Yep, the financial bubble was bad, S&P dropped to 666. Today it is over 5000. So you would have been happy with some protection, which rises when the S&P falls, or just have some dry powder. Which is why people are wrong trying to make investing sound easy. It's not so simple as just pile all your money into the S&P 500. Thanks.
Distilled Mental Models: 1. “Investors should remember their scorecard isn't computed using the Olympic-diving method: Degree-of-difficulty doesn’t count. If you're right abt a business whose value is largely dependent on a single key factor that is both easy to understand & enduring, the payoff is the same as if you should correctly analyze an investment alternative characterized by many constantly shifting & complex variables.” - Warren Buffett - 2. “The higher return a business can earn on its capital, the more cash it can produce, the more value is created. Over time, it is hard for investors to earn returns that are much higher than the underlying business’ return on invested capital.” ~ Warren Buffett ~ 3. “Over the long term, it’s hard for a stock to earn a much better return than the business which underlies it earns. If the business earns six percent on capital over forty years and you hold it for that forty years, you’re not going to make much difference than a six percent return - even if you originally buy it at a huge discount. Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive looking price, you’ll end up with one hell of a result.” ~ Charlie Munger ~ 4. The P/E ratio of any company that's fairly priced will equal its growth rate. . . . If the P/E of Coca-Cola is 15, you'd expect the company to be growing at about 15 percent a year, etc. But if the P/E ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year...and a P/E ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a P/E ratio of 12 is an unattractive prospect and headed for a comedown. . . . In general, a P/E ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative. // Peter Lynch, One Up on Wall Street 5. “Over the longest period of time .. your return approximates the business return to capital invested in the business itself over the long term. The 2 tend to really converge pretty closely.” ~ Li Lu ~ 6. “In short, companies that achieve a high return on capital are likely to have a special advantage of some kind. That special advantage keeps competitors from destroying the ability to earn above-average profits.” ~ Joel Greenblatt ~ 7. “It is obvious that a variation of merely a few percentage points has an enormous effect on the success of a compounding (investment) program. It is also obvious that this effect mushrooms as the period lengthens.” ~ Warren Buffett ~ 8. Capital invested is the mother of Growth. Growth is the mother of Additional Values. Additional Values are generated by the Mother Growth and nurtured by the Grandma Capital Invested.
Extremely helpful video, if possible could you cover the famous 1992 fama french cross section of return papers and how it was formulated using a long short portfolio, could it be that the size and value premium found for that dataset exists due to negative returns of market beta and not due to size and value premium considering post 1981 the size effect has diminished
Hello, very good video! Can you please make a video on how you can use these informations and Bayes theorem in real life (real stock market). For example take one company you want to invest and use theories and formula on the video in real life. I would really appreciate, thank you
The risk free rate is there throughout. For each factor we take the exposure to that factor times the risk premium for that factor. Where the risk premium is the return to the factor minus the risk free rate. In the example, we subtract the risk free rate (1%) from each of the factor returns.
I'm pretty sure that he just forgot to add it because even in the answer he refers to the exposure factor having the risk free taken away from it but he doesn't clarify how that has any affect on the risk free rate that would be there regardless i haven't done the calculation myself yet so once i do i can clarify further if needed
When I calculated it using the risk free rate at the beginning included I got 11.33% and I'm pretty confident that is the correct answer but if anyone can explain why not then I'm all ears
The risk free rate is there throughout. For each factor we take the exposure to that factor times the risk premium for that factor. Where the risk premium is the return to the factor minus the risk free rate. In the example, we subtract the risk free rate (1%) from each of the factor returns.
0:15 It is related to CAPM but it isn't [the CAPM] 0:28 It is Related to CAPM In other words, APT and CAPM are related, but they are not the same thing. Sorry if there is/was any confusion.
Great video! Content is for me and maybe about me) All cool, but where subscribers? I accidentally came across your channel. It is better for you to bring it to the recommended, try a service like utify or youtube ads.
It makes absolurely no sense to tie compensation to market cap. As a CEO, you could simply issue new shares and/or perform enough stock-based acquisitions. As long as the return on capital > 0% you would be rewarded. This is what GE did in the late 90s and early 2000s. You're literally begging companies to destroy value. There is no economic difference between buybacks and dividends, besides investor tax implications. It is a transfer of cash from the company to investors. Are dividends "market manipulation"? What matters is shareholder value not how "big" a company is. If there aren't enough potential investments that earn > the cost of capital, share buybacks are the highest value add companies can give to shareholders.
