Five Surprising Insights About Stock Indexes and Funds
Money For the Rest of Us
J. David Stein
4.5 • 1.4K Ratings
🗓️ 9 August 2023
⏱️ 33 minutes
🧾️ Download transcript
Summary
We share five things we have learned about stock index valuations, earnings, currency, and why value investing isn't dead.
Topics covered include:
- How index providers divide the stock universe into large and small, growth and value
- The difference between the price-to-earnings ratio and earnings yield and which is better
- How earnings volatility can impact annual earnings growth and what to use to estimate future earnings
- How value stocks often grow earnings faster than growth stocks
- How value has outperformed growth in the last three years
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Show Notes
Related Episodes
102: What It Takes To Be A Value Investor
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Transcript
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| 0:00.0 | Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, |
| 0:05.7 | how to invest it and how to live without worrying about it. I'm your host, David Stein. |
| 0:10.8 | Today is episode 443. It's titled Five Surprising Insights about Stock Indexes and Funds. |
| 0:18.7 | In 1995, I became an institutional investment advisor. As we structured portfolios, |
| 0:26.0 | they typically had large-cap growth managers, large-cap value managers. We would have the same |
| 0:33.2 | on the small-cap side, growth and value managers that invested in smaller companies. |
| 0:39.8 | In order to determine which managers to recommend to our clients, we met with hundreds of managers |
| 0:46.7 | per year and we had a constant stream of investment managers on the stock side, the bond side, |
| 0:53.1 | and eventually other asset classes come to our office. The first manager I ever met with was |
| 0:58.8 | anchor capital advisors based out of Boston. They just celebrated their 40th anniversary. When I met |
| 1:05.6 | with a manager, I didn't really have any idea what to ask them. They typically would have a |
| 1:10.9 | presentation book, they would go through their charts. I remember asking a fairly detailed follow-up |
| 1:17.1 | question about their strategy that required some additional work on their part, and I never |
| 1:22.7 | heard back, so we didn't ever recommend them as a manager. I loved meeting with managers. I was |
| 1:30.1 | intrigued by both growth style managers and value style managers, and they were represented |
| 1:36.7 | both styles in our investment portfolios. I would follow their stock picks, sometimes I would |
| 1:41.8 | pair at their stock picks, often it wouldn't go very well. After about six or seven, eight years |
| 1:48.5 | of doing that, I decided, well, what if we manage money by taking the high-conviction stock picks |
| 1:55.3 | of our top managers on a recommended list and put together a portfolio? Each manager's top 10 |
| 2:00.9 | holdings, this was more of a small to mid-cap style portfolio, and I back-tested it. I got the ideas |
| 2:07.6 | and I spent several months going through a back test to verify that the best ideas from our top |
| 2:14.2 | managers would generate excess return, and then we could structure portfolios, model portfolios, |
... |
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