Excess Returns

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Quantifying The Motley Fool’s Small Cap Growth Investment Strategy Mar 28, 2021

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The Motley Fool is not known for their quantitative models. They are known for a discretionary growth style of investing that attempts to identify game changing companies and then holds them for the long-term, seeking to generate returns that are multiples of their original investment.

But despite their discretionary nature, their book The Motley Fool Investment Guide did contain a detailed quantitative model to select small-cap growth stocks. When we launched Validea in 2003, we wouldn't have guessed that this model would have outperformed all the other models we launched, but it has produced the best return of all the models we follow in the 18 years since.

In this episode, we take a look at the model we extracted from the Motley Fool Investment Guide and the criteria it uses to select small-cap growth stocks.

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Applied Finance Capital Management

Rafael Resendes On Intrinsic Value, Economic Margin and How Some Value Models Have Lost Their Way Mar 25, 2021

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Systematic value strategies have had one of the worst performing periods in their history in the past decade. This extended underperformance, coupled with changes in the market and economy that many argue are unfavorable for the strategy have led many to question whether it is permanently broken.

As believers in the strategy, we have a natural tendency to discount these arguments and to invite on guests who support our opinion. So in this episode, we wanted to counteract that bias and look at the other side of the coin.

We are joined by Applied Finance founder Rafael Resendes, who has been a vocal critic of traditional approaches to value. We talk about why traditional value may not produce the kind of results many value investors are looking for going forward and examine the arguments against the strategy.

We discuss:

- the difference between value and cheapness

- the importance of economic profit

- the case against the investment factor

- the five factor model he built to address deficiencies in popular academic models

We hope you enjoy the discussion.

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Rafael Resendes (@rresendes) / Twitter

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What Has Really Driven the Rebound in Value Stocks? Mar 21, 2021

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There is a popular narrative out there that value investing is back. And it makes sense given the huge run that many value funds have had off the market bottom. But when you look beneath the surface, it turns out what drove those returns may have little to do with value at all. In this episode, we look at what has actually driven the returns of many value strategies in the past year, and the opportunity it may create for long-term value investors.

We hope you enjoy the discussion.

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Kevin Zatloukal (@kczat) / Twitter

Machine Learning, Fantasy Football and Factor Investing with Kevin Zatloukal Mar 14, 2021

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In this episode, we are joined by Kevin Zatloukal. Kevin teaches Computer Science at the University of Washington and has his Ph.D. in Computer Science from MIT. He previously was a programmer for both Microsoft and Google. He is also a member of O'Shaughnessy Asset Management's Research Partner Program, where he has written two papers applying machine learning concepts to investing. In the interview, we discuss the basics of machine learning and some examples of how it is applied, including:

- the different types of machine learning and some common algorithms

- how machine learning can be used in fantasy football to identify players with the potential for success - the application of decision stumps and clustering to value investing

- the balance between intuition and empirical results

We hope you enjoy the discussion.

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Lessons From Warren Buffett's 2021 Annual Letter Mar 07, 2021

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In this episode, we discuss the major points Warren Buffett covered in his 2021 annual letter and talk about some lessons investors can learn from them.

We discuss:

- the importance of recognizing mistakes and learning from them

- why operating earnings are a better measure of Berkshire's business than GAAP earnings

- the evolution of Buffett's investment approach over time

- why Berkshire's approach differs from most other conglomerates

We hope you enjoy the discussion.

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Statistical, Evidence Based Investing | Bridgeway Capital Management

Bridgeway Founder John Montgomery On Their Unique Culture and Lessons From a 25+ Year Career in Quant Investing Mar 04, 2021

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In this episode, we are joined by John Montgomery, the founder and CIO of Bridgeway Capital Management. Bridgeway is unique in the world of Wall Street, where profits are usually the primary motive, in that it donates 50% of its profits to charity, makes everyone who works at the company a partner, and strives to maintain a low ratio of compensation of its highest paid team members relative to the lowest paid. The firm has also built an excellent long-term record managing quantitative, factor-based strategies. In the interview, we discuss Bridgeway's unique culture, John's path to becoming a quantitative investor, and the biggest lessons of his career running factor models. We also talk about Bridgeway's process of building quantitative models and how they view the major investing factors. We hope you enjoy the discussion.

MORE ABOUT BRIDGEWAY

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Replicating Anomalies by Kewei Hou, Chen Xue, Lu Zhang :: SSRN

Academic Research Spotlight: Replicating Anomalies by Lu Zhang, Chen Xue and Kewei Hou Feb 28, 2021

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In this episode, we are trying something new. There is so much academic research out there about markets, and what drives their returns over time, that it can be very difficult for investors to keep up with all of it. So we are going to start highlighting some of our favorite academic papers each month and breaking down their key lessons.

We start with paper Replicating Anomalies by Lu Zhang, Chen Xue and Kewei Hou. In this paper, the authors examined 452 stock market anomalies to see how they held up once the impact of micro-cap stocks was reduced. We summarize the findings from the paper and what they mean for investors.

We hope you enjoy the discussion.

DIRECT LINK TO REPLICATING ANOMALIES PAPER

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GameStop: What Happened, How it Happened, and Lessons We Can Learn From It Feb 21, 2021

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The rapid rise and fall of GameStop earlier this year was unlike anything many of us have seen in our investing careers. The stock's price went from the single digits to upwards of $400 per share in a very short time, and then lost most its value in the weeks that followed. In this episode, we take a look behind the scenes at the factors that led to GameStop's massive gains, and how those same factors eventually led to the ensuing decline We also take a look at some lessons investors can learn from the GameStop saga.

We hope you enjoy the discussion.

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The Elusive Definition of Risk – And Some Practical Ways to Measure It Feb 14, 2021

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Risk is one of the most difficult concepts in investing to define. Part of that is because we face many risks as investors that come from many different directions. But another part of it is that risk is ultimately different for every investor, which makes a universal definition impossible to find.

In this episode, we look at some of the most important risks we face as investors, and why they are impossible to disentangle from our own behavior. We also look at some practical ways we use to measure risk to help optimize results for the focused factor-based strategies we follow.

We hope you enjoy the discussion

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