Comments by "JP 72" (@739jep) on "How to Evaluate Your Investment Decisions" video.

  1.  @jl8252  the key here is if these historical premiums are because these types of stocks are riskier or because investors have behavioural biases. Performance can be expected to continue if the historic premiums are risk based (and therefore there is no alpha). If they are behavioural based then yes we can expect them to disappear post publication, due to the mechanisms you’ve described. Perhaps not immediately however as behavioural biases can be persistent even after identified. This does not mean that the historical premiums are predictive of the future in the way you’re describing. We know that historically these premiums existed , but we don’t know when or by what magnitude they will show up in the future - we just expect there to be a premium over the long term. It’s the exact same thing with the market premium , yet people are always pretty confident that long term stocks will provide a return. By your same logic it’s possible that stocks never again return a premium over treasury bonds - and I agree it’s possible , but I’m not going to invest as if I expect that. We have a strong theoretical basis as to why these historical premiums are risk based and these risk factors are currently included in pricing models that explain approximately 95 percent of asset prices. That’s a pretty useful model I think.
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  2. There is a huge difference between these two methods of evaluating performance. Historical evidence is always used when investigating the world - it can then be used to make predictions of the future and it can then be tested. Historical premiums have been widely tested in and out of sample and have been shown to be robust and persistent. Not only that there is a strong theoretical basis to support why this empirical evidence exists and why we can expect it to continue (it is not based purely on returns) . This does not exist for all types of investment strategies , in fact , a lot of popular strategies have been demonstrated to be ineffective AND also have a strong theoretical basis as to why nobody should consider these strategies when investing. For example stock picking has been shown to be an ineffective strategy , but it’s obviously possible to pick stocks and get a good outcome. That does not mean the decision to invest in an individual stock was a good one. Likewise you could have invested in a market cap weighted index etf prior to the covid crash and experienced an immediate and significant loss. That didn’t mean the decision to invest in a market cap weighted index was a bad one.
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  3. There’s plenty of opportunity to ‘dive in deep and get nerdy’ with this type of investing. Research into factors, pricing models , market efficiency etc leaves plenty of opportunity for research. But I get your point , you get utility from the fun of it , but that’s not what this channels about - at least not at the cost of forgetting what we know about risk , asset returns etc
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