The Best Investment Writing Volume 5: Selected Writing from Prominent Investors and Authors

Episode Summary

Executive Summary: This episode is a compilation of investment research essays spanning momentum, value, asset-class narratives, diversification, factor investing, and crisis behavior. The recurring message is that markets are shaped by structural changes, valuation extremes, and investor psychology—not just recent performance—and that robust, rules-based, diversified approaches tend to outperform simplistic narratives over full cycles.

Main Topics: Trend following and momentum turning points (Priority: 5/5): Campbell Harvey and Michele Mazzolini argue that time-series momentum suffers when slow and fast lookback windows disagree, signaling turning points. They show turning points are a key driver of weaker recent performance and propose a dynamic strategy that blends fast and slow signals based on observable market states. Value investing, valuation spreads, and digital-age change (Priority: 5/5): Multiple segments argue that value has been hit hard recently but remains structurally attractive. One author says the decline in traditional value metrics reflects the rise of intangible assets, network effects, and digital platforms, while another shows simple cheap-stock screens still beat growth over long periods. Global diversification and regional leadership rotation (Priority: 4/5): The global diversification section emphasizes that no equity market leads forever. It warns against home bias, shows how country leadership rotates across decades, and argues that valuation and currency matter when deciding how much to diversify internationally. Productivity, innovation, and idea diffusion (Priority: 4/5): Vanguard’s megatrend piece links future productivity growth to the spread of ideas across industries and countries. It introduces idea multiplier and idea diffusion metrics and argues that rising knowledge sharing can lift productivity, wages, profits, and long-run returns. Bond indexing and the risks of passive fixed income (Priority: 4/5): GMO’s bond discussion argues that passive bond indexing is flawed because cap-weighted bond indexes load up on the most indebted issuers, extend duration when yields are low, and lower expected returns while increasing credit risk. Myths, broken asset classes, and crisis investing (Priority: 4/5): Several essays challenge investment myths, including claims that asset classes are permanently broken or that central banks can solve everything. Another section argues crises create the best opportunities for small-value and factor strategies, but only for investors with discipline and dry powder. Factor investing and the role of short legs (Priority: 3/5): Research from Robeco shows that most factor premium value comes from the long side of factor portfolios, while short legs add less unique alpha and often carry higher volatility and implementation costs.

Key Arguments: Trend-following underperforms when markets experience more frequent turning points, because static lookback windows react too slowly or too noisily. Dynamic blending of fast and slow momentum signals can improve performance, especially after corrections and rebounds. Turning points are distinct from volatility and can explain recent deterioration in trend-following returns across assets. Traditional value remains cheap on many measures, and long-run evidence still supports value over growth despite prolonged drawdowns. The rise of intangible assets, digital platforms, interoperability, and network effects reduces the usefulness of book value as the key value metric. Equity leadership rotates across countries over time, so concentrating in one country or region is risky even if it has dominated recently. Global diversification helps capture future leaders and reduce the risk of extended underperformance from home bias. Innovation and productivity growth depend on cumulative idea generation and diffusion, not just isolated breakthroughs. Passive bond indexes are not neutral: they mechanically concentrate risk in the most indebted issuers and can become more aggressive at the worst time. Crisis periods create especially strong opportunities for simple factor tilts such as small value, because fear and forced selling push prices away from fundamentals. Most factor premiums are stronger in long-only implementations than in short legs, due to shorting costs and higher volatility on the short side. Investors should focus on robust process, diversification, and valuation discipline rather than headlines declaring asset classes dead.

