We’re often asked if there is a scientific / academic approach to investing that should be taken. The word “science” is not used lightly for the scientific method requires rigorous, independent testing by peers and independent academics to effectively certify its demonstrable “truth.” In the field of investments, there is a science to the investment process that has been independently and academically verified over the decades. It relies upon Nobel Prize recipients’ theories which are more than theories but proven methodologies.
Our portfolios are solidly built upon the foundation of these theories:
Efficient Market Hypothesis (EMH). Eugene Fama received a Nobel Prize in Economics for his hypothesis stating that overall markets were efficient in pricing stocks. Basically this means that everything that was known about a company and its stock, at a current moment in time, was already priced into the stock and all that could change that price was the unknown – effectively, tomorrow’s news. This further demonstrated that attempts to profit by any minor pricing inefficiencies was pointless and hardly worth the effort given how effective today’s markets are in incorporating news into pricing virtually the minute it occurs. The chances of any single investor being able to exploit these occasional mispricings on a consistent enough basis to make a meaningful difference in total return are exceptionally slim. Basically, the capital markets work!
Modern Portfolio Theory (MPT). Harry Markowitz received the Nobel Prize in Economics for this seminal work related to diversification of portfolios. The theory, in its simplicity (without getting into the complex mathematics) demonstrated how a portfolio constructed of non-correlated asset classes (meaning they didn’t all move the same way at the same time) could increase the long-term expected returns of a portfolio while concurrently lowering the overall risk.
The Four Factor Model. This study by the aforementioned Eugene Fama and Professor Kenneth French has shown that there are premium returns that can be obtained by focusing on specific market factors (related to risk) that deliver higher expected rates of return over time. Certainly not every year – but over time. The factors are:
A. The Market Factor. Stocks have a higher expected long-term rate of return, over time, than do bonds (or fixed income).B. The Size Factor. Small companies, over time, deliver higher expected long-term rates of return than do large companies.C. The Value Factor. This relates to “value” or distressed stocks, as Prof French prefers to call them – stocks that have a low market price relative to their company’s book value. This pricing is generally due to actual or perceived problems with the company itself. As such, value stocks have a higher long-term expected rate of return, over time, than do growth stocks.D. The Momentum Factor. This last factor was later added by Mark Carhart PhD. Momentum relates to investing in companies that have increased in price while selling those that have decreased in price.
All of the foregoing relate to risk: stocks are riskier than bonds, small companies are riskier than large, distressed companies are riskier than growth companies, stock price movements in and of themselves are risky as well. As Nobel Laureate, the late Merton Miller determined, for corporations, it is all a cost of capital equation related to risk. Because stocks are riskier than bonds and the other factors described, companies with higher risk incur a higher cost of capital – the market demands a higher rate of return for these than it does for less risky companies. If there was not this premium expected rate of return than why would anyone take on the added risk and invest in them for no additional return? There has to be the added incentive of additional return in order to attract capital.
If you believe that the foregoing “science” of investing isn’t particularly sexy you’re right. As noted investor advisor coach Dan Wheeler has cogently observed: “the sizzle of smart investing is there is no sizzle… Investing doesn’t have to be sexy, it just has to work!”
Fred Taylor is a wealth and investor coach, founder and President of Professional Associates Wealth Coaching, Inc. located in Marietta, GA.
A navy veteran, he attended and graduated from Upsala College where he was the first recipient of the scholar/internship program offered by Northwestern Mutual Life Insurance Company. Upon graduation, he began his career with Home Life of NY. Subsequently, he worked with former Congressman Eugene Keogh and with the Medical and Dental Associations in the New York and New Jersey metropolitan area providing endorsed Retirement Plans to their members. He then spent five years with Wall Street firms prior to relocating to Atlanta in 1973
After relocating, he formed Professional Associates of Atlanta, the predecessor to his present firm. During this period, Fred was responsible for creating the first endorsed financial planning program for a professional association. Concurrently, he was an early member and proponent of the financial planning and Certified Financial Planner movement. He has earned the professional designations: Chartered Life Underwriter (CLU) in 1975, Certified Financial Planner (CFP®) in 1978 and Accredited Investment Fiduciary (AIF®) in 2005. He is a member of the Society of Financial Service Professionals and the Financial Planning Association. For the last several years and currently he has been selected as one of Atlanta Magazine’s “Five Star Wealth Advisors.”
As an active speaker, lecturer and writer, Fred has spoken and taught at numerous national and international professional conferences, symposiums and civic events as well as having authored several published articles. He has appeared on programs with such notables as former President Gerald Ford, Former Israeli Foreign Minister Abba Eban, and noted investment icons such as Sir John Templeton and Phillip Carret. He has been profiled in Business Atlanta and had been a regular guest on WRNG & WSB radio in Atlanta. As a coach to his clients, he considers most rewarding, the time that he spends teaching, lecturing and mentoring. He teaches the “Investor Education Seminar” series, a four year, quarterly program for investors as well as a monthly class: “Separating Investment Myths From Truths.” Additionally, he also conducts periodic “Investor Boot Camps” for individuals and group entities.
An avid sportsman, Fred is an active scuba diver and tennis player and holds a National and two Southern Sectional Championships as well as several state and local titles. He currently resides, with his family, in Marietta, GA.
The Lies My Broker Taught Me and 101 Truths About Investing. Co-authored with Mark Matson.
Films: Navigating The Fog of Investing. Jointly, with Abundance Technologies and McGriff Productions
TV: Contributor & Executive Associate, Nationally shown Public Broadcasting “special:” Mark Matson’s Main Street Money
Note: Five Star Award candidates are evaluated against 10 objective eligibility and evaluation criteria such as client retention rates, client assets administered, firm review and a favorable regulatory and complaint history.
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