O’Shaughnessy also has looked at dividend growth levels compared to dividend yield and wonders why investors look at strategies like the Aristocrats—his work showed that high levels of dividend growth was less important than just high dividend yield historically, though that dividend yield used to be more associated with value portfolios. Since the financial crisis in 2009, his work suggests the low interest rate environment has made dividend yield less correlated to typical value investing (the U.S. markets more so than international markets).
Disposition Effect in NFL Prediction Markets
Similar to how investors want to get even in stock markets, looking at gambling prediction websites for NFL games, Hartzmark demonstrated how NFL speculators close out positions during games when they have gains and also hold on to their losing position too long when they should close out for a loss, leading to systematically biased prices in these prediction markets as well.
Alpha vs. Assets
O’Shaughnessy was recently appointed to be the CEO of OSAM, and he brings a fresh set of eyes to build his firm for long-run success. One of the core tenets by which OSAM is building strategies that are designed for alpha, and not necessarily just for large asset gathering.
OSAM sees a clear trade-off in that the more assets one gathers, the less flexibility and more trading costs and frictions one would have that can impinge upon one’s ability to generate alpha. Getting specific here, O’Shaughnessy believes the capacity of some large-cap value strategies may be as much as $100 billion, while his firm could handle perhaps one-quarter of those levels.
One of the value investing factors that has received a ton of attention has been the price-to-book ratio. I wondered if price-to-book accomplishes anything beyond just being a financial sector bet today.
O’Shaughnessy discussed some of the challenges of price-to-book ratios today, including: the rise of intangible assets being approximately one-third of the S&P 500’s book value today, buybacks and how they impact “common equity” levels, as well as low price-to-book levels being a proxy for bankruptcy risk. Chris Meredith, O’Shaughnessy’s colleague, has written about some of the challenges of price-to-book ratio investing.1
I asked O’Shaughnessy if he is planning to launch a cryptocurrency strategy, given the success of his “Hash Power” podcast series. He responded that it is something he has considered, given that it is a new asset class that is data intensive and quantitative in nature like OSAM’s specialty, but he does question whether one wants to own the beta of this asset class in a similar way one wants to own equity beta.
A use case that O’Shaughnessy finds particularly compelling is the “tokenization” of specific cash flow streams and having these tokens becoming a legal security in which one can invest. This will certainly be an interesting space to study, and O’Shaughnessy does his learning in a very public and educational way.
This was a great conversation with one of the leading finance academics and one of the leading asset managers. My thank-you goes to both of them and to Wes for organizing this discussion.
The following post was republished with permission from Wisdom Tree.