You have a point: there is research that speaks favorably of low-beta basket investing. But it's not volatility that produces abysmal returns, it's terrible fundamentals. In terms of measuring the fundamental risk of an individual company, volatility is a negligible indicator.
-
-
Replying to @Tinyvalue
I'm fine with that. So you would personally say that poor quality subsumes high volatility?
1 reply 0 retweets 1 like -
Replying to @soloprosperity
Volatility, in part, subsumes poor fundamentals, which isn't necessarily contingent on quality. The realization or assumption of fundamental risk (overvaluation, bankruptcy risk, managerial risk, etc) by the market should, in theory, produce volatility.
1 reply 0 retweets 1 like -
Replying to @Tinyvalue @soloprosperity
So volatility can be a bi-product of risk, but doesn't embody risk by itself. Stock in a reasonably priced, good company can become volatile for a myriad of reasons, of which the increased volatility may make it less risky. So fickle, hah.
1 reply 0 retweets 1 like -
Replying to @Tinyvalue
Great explanation. I agree that there seems to be a correlation between high-vol & poor quality, which seems to be why both work as a solid negative pre-screen, sometimes removing the same names. I tie volatility to behavioral risk. Higher vol = Higher behavioral risk.
2 replies 0 retweets 0 likes -
Replying to @soloprosperity
Interesting stuff! You've really made me think. How useful have you found the high-vol pre-screen to be at measuring quality in periods of macroeconomic turmoil? I wonder if, broadly speaking, the usefulness of various screens change depending on where we are in the cycle. Hmm...
2 replies 0 retweets 1 like -
Replying to @Tinyvalue
1. I have never specifically measured it outside of my anecdotal experience on running my quant screens. Whathere the end target was a value or momentum portfolio, weeding out the 10% highest volatility names OR the 10% worst quality names...
1 reply 0 retweets 1 like -
Replying to @soloprosperity
2. On various metrics (Accruals, Bloat, RoE/RoIC, etc.) it always improved resukts over time. When I started to look at the names being removed, I noticed that there was some overlap in every period (Names were in both bad buckets).
1 reply 0 retweets 1 like -
Replying to @soloprosperity
3. I have never tested or thought about the macro piece but there are papers that try to link the two subjects (Stock factors and Macro factors). It makes sense to me, at least in theory.
1 reply 0 retweets 1 like -
Replying to @soloprosperity
4. Historically, it seems that the deeper an economic recession, the worse value performs relatively (29, 73, 08 etc.). This makes sense to me from a beahvioral aspect, which to me, is all factor investing is. I would bet there are other links.
2 replies 0 retweets 1 like
Right, that companies cheap beforehand (due to distress or other), are seen in an even worse light during recessions. This makes behavioral sense. Great conversation. I'm going to be doing a lot of thinking as well, ha. I'll let you know if I make any "groundbreaking" inferences.
Loading seems to be taking a while.
Twitter may be over capacity or experiencing a momentary hiccup. Try again or visit Twitter Status for more information.