broadly diversified index funds. God bless you
Ah yes, Fama and French #1 Fan
@@erickcarlson9245 me too
somehow , me too
Eugene fama is a genius
And far underrated
Didn't know Anthony Hopkins was into investing
6:50 why value stocks is riskier despite the margin of safety. For Fama Value stocks have some difficulties and hence why they have low P/B. He acknowledges that value stocks are good if you look at the fundamentals to market value but he argues that value stocks fundamentals look bad relative to book value. The argument between Fama and Value investors appears to be an interpretation and not the facts, which is already said by Richard Thaler during his interviews with Fama.
The World has Insightful Genius.
Modern Portfolio = Free Stocks-Portfolio
Free Portfolio = Free Equity
Free Portfolio = Free Self-Built Investment Company
Does this still work when the global economy tanks due to a pandemic but mega cap corporations receive unlimited liquidity from the Fed while small businesses suffer and ultimately fail?
Good question, wondering that myself
that's why it is riskier therefore higher expected returns
It hasn't been working since 2008. Growth stocks have been outperforming value stocks since then.
@@Gionimo which occurs with a chance of ruffly 10%, that is the risk you have to take with factor investing
@@Gionimo
Japanese bonds have outperformed Japanese stocks since 1990
How do they categorize pre-profit companies?
If you're here, you're a smart cookie
Eugene's seems to think that markets are efficient. He stated that the business which, according to his 3 factors, have a higher expected return are also riskier, meaning there's no better decision. This would make the market efficient only if the relation between risk and expected return is linear (otherwise a bit more risk could be associated with much more expected return)
They later revised to 5 factors, this is an older interview. Also, he believes it's a theory used to develop a MODEL, but agrees that it's almost impossible to test.
@@Omar-et7sb Curse of Dimensionality.
@@Omar-et7sb you re good , man.
From what I know their starting assumption is that in an efficient market, maybe in a Walrasian system even, what factors influence stock returns. The joint hypothesis problem follows.
Some much noise over finance ideas today...
I'd better go back to Gene Fama's ideas...specially when i'm planining my phd .
6 years old and only 34k views
He is older now.
Might be the fact that Large cap growth has grossly out performed since this was release.
if value stocks outperform due to value companies being risky (bad quality stocks), then why does the profitability/quality factor exist? the profitability/quality factor dictates that highly profitable firms and firms of good quality outperform both stocks with low profitability as well as stocks of bad quality, the value factor and the profitability/quality factor contradicts each other.
because they occur if the market has voted for it. and they did so because they might not be sustainable
I disagree with size being a risk factor, because if expected returns are explained by size (market cap= price*shares outstanding), and at the same time, price is explained by expected returns. As a result, this is actually simultaneous causality: X causes Y, and at the same time, Y causes X.
So:
- We cannot observe the ceteris paribus effect of size (X) on Returns (Y).
- Returns and size are only observed when they are jointly in equilibrium (happen at the same time).
Conclusion, size coefficients are biased, unless someone tells me what cross-sectional relationship (Risk) between individual assets that size proxy for?
Okay. I can help with that query of yours. BUT firstly you need to explain to me in a human language what you just said. Investing is a pretty simple ball game which is why I need you to explain in a child's language. "If you can't explain it to a 6-year old, you don't understand it yourself" - Albert Einstein.
If small cap has ''growth'' stock it's gonna perform badly. If your ETF has ''Small cap value'' you'll benefit on the long run. Small cap Value is the gem you're looking for.
Price is explained by expected returns, but expected returns are calculated as a function of the cost of capital. The cost of capital is determined by risk, which is explained by the aforementioned coefficients in the Fama-French model. That is, risk must first be determined through various factors (like in the Fama-French model, or CAPM model), then expected returns are calculated - with the final product being price discovery (market cap).
Price is not just explained by expected returns (Y), but also by the variance of the expected returns. X causes Y but Y doesnt cause X.
Size proxies for the the cross-sectional risk of being more or less effected by market fluctuations and adverse events, and the ability to smoothen cash flows across a usually more diversified range of customers.
Repeating the guys above: price is explained by expected returns AND a few other factors
This makes an argument for growth stocks in my opinion
Nope, the fact that value stocks are riskier is what makes them give more return, hence, having higher expected return than growth stocks.
@@Felipe07121999 I guess if you already have a 100% stock portfolio and you want to increase risk, then sure - add some heavily cyclical value stocks that risk becoming obsolete. Otherwise I'd rather sacrifice bonds in exchange for market cap weighted equity index funds in order to increase my expected returns.
@@Bunjee77 you are choosing exposure to the market risk factor.
The fact is that you can have a better risk adjusted return by exposing to these other systematic risks, it is more efficient to be exposed to these main factors in the long run than only one of them. But bro, do whatever you want with your money, just saying
@@Felipe07121999 I genuinely want to understand this better so if you could please try to explain what you just said in plainer English, that would be great. I'm not trying to be hostile
@@Felipe07121999 doesn't a value factor index fund also have market risk? I don't understand your point
If they are riskier than why doesn't anybody understand why? People should atleast know why they avoid them, and that is not a good explanation.
Uncertain business outcomes, essentially. Small caps tend to be growth or niche companies where their economic viability is unproven. Because their market cap is much lower than their large cap counterparts, they also have less interest from institutional buyers who may have ownership limitations (imagine you're a $10b fund that wants positions between 1-5% of the fund and to never own more than 10% of any company - you must screen out any stock below $1b market cap). Because of this lack of interest, they have liquidity problems which further depresses the price (the premise of the Pastor-Stambaugh model, which adds a liquidity premium to FF). Some of the companies will catch on and either grow to become midcaps or will be acquired for some premium, some will remain smallcaps due to small market size, and some of them will fail and shut down (actual bankruptcy is more rare, distressed assets are often acquired at a discount instead). Because of all this uncertainty, and because of their depressed initial valuation, they significantly outperform their stable large cap counterparts when they do succeed.
The risks can be mitigated quite easily with the right allocations.
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@@BobKimball
..
The beauty of the Fama-French papers is that they provide a way to organize pricing anomalies and used statistical evidence in a rather descriptive form.
Are HML and SMB portfolio returns really explanations? As an economist, I would concur that it is not sufficient because it is not properly tied to firm and consummer behavior.
However, it does narrow down the focus: instead of trying to explain a zoo of seemingly ubrelated facts, you have to say why on Earth HML and SMB should produce a roughly good description of cross-sections of average returns. It's a big improvement, to say the least.
Nunca he echo esto guiero aserlo pero no se como por eso e Perdido mucho dinero gue me an donado nuca he colectado ni un centavo como puedo aserlo no ay alguna oficinas gue me aguden nesicto
What is Joe Biden doing here 😂
Brandon is checking in into hospice next week