Buy Unpopular Stocks?

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Park
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Buy Unpopular Stocks?

Post by Park » Sun Nov 04, 2018 1:04 pm

http://tools.morningstar.ca/cover/video ... &id=887433

The above is a link from morningstar. It discusses the importance of popularity, when it comes to stock returns. Less popular stocks tend to do better than expected. Popularity helps to explain the value premium, the small premium and volatility premium. The link divides popularity into those used in classical finance theory (expected return, risk, liquidity, tax efficiency) and those coming from behavioral finance. Those coming from behavioral finance include brand value, reputation and competitive advantage.

"One was brand value. And there are external measures of brand value where companies are ranked. And it turns out, by building portfolios over time of companies that have a lower brand value versus those with a higher brand value, the interesting thing is that ones with the lower brand value outperform the ones with the high brand value. A similar thing happens with reputation. So, companies that have a great reputation actually perform lower, they have lower returns than companies that don't have that greater reputation.

And the third factor is competitive advantage which we use, the Morningstar moat measure. And what we found was that basically the same phenomena that companies that don't really have a moat in terms of having a competitive advantage actually outperform portfolios of companies that have a great deal of competitive advantage."

The finding about competitive advantage surprises me.

Edited to include the following: I've tried to post the correct link at the top of the post, but it's not working. If you google "Why popular stocks may not make the best investments" along with "Paul Kaplan", you should get to the relevant link.
Last edited by Park on Sun Nov 04, 2018 5:08 pm, edited 2 times in total.

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cheese_breath
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Re: Buy Unpopular Stocks?

Post by cheese_breath » Sun Nov 04, 2018 1:24 pm

Just buy S&P 500 or TSM and you get the popular and unpopular.
The surest way to know the future is when it becomes the past.

Topic Author
Park
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Re: Buy Unpopular Stocks?

Post by Park » Sun Nov 04, 2018 2:22 pm

The following is from the blog of Patrick O'Shaughnessy:

http://investorfieldguide.com/will-you- ... ck-market/

It shows the distribution of returns for value and growth stocks. 53% of value stocks beat the equal-weight market return, compared to 34% of growth stocks. However, of those value stocks that outperform, the average outperformance is 29.2%. For the 34% of growth stocks that outperform, the comparable number is 48.9%.

Higher return is more popular with investors. And if you can pick the right growth stocks, you will get higher return than with value stocks. The operative word here is if.

https://www.questia.com/library/journal ... ent-styles

The above link is to an academic paper, and the following is an excerpt from the conclusion section:

"The time-changing nature of the risks of stocks versus bonds has been extensively
analyzed and the results are used by practitioners to make asset allocation decisions. In
contrast to previous literature, this study concentrates on the time-changing nature of the
risks of different equity styles. In addition, we incorporate investors' degree of risk tolerance
into the analysis. We find that for more risk-averse investors, the large-cap growth style is
the safest style for a shorter investment window, while the small-cap value style is the safest
style for a longer investment window. However, more aggressive investors would consider
the small-cap value style as the safest style across all time horizons and also view value styles
safer than the growth styles of similar size. In addition, the small-growth style is the most
risky style across all investment horizons for both types of investors"

The above is based on US stock data from 1926 to 2008.

Lower risk is more popular with investors. The above paper would suggest that if you're a more risk averse investor, large growth is the least risky of small value/large value/large growth/small growth for a shorter investment window. When you read the paper, shorter investment window could be interpreted as up to 5 years.

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nedsaid
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Re: Buy Unpopular Stocks?

Post by nedsaid » Sun Nov 04, 2018 2:41 pm

Park, you are on to something here. We pretty much are singing from the same hymn book. Wall Street is an expectations game and low expectations are easier to beat than high expectations. One would expect this to be self-evident but some folks here are pretty fanatical about efficient market theory.

