Before you invest a penny, listen to Bob Haugen.
He’s a former finance professor who’s spent half a lifetime studying the stock market. He’s written a number of books and papers, and is the co-author of remarkable piece of analysis entitled “Case Closed” and available here. Read the analysis .
He looked in excruciating detail at the characteristics of which stocks did best (and worst) over nearly half a century, from 1963 to 2007.
Most of these “styles” are a waste of time. And the idea that you need to take on more “risk” to earn higher returns is a total con.
On the contrary, he says, the stock market has a big secret.
Over many decades, “the stocks with the highest risk produced the lowest returns — and stocks with the lowest risk produced the highest returns.” In other words, he says, “the risk/return ratio was upside down ... the payoff to risk is consistently negative over the 45-year period of this study.”
Like Asness, Frazzini, and Pedersen, and Antti Ilmanen, Bob Haugen believes that there's no risk premium within equities, but there still is a risk premium! This inconsistency is necessary because they can't wean themselves from the utility theory that leads inexorably to the risk premium. That is, as long as utility is an increasing function of wealth, at a decreasing rate, you get a risk premium! So, they basically all have this localized risk loving, but global risk aversion. To paraphrase Benjamin Franklin, such a utility function is 'so convenient a thing since it enables one to find or make a reason for everything one has a mind to do.'
In contrast, I think one should junk the standard argument of the utility, wealth, and replace it with status. Then everything is consistent, and you can explain why happiness does not increase when societies get wealthier (the Easterlin paradox). Risk premiums are to economics what the luminiferous aether was to pre-relativistic physics: omnipresent but unmeasurable.
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