#21
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Re: Market Timing
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[ QUOTE ] [ QUOTE ] Anything with low Price/Book will have higher returns (see Fama-French literature). [/ QUOTE ] nittiness talking here but you do mean "had" rather than "will have" right? [/ QUOTE ] We can never truly know the future. That said, the Price/Book premium(hencetoforth the Value Premium) has persisted out of sample in almost every developed and emerging market(couple exceptions like Italy but that could easily be noise) from 1929-present. [ QUOTE ] the counter though is that companies about to go bankrupt have the lowest price to book ratio since their future is in doubt and the dissolution of their assets is near inevitable. [/ QUOTE ] The explanation for the value premium seems to be some combination of behavior and human capital risk. The former is a free lunch and the latter is not. No one knows the whole story, yet. [ QUOTE ] i haven't read the literature obviously but what types of companies (in what industries) have low price to books. aren't those basically banks? high price/book would imply the mkt expects large earnings growth off of a small asset base, like google or biotech companies i presume. [/ QUOTE ] Banks typically have low price/book, as do utility companies and other sectors where slow growth is expected. Other companies with low Price/Book are typically distressed. [/ QUOTE ] right, so what is the reason for low value to book leading to higher expected returns? i'm not familiar with the behavior & human capital risk arguments. Barron |
#22
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Re: Market Timing
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[ QUOTE ] Anything with low Price/Book will have higher returns (see Fama-French literature). MSCI indeces have solid value loading... the only retail indeces with lower price/book are S&P Pure Value indeces. The ETFs RPV, RFV, RZV cover the S&P Pure Value indeces. PZI is lower Price/Book than MSCI Small Value, but it's quasi-active management and .72 ER. [/ QUOTE ] Those are some very interesting ETF's. From what little I was able to gather, they have higher ER's and higher turnover but have offered higher returns if the methodology is back-tracked 10 years. In a taxable account, capital gains are also tax differed for ETF's so the turnover doesn't really seem like that much of a problem. I am more interested in small-cap indexes because the companies are less well-known and therefore more likely to be "on sale". Am I correct in this assumption? Also, I would like to evaluate each ETF's fundamentals if possible (P/E, P/B, ROE, ect...) [/ QUOTE ] You can use morningstar.com to get current fundamentals and the following links to compare size/value loading from 1996-2006: Uno Dos |
#23
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Re: Market Timing
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right, so what is the reason for low value to book leading to higher expected returns? i'm not familiar with the behavior & human capital risk arguments. [/ QUOTE ] Behavioral in a nutshell: People don't like low p/b stocks, they're unglamorous, whatever... I haven't reviewed the literature on this, but I do have David Dreman's book sitting around. Human Capital: Value stocks tend to do worst in times when the average person at the same time that people lose their jobs, housing prices go down, etc... so the average person demands compensation for these risks. Think of a person's human capital as an asset class: Value(and small) stocks have high correlation with that asset class(on average) and so portfolio efficiency is hurt when you double up on small/value. By this definition, people with human capital that is uncorrelated with small value do get a free lunch paid for by the majority of investors who don't. |
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