I have put this point to the efficient market theory fanatics here and it goes something like this: if you really believed in Efficient Market Theory, you could have put 100% of your money in the High Tech and Internet bubble, in some cases such stocks were priced to infinity. If the theory were 100% true, it should make no difference which segments of the market you put your money into. The High Tech and Internet stocks should have acted in the exact same fashion as Value stocks during the 2000-2002 bear market but they didn't. As far as I know, no one has ever answered me on this because we all know deep down that you can pay too much for stocks and that speculation exists. There are "firm foundation" stocks and "castle in the air" stocks. In market panics, we all want the "firm foundation."

Valuations matter and matter a lot.

Actually, I do believe the markets are fairly efficient. Otherwise, all kinds of people would be beating the averages and they are not. But what I can say is that markets or segments of the market can be affected by excessive optimism or excessive pessimism. It is that human emotion that keeps markets from being 100% efficient. But they are efficient enough. Greed and fear have not been repealed.
A fool and his money are good for business.

danaht
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Re: Buy Unpopular Stocks?

Post by danaht » Sun Nov 04, 2018 4:35 pm

I agree with just buying the S&P 500 or even a total stock market index. Buying unpopular individual stocks may lead to buying several value traps. Or if you really want to buy unpopular stocks - it might be safer to allocate more between buying total international and total US (index fund) based on which is least popular. That way you are still buying a diversified index (the only difference is US or international)

UpperNwGuy
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Re: Buy Unpopular Stocks?

Post by UpperNwGuy » Sun Nov 04, 2018 6:14 pm

cheese_breath wrote:
Sun Nov 04, 2018 1:24 pm
Just buy S&P 500 or TSM and you get the popular and unpopular.
^^^^ THIS!

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bertilak
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Re: Buy Unpopular Stocks?

Post by bertilak » Sun Nov 04, 2018 6:28 pm

if you think a stock is unpopular, try haggling the price down with your broker. Tell him the stock is unpopular and he won't get a better offer anywhere else.

All kidding aside, you can put in a low-ball bid and see if anyone takes it.
Last edited by bertilak on Sun Nov 04, 2018 6:36 pm, edited 1 time in total.
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nedsaid
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Re: Buy Unpopular Stocks?

Post by nedsaid » Sun Nov 04, 2018 6:34 pm

UpperNwGuy wrote:
Sun Nov 04, 2018 6:14 pm
cheese_breath wrote:
Sun Nov 04, 2018 1:24 pm
Just buy S&P 500 or TSM and you get the popular and unpopular.
^^^^ THIS!
Except that the market over weights the popular stocks. Popular has higher market caps than unpopular. That is why Paul Merriman splits his stock portfolio between Indexes and Value.
A fool and his money are good for business.

Jeff Albertson
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Location: Springfield

Re: Buy Unpopular Stocks?

Post by Jeff Albertson » Sun Nov 04, 2018 7:13 pm

By unpopular, I presume you mean value stocks.
Jonathan Clement has a new article on the Money Magazine web site, "The Stock Market Just Had Its Worst Month Since 2011. Here’s What You Should Do Now".
http://time.com/money/5441834/stock-market-october/
Among other things he asks if it's time for value stocks to out-perform. spoiler alert: nobody knows
He also discusses "what's cheap" with wbern.

UpperNwGuy
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Re: Buy Unpopular Stocks?

Post by UpperNwGuy » Sun Nov 04, 2018 9:56 pm

nedsaid wrote:
Sun Nov 04, 2018 6:34 pm
UpperNwGuy wrote:
Sun Nov 04, 2018 6:14 pm
cheese_breath wrote:
Sun Nov 04, 2018 1:24 pm
Just buy S&P 500 or TSM and you get the popular and unpopular.
^^^^ THIS!
Except that the market over weights the popular stocks. Popular has higher market caps than unpopular. That is why Paul Merriman splits his stock portfolio between Indexes and Value.
Sorry, but my IPS says to buy the market, not to try to beat it.

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