Guest: Larry Swedroe. Larry is a principal and director of research for Buckingham, an independent member of the BAM Alliance. Previously, he was vice chairman of Prudential Home Mortgage. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has since authored seven more books. In his role as director of research and as a member of the firm’s Investment Policy Committee and Board of Managers, Larry regularly reviews the findings published in dozens of peer-reviewed financial journals, evaluates the outcomes and uses the result to inform the firm’s formal investment strategy recommendations. He has had his own articles published in the Journal of Accountancy, Journal of Investing, AAII Journal, Personal Financial Planning Monthly and Journal of Indexing.
Topics: As we recorded Episode 28 on Halloween, it starts with Meb referencing his costume from the prior weekend’s festivities. Can you guess what it was? He stayed true to his financial roots, dressing as Sesame Street’s “Count von Count.” (Sorry, no photographs.)
But the guys jump in quickly, beginning with the subject of Larry Swedroe’s 15th and latest book – “factors.” Larry tells us that the term “factor” is confusing. He defines it as a unique source of risk and expected return. So which factors should an investor use to help him populate his portfolio? Larry believes there are 5 rules to help you evaluate factors: 1) Is the factor “persistent” across long periods of times and regimes? 2) Is it “pervasive”? For instance, does it works across industries, regions, capital structures and so on. 3) Is it “robust”? Does it hold up on its own, and not as a result of data mining? 4) Is it “intuitive”? For instance, is there an explanation? 5) Lastly, it has to be “implementable,” and able to survive trading costs.
The guys then switch to beta. Larry Swedroe mentions how valuations have been rising over the last century. He references how CAPE has risen over a long period, and points out how some people believe this signifies a bubble. But Larry thinks this rising valuation is reasonable, and tells us why. Meb adds that investors are willing to pay a higher multiple on stocks in low-interest rate environments such as the one we’re in.
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Links from the Episode:
- Your Complete Guide to Factor-Based Investing: The Way Smart Money Invests Today
- All of Larry’s ETF.com columns
- The BAM Alliance
- Twitter @LarrySwedroe
- “Detecting True Factors in the Factor Zoo: Assessing the Economic Rationale behind Equity “Factors
- Triumph of the Optimists: 101 Years of Global Investment Returns
- Modigliani–Miller theorem
- “The John Bogle Stock Valuation Model“
- “How Much Are Those Dividends Costing You?“
Running Segment: “Things I find beautiful, useful or downright magical”:
Article by Meb Faber, Read the transcript here.