High Returns from Low Risk: A Remarkable Stock Market Paradox by van Vliet Pim & de Coning Jan

Author:van Vliet , Pim & de Coning, Jan [van Vliet , Pim]
Language: eng
Format: epub
ISBN: 9781119351092
Publisher: Wiley
Published: 2016-11-20T16:00:00+00:00

Notes

1 See www.dollartimes.com/inflation/inflation.php?amount=100&year=1929 to calculate the loss in purchasing power over time.

2 Jargon for an investment that appreciates to ten times its initial purchase price. The term ‘ten bagger’ was coined by legendary fund manager Peter Lynch in his book One Up On Wall Street . Lynch coined the term because he is an avid baseball fan, and ‘bag’ is a colloquial term for base; thus, ‘ten bagger’ represents two home runs and a double, or the stock equivalent of a hugely successful baseball play.

3 To directly compare the return difference of both portfolios on a like-for-like basis, you scale up the conservative portfolio and scale down the risky portfolio, also correcting for financing costs. The resulting t -value is 9.4, far above the critical 2.0 level. To put this result into a practical perspective, such an enormous t -value corresponds with a probability of 1 in a quintillion instances.

4 Let me place this robust result in the context of a recent and still ongoing debate among academics. The leading science journals have become more aware and critical of so-called ‘false positives’; results that seem to be significant but, in fact, aren’t. As many researchers are encouraged to publish significant results, they have a clear incentive to go ‘data fishing’: undertaking actions just to get a seemingly robust t -value. This understandable human behavior is seriously threatening the quality of science, as many studies cannot be replicated. The most obvious solution to this problem is simply to raise the bar. Campbell Harvey, a former Journal of Finance editor, suggests increasing the critical t -value for evaluating investment strategies from 2 to 4.

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