Investing in undervalued securities worldwide

Weekly Update 16 September 2024

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The “efficient market hypothesis” (EMH) is an important concept in academic finance. It says that (because of intense competition amongst investors and the wisdom of crowds) stock prices are more or less correct at all times. It is impossible to beat the market, other than through luck or by taking on more risk than the market.

If the EMH is correct, the best approach for investors is to invest in index funds.

A recent paper by fund manager Clifford Asness argues, however, that the stock market has become less efficient over the past 30 years.
papers.ssrn.com/sol3/papers.cfm?abstract_id=4942046

He cites as evidence the 2019-2020 rally of Growth stocks, and the poor performance of Value stocks during the same period, which in his view was irrational.

Asness offers a number of explanations for the less efficient markets of today:

1. Index funds, which buy stocks no matter whether they are attractively valued, have distorted markets.

2. Low interest rates made investors overpay for Growth.

3. New technologies, instead of improving how markets work, have turned the stock market into a casino where irrational traders move prices away from fundamentals.

Asness is particularly critical of social media, which he views as providing fuel for reckless users of gamified, 24/7 trading platforms. These users trade stocks they know little about, all in the same direction, depending on the exhortations of social media gurus.

I agree only partially with Asness. The stock market remains highly efficient: otherwise 90% of professionally managed funds would not underperform the market.
www.spglobal.com/spdji/en/research-insights/spiva/

I also think that instead of blaming social media, it would be better to explain the Growth stock bubble of 2020 by invoking a favourite pattern of Asness himself: momentum.



Investors like to invest in strategies that have done well recently. On eToro, 12 to 24-month track records are important; professional investors evaluate their managers using 3-5 year past performance.

So, if a strategy has done well for the past 1-5 years, more money will tend to flow into it. This will push up the prices of stocks held in the strategy, and it will tend to do even better, leading to more inflows. This process continues until the strategy becomes so popular that it fails because the stocks it holds have simply become too expensive.

Those who have the mental discipline and strength to bet against these kinds of multi-year strategy bubbles will, I agree with Asness, stand to gain in the long run. That is why I stick with Value stocks, which in my view continue to have more upside potential relative to Growth stocks.

2024 performance
@triangulacapital +39.0%
SWDA.L +16.0%

Portfolio changes
None

Copy Trading does not amount to investment advice. The value of your investments may go up or down. Your capital is at risk.

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Disclosures

eToro is a multi-asset platform which offers both investing in stocks and cryptoassets, as well as trading CFD assets.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 51% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

eToro (Europe) Ltd., a Financial Services Company authorised and regulated by the Cyprus Securities Exchange Commission (CySEC) under the license # 109/10.

eToro (UK) Ltd. is authorised and regulated by the Financial Conduct Authority (FCA) under the license FRN 583263.

Your capital is at risk. Other fees may apply. For more information, visit etoro.com/trading/fees.

Pietari Laurila is not a registered investment advisor and does not offer investment advisory, fund management or wealth management services.

Triangula Capital is a brand name, not an incorporated entity.

This page is provided for information purposes only. It is not a recommendation to copy the Triangula Capital strategy or to invest in any fund or security.

2009-2020 performance figures are from Pietari’s personal Interactive Brokers account. They are time-weighted returns calculated in accordance with the Global Investment Performance Standards (GIPS).

From 2021, performance is calculated by eToro.

Past performance is not indicative of future results.

Track Record

It is often said that past performance is not a guarantee of future performance.

That is true. But there is also some evidence indicating that portfolios that performed better in the past, do perform better in the future.

“[…] top-decile prior-alpha funds produce annual future alphas of about 150 bps, net of fees” Source

Risk warning: That is only one study. In general, past performance is not indicative of future results.

Aligned Incentives

Pietari invests the majority of his net worth in the strategy. This ensures that his interests are aligned with investors who copy the strategy.

“Funds with high-incentive contracts deliver higher risk-adjusted return, and the superior performance remains persistent. The top incentive quintile of funds outperforms the bottom quintile by 2.70% per year” Source

Risk warning: Pietari holds accounts with multiple brokers and may therefore have a conflict of interest when deciding which accounts he should trade in first.

Unconstrained Investments

The strategy has fewer constraints on its investments than traditional mutual funds.

The strategy portfolio can be invested in stocks, bonds or cash and these allocations can vary over time.

Compared to traditional mutual funds, the strategy also:

  • holds fewer securities
  • trades more
  • avoids following the index

Each of these points has been shown to be an important predictor of portfolio performance.

“We […] find that portfolio concentration is directly related to risk-adjusted returns for institutional investors worldwide” Source

“A one-standard-deviation increase in turnover is associated with a 0.65% per year increase in performance for the typical fund” Source

“We find that truly active funds significantly outperform closet indexers. Further, we find that the truly active funds are able to outperform their benchmarks on average by 1.04% per year” Source

Risk warning: Concentrated portfolios with few positions can suffer large losses if bad news arrives about any of the companies in the portfolio.

Cheap Stocks in Cheap Sectors

The strategy invests in geographies and sectors where values have collapsed due to macroeconomic problems.

Within these geographies and sectors, the strategy overweights stocks that trade at low valuations on measures such as price-to-earnings or price-to-net asset value.

Every stock in the strategy portfolio must also be a good company, with no obvious red flags or long-term threats to its business model.

The aim of the strategy is to maximize returns, even if this means taking more risks than usual.

Risk warning: The strategy portfolio tends to be concentrated in risky stocks, which means that its losses in any market downturn will likely exceed those of the market index.