I think you misunderstand. Mathematically, company value equals shares outstanding times share price. For a company that is worth $1,000: If there are 1,000 shares, then the share price is $1. If there are 500 shares, then the share price is $2. If there are 100 shares, then the share price is $10. If there are 50 shares, then the share price is $20. If there are 10 shares, then the share price is $100. Etc. If the company splits shares, the share price automatically adjusts. Say there are 100 shares and the share price is $10. If there is a 2 for 1 stock split, there becomes 200 shares worth $5 each. Market cap does not change. If the company issues a dividend, the share price automatically adjusts. Say there are 100 shares and the share price is $10. If there is a $1 dividend per share, the 100 shares will automatically be worth $9 ex dividend. Company value equals shares outstanding times share price. The same thing happens as a company buys back it's shares. It doesn't happen automatically, but the effect is the same. Say there are 100 shares and the share price is $10. If the company issues debt to buy back 50 shares, the price will rise to around $20 so that the new outstanding shares (50) times the new price ($20) will equal the same as before the share repurchase. No value was created. No investment was made that earned more than the cost of capital. The CEO didn't do anything to increase shareholder value. Empirically, this is exactly what is happening. Because compensation isn't tied to market capitalization, CEOs issue debt to buy back shares in order to profit from the share price increasing. The manipulate the market instead of creating value by investing in order to personally increase their wealth. If they were forced to tie their compensation to market capitalization, it would eliminate this problem.
@@investmentmanagementlab4528 "No investment was made that earned more than the cost of capital" Cash was converted into shares. By definition, it matches the cost of capital of the shareholders (if it didn't, they would have already sold their shares). Market capitalization is irrelevant, what matters is shareholder return. And you didn't actually address my point. Are dividends pointless as well?
@@investmentmanagementlab4528 I'm the CEO of a company you're a shareholder of. I tell you that there are no current opportunities that would yield better than an 8% return. Let's say the expected return on stocks is 11%. If I have $100 million in excess cash, should I keep it or redistribute it to you the shareholder? If the cost of debt is 3%, should I increase my leverage to redistribute cash and balance my total cost of capital or do nothing? In other words, do I increase the "size" of the company or do what is objectively better for shareholders? This is borne out empirically by the (per share) performance of consistent dividend payers and companies that buy back shares.
@@frenchmarty7446 I understand your academic arguments and agree with much of it. What I'm talking about here is a mechanism to eliminate the possibility of management profiting from market manipulation, which is clearly happening. In fact, buybacks became popular at the exact instance when it became legal for management to profit from market manipulation. You can research this on your own. William Lazonick's research is a good place to start.
@@investmentmanagementlab4528 You have yet to actually argue why buybacks are a form of market manipulation, so you can't make a response predicated on that being true. I reject that premise, so a response that implicitly assumes it's true doesn't mean anything to me. Tying compensation to market capitalization is a terrible idea that would destroy shareholder value. Full stop. This isn't an issue of "academic" vs practical, this is an issue of actually acknowledging objections to your idea or just presuming you're correct. If buying back shares increases my return as a shareholder, management ***should*** profit. I don't think you grasp we have fundamentally different views here.
Here's a question, could the CAPE ratio (or preferably the CAEP) be adjusted for: Sector composition. Maybe take the following 10 year equity returns, run a multiple regression that includes the CAEP and the proportion of each sector (% tech, % finance, etc) and isolate some multiplier you can apply to CAEP based on sector composition. Using free cash flow to equity instead of accounting earnings. Maybe going as far to remove R&D as an "expense". Better cyclical adjustment. Maybe linear regression to estimate next year's earnings instead of just a ten year average (a kind of cyclically adjusted forward earnings) and/or remove outliers (median earnings, etc). I wonder if any of this has been tried and if it would be a better or worse predictor of forward returns.
Just read black swan - if I’m not mistaken, seems you have this exactly wrong. Taleb’s point is the fat tail events happen LESS frequently, but their impact is has excessive impact on overall distribution characteristic. What am I missing here?
By definition, distributions with fat tails are those in which extreme events occur more often than they do in normal distributions. Compared to fat-tailed distributions, in the normal distribution events that deviate from the mean by five or more standard deviations have lower probability, meaning that in the normal distribution extreme events are less likely than for fat-tailed distributions. Stock market returns have fat tails. This means that extreme negative returns in the stock market occur more often than they would if stock market returns were normally distributed.
In a fat tailed distribution, a smaller portion of events determine the majority of the properties. It is not so much an issue of frequency but importance. A smaller and smaller number of events determine the overall properties of the distribution. Hence "black swan" events because you don't have a large enough sample size to know the underlying properties of the system. If, by fat-tailed event, you mean +/- >3 standard deviations, then you are completely wrong. They occur orders of magnitude more frequently in a fat tailed distribution than in a gausaian/normal distribution.
