May

15

Henrik Cronqvist, Stephan Siegel, and Frank Yu:
Value versus Growth Investing: Why Do Different Investors Have Different Styles?  [39 page PDF ]

Abstract:

We find that several factors explain an individual investor's style, i.e., the value versus growth orientation of the investor's stock portfolio. First, we find that an investor's style has a biological basis and is partially ingrained in an investor from birth. Second, we show that an investor's hedging demands as well as behavioral biases explain investment style. Finally, an investor's style is explained by life course theory in that experiences, both earlier and later in life, are related to investment style. Investors with adverse macroeconomic experiences (e.g., growing up during the Great Depression or entering the labor market during an economic recession) or who grow up in a lower socioeconomic status rearing environment have a stronger value orientation several decades later. Our research contributes a new perspective to the long-standing value and growth debate in finance.

Victor Niederhoffer writes:

This is why we count and do prospective studies versus retrospective ones, and why we eschew paying attention to work form Yale professors who average earnings over 10 years , many of which were not reported until 6months after the earnings were or were not reported, with retrospectively selected stocks.

Rocky Humbert writes: 

Vic, by your own admission and work, if the stock market declines massively this year, it increases the probability of a greater-than-average return in the future. And by extension, if the stock market rises massively this year, it increases the probability of a lower-than-average return in the future. Why don't you extend this logic (which is both fundamental and technical) to relative valuation (i.e. growth v value) ; perhaps because your data set is lacking one of the largest multi-year examples (1997-1999) in history?

Also please explain how dismissing Shiller (or anyone else's argument) strengthens your argument– which I interpret as being a blanket belief that "fast growing company stocks outperform inexpensive slow-growing stocks." I can provide you with many strong academic studies that have documented this phenomenon in the past; as well as good studies that demonstrate momentum, small cap and other factors have historically outperformed. I would also like to better understand how you define a prospective study — since I find your use of the term confusing in this context.

As others have noted, this list has increasingly veered from its mission and why I joined; because the direction and rigor comes from the top, this exchange provides an excellent opportunity to reorient — unless you'd rather demur and focus on longevity.

Since when is this kind of thing true for future returns in a random walk? 

Russ Sears writes: 

The stock market declines massively this year, it increases the probability of a greater-than-average return in the future. And by extension, if the stock market rises massively this year, it increases the probability of a lower-than-average return in the future. There is a subtlety in this statement that I think should be pointed out, it is time. A quick hard drop increases the chance of a quick high return next year. However it is not symmetric with time. A large risk may lower expected return over a much longer period of time. Knowledge and therefore increases in wealth stays with us longer than destruction.

Victor Niederhoffer writes: 

Since when is this kind of thing true for future returns in  a random walk? 


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