Data Points: Assets in passive core bond funds: nearly 40% - Share of core bond funds managed passively, up from 16% a decade earlier. Turning-point impact on portfolio returns: -9.2 percentage points - A one-standard-deviation increase in average turning points is associated with lower annual returns for a multi-asset trend portfolio normalized to 10% volatility. Multi-asset static trend return: 7.5% annualized - Average annual return over the 30-year evaluation period in the trend-following study. Multi-asset static trend return in recent decade: 1.8% annualized - Performance of static trend following in the most recent decade. Multi-asset dynamic trend return in recent decade: 4.3% annualized - Dynamic trend strategy result in the most recent decade. U.S. stock market return: 11% average annual return - Verdad decomposition of the U.S. market from 1996 to 2020. Revenue growth contribution to market return: 6% - Largest source of U.S. equity returns in the return decomposition example. Value portfolio vs growth portfolio return: 13.16% vs 10.39% - Cheap half vs expensive half of the 1,000 largest firms, sorted on price-to-earnings. Value-growth spread over 42 years: about 3% - Annualized spread between cheap and expensive halves of the universe. Cheap half compounded outcome: about $16,000 from $100 - Illustrative compounded result for the value portfolio over 42 years. Growth half compounded outcome: about $6,000 from $100 - Illustrative compounded result for the growth portfolio over 42 years. Russell 1000 value vs growth over 10 years ending July 31, 2020: 10% vs 17% - Index performance cited to illustrate value underperformance. Russell 1000 market return over same 10 years: 13.85% - Benchmark comparison in the value-investing segment. Value vs growth over 2020 YTD through July 31: -25% vs +25% - Example of dramatic seven-month divergence during the pandemic period. Average annual value-fund spread in long run: over 2% - Value still outperformed growth over the 42+ year PE-sorted sample after adding 2020 data. Annualized value factor excess return since 1960 to 2006: nearly 15-fold cumulative excess return - Larry Siegel references the long historical success of the Fama-French value factor. Average annual returns by company type: 8%, 10%, -3%, 6% - Return decomposition of profitable growth, low-growth value creators, unprofitable growth, and low-growth value destroyers. Number of countries/regions in global equity rotation analysis: 10 regions / 18 MSCI World countries - Used to show leadership rotates over decades and U.S. dominance is not permanent. U.S. market cap vs China: $48 trillion vs $4-5 trillion - Larry Siegel’s point that the world is not just the U.S. and China. Passive AG duration increase: about 70% - GMO argues the Bloomberg Barclays U.S. Aggregate has materially increased duration since the GFC. BBB share of AG corporate sector: 50% - Up from about 32% pre-GFC, indicating deteriorating credit quality. AAA to BBB spread: below 100 bps - Recent compensation for credit risk in the AG corporate sector has compressed sharply. AG yield pre-2008 vs recent: about 6% vs below 2% - Illustrates the bond index’s increasing duration risk at lower yields. U.S. productivity growth post-2000 average: 0.6% - Baseline cited in Vanguard’s idea multiplier piece. Expected productivity growth from idea multiplier: 1.2% to 1.5%+ annually - Projected next-five-year productivity growth based on rising idea multiplier and diffusion metrics. Idea multiplier increase to productivity effect: 0.1 unit -> +2.6 percentage points - Industry-level relationship estimated over subsequent five years. Idea diffusion increase to productivity effect: 0.1 unit -> +2.0 percentage points - Country-level estimate for GDP per worker growth over five years. Home bias in citations: 43% in 1970 to 23% recently - Shows increased cross-border idea sharing. Factor portfolio Sharpe ratios: long legs 1.10 vs short legs 0.69 - Robeco found long-only factor legs outperform short legs on a risk-adjusted basis. High-yield spread crisis threshold: 6.5% - Used in the crisis-investing paper to separate normal and stressed regimes. Private equity deal volume correlation with spreads: -69% - PE activity falls when high-yield spreads rise, limiting crisis opportunism. Average IRR in high-spread vintages: 17% vs 12% - Private equity vintage returns are higher when spreads average above 6.5%. Default/excess risk signal: small value best-performing asset class during crises - Crisis investing paper identifies small value as the strongest crisis-era performer.

Pivotal Quotes: "“The Achilles heel of trend investing.”" — Campbell Harvey: Describing trend-following’s weakness at turning points where slow and fast signals disagree. "“Passive investing in bonds today turns prudence on its head.”" — Peter Cipinelli: Core claim of the GMO bond-index critique. "“Reports of the death of asset classes are greatly exaggerated.”" — Amy Cook / research theme: The broken-asset-classes section argues temporary underperformance often precedes strong rebounds.

Implications: The episode argues for disciplined, rules-based investing: adapt to regime changes, diversify across styles and regions, respect valuation, and avoid assuming recent winners or fallen asset classes will persist forever.