The Journal of Investing

Economic Moats and Stock Performance: Is Warren Buffett wrong?

2024-09-25T05:24:45+00:00

Warren Buffett champions investing in firms with wide ‘economic moats’ which protect them from competitors. The Efficient Markets Hypothesis suggests such firms will have their values bid up until any potential excess risk-adjusted returns disappear, eliminating the benefit from investing in such firms. We show that firms with wide economic moats enjoy greater returns than firms with no economic moat but have lower dividend yields – albeit with a faster dividend growth rate. Firms with wide moats do not outperform the market. Firms with no moat underperform the market. We propose a zero-value long-short portfolio to profit from this disparity while simultaneously eliminating a portion of market risk.

Emerging Markets Plus

2025-06-29T07:51:19+00:00

“Emerging Markets Plus” is an attractive option for investors in developing countries, because the addition of a frontier market allocation to an emerging market portfolio can produce a more efficient result.

This paper tests portfolio allocations to MSCI Emerging Markets (MSCI EM) with portions in MSCI Frontier Markