In this study, we examine how idiosyncratic risk is correlated with a wide array of anomalies, including asset growth, book-to-market, investment-to-assets, momentum, net stock issues, size, and total accruals, in international equity markets. We use zero-cost trading strategy and multifactor models to show that these anomalies produce significant abnormal returns. The abnormal returns vary dramatically among different countries and between developed and emerging countries. We provide strong evidence to support the limits of arbitrage theory across countries by documenting a positive correlation between idiosyncratic risk and abnormal return. It suggests that the existence of these well-known anomalies is due to idiosyncratic risk. In addition, we find that idiosyncratic risk has less impact on abnormal return in developed countries than emerging countries. Our results support the mispricing explanation of the existence of various anomalies across global markets.
I think craft is right, you just dont read what other people write, then you reflect back something entirely different, and argue against that. Its very odd!
I am going to follow his example in the other thread and leave you to it, good luck with what ever it is you do!
On topic, I think evidence based paper that show methods dont work are more common than the reverse, so might be slim pickings. Nearly everything I have seen is not of rigorous academic standard, its just dressed up to look like it!
I think craft is right, you just dont read what other people write, then you reflect back something entirely different, and argue against that. Its very odd!
I am going to follow his example in the other thread and leave you to it, good luck with what ever it is you do!
On topic, I think evidence based paper that show methods dont work are more common than the reverse, so might be slim pickings. Nearly everything I have seen is not of rigorous academic standard, its just dressed up to look like it!
We are all experts at fooling ourselves
I’m not sure how Buffett or most of F/A in general fits into an evidence based thread. Assuming we are looking for evidence to a scientific standard.
.Certainly Buffett & Co and there are long term successful T/A exponents as well provide enough evidence to nullify the efficient market hypothesis. But there is no evidence I have ever seen of what does work every time
My main interest around the concept of evidence based is how people cope once they see holes in the beliefs that used to fortify their involvement in the market. Do they look for new beliefs or can they still embrace the market in the face of their uncertainty. Not a lot seem to make the step into coping with true uncertainty, they keep looking for another belief to trust in or refortify their existing beliefs in the face of nullifying evidence.
What do you do with your own investment research? Aren't your investment conclusions based on a set of beliefs, supported by data and a framework of thought that combines them? If these are never fully certain and subject to ongoing development, what do you do when the facts as you knew them change with the arrival of unexpected information or your understanding of how you combine them changes? Generally speaking, the appropriate step to take is to act in accordance with what you believe to be true now, which may include leaving a wide(r) margin for error. You'd be familiar with what Keynes had to say about what to do when 'facts' change (in which case they were never really facts, but beliefs).
This is the same deal with the investment models which are created, tested against data and modified in light of evidence. When data contradicts a belief entirely, the belief must be discarded. If it is somewhat inconsistent, then you apply judgment, or reach for things like Maximum Likelihood estimation, Bayesian Adjustments, thresholds for rejection vs another hypothesis, or simply guess about what the right thing to do with your understanding of the world should now be.
As to coping with true, pervasive, uncertainty from a research perspective, you really can't. No margin for error is large enough to allow for it unless you know the bounds within which it is uncertain. Nothing can be proved conclusively or not if the idea under investigation is dominated by true uncertainty. Sure, you can get observational outcomes and some of these may produce stuff which meets some stats tests and have '*** (Significant at P = 0.01)' next to them. However, in a fully uncertain situation, you can't put too much weight on these outcomes. The more correct thing to say is "don't really know what this observation means" to any observation drawn from a fully uncertain situation. That would make for seriously boring copy...or otherwise be an excellent argument for indexing, in some ways.
As to confirmation bias, or otherwise making your career on an 'anomaly' (Shiller) or explaining it away via a risk exposure (FAMA), why should that behaviour be so surprising? You get Nobel Prizes and tenure for doing that. It also fills about 80% of the thread volume here. Where would ASF be without it?
I’m not sure how Buffett or most of F/A in general fits into an evidence based thread. Assuming we are looking for evidence to a scientific standard.
Let me get this straight...
The world's most successful investor - Buffett - just told you that 8 investors he personally know, many of whom he had worked with, all of whom he know for a fact learn from the same two teachers and apply, with very little modification, the same set of principles... and all of these nine all run different fund, all pick different stocks (with very few overlap, and no coordination among them)... and all of them managed to produce annualised, compounded returns of 20% or over for at least 20 years up to when the lecture was given...
And that is not "scientific" proof enough? Those successes are not evidenced enough to meet your strict criteria of scientific inquiry?
Seriously?
OK... how about the simple idea of looking for a $1 value and only ever pay 50 cents for it?
If you set out to find a buck but will only buy it for half that, there need to be convincing evidence whether or not that will make you profit?
Whatever happen to just accepting the word of the guy with $70 billion or something?
Notwithstanding the sense of "value" investing, how Buffet and his ilk does things bear no relation to an individual private investor.
Suggested reading.... Freakonomics and Fooled by Randomness.
......fooled by randomness.
Pick a company with a business you could understand.
Read its reports and account.
Read into its industry and competitors.
See if the company is going to go broke. See how it has been doing. See what are its assets and liabilities. See how its returns has been.
Estimate its position in relation to the industry. Have an idea of how its future would work out - will it still survive, will it go broke...
Then estimate its approximate value.
Buy below those estimates.
---
Not easy. Not effortless. Not always possible to find business you know and like and sell at a good price.
But not exactly Rocket Science either.
Expected Returns by Antti Ilmanen. And hundreds of reference paper included inside. The author one of the best in its field and a practitioner not academic. It will be a long read, require understanding of asset pricing theory but no maths involved in the book .
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