Guest: Jack Vogel. Jack conducts research in empirical asset pricing and behavioral finance. He is a co-author of DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth and QUANTITATIVE MOMENTUM: A Practitioner’s Guide to Building a Momentum-Based Stock Selection System. His academic background includes experience as an instructor and research assistant at Drexel University in both the Finance and Mathematics departments, as well as a Finance instructor at Villanova University He has a Ph.D. in Finance and a MS in Mathematics from Drexel University. Jack graduated summa cum laude with a BS in Mathematics and Education from The University of Scranton.
Date Recorded: 7/6/17
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Summary: In Episode 61, we welcome Jack Vogel, CFO/CIO of Alpha Architect, and the partner of Wes Gray, who you may remember as one of our earliest Meb Faber Show guests.
After Jack tells us a bit about his background and how he came to be at Alpha Architect, Meb jumps in, starting with “factors” – specifically, the value factor. Meb asks about Jack’s value philosophy in general, and how he creates a value portfolio.
What follows is a great look at how a professional portfolio manager/asset allocator creates a portfolio. Using quantitative tools, Jack starts by constructing the universe of potential assets to include, keeping in mind scale. Next, Jack applies some forensic accounting in order to exclude certain toxic assets that one wouldn’t want in a portfolio. Then, he screens for value. Jack likes using enterprise multiples. Finally, he looks for “quality.” These are things like free cash flow, margin growth and marketing stability.
Meb then points the conversation toward momentum investing. Jack offers us a general overview first, noting how momentum investing can be really beneficial for value investors. He also makes the point how it’s definitely different than growth investing.
In discussing creating a momentum portfolio, Jack discusses adding seasonality (which means addressing when to rebalance) and quality. On the topic of quality, Jack gives us a great example of what it means in the context of earnings; it involves two stocks, one of which is flat for an extended period, but then explodes in value in a short amount of time, versus the other that experiences the same growth, but gradually and consistently over the entire period. Which earnings are more “quality”? Jack gives us his thoughts.
Next up is Alpha Architect’s great tool, Visual Active Share. It’s a wonderful way for investors to compare the holdings of an ETF to its benchmark index. Investors can use this to see just how “different” the ETF in question truly is. After all, you don’t want to be paying too much in fees for an ETF that’s really just a closet index fund. The guys discuss whether there’s a particular number for what “good” active share is, as well as the challenge of tracking error as you grow more “different.”
As usual, there’s a great deal more in this episode: Alpha Architect’s new value, momentum, trend ETF… A discussion of the state of robos… What new tools Jack and his crew at Alpha Architect are working on now in order to help investors pull back the curtain on various funds… And of course, Jack’s most memorable trade – it was the last individual stock he owned, which he now refers to as “The Titanic.”
What was the stock? Find out in Episode 61.
Links from the Episode:
- Alpha Architect website
- White Papers on Alpha Architect
- On the Performance of Cyclically Adjusted Valuation Measures
- Enhancing the Investment Performance of Yield-Based Strategies
- Using Maximum Drawdowns to Capture Tail Risk
- Does Complexity Imply Value? AAII Value Strategies from 1963 to 2013
- Why Do Enterprise Multiples Predict Expected Stock Returns?
- 6:34 – Quantitative Value (Book) and Quantitative Momentum (Book)
- 6:46 – Our Quantitative Value Philosophy
- 13:43 – Analyzing Valuation Measures: A performance Horse Race over the Past 40 years – Vogel, Gray
- 25:31 – “Frog in the Pan” – Vogel, Gray
- 31:33 – activeshare.info
- 39:07 – The Value and Momentum Trend Philosophy
- 43:29 – DIY Financial Advisor (Book)
- 58:53 – AlphaArchitect.com
Article by Meb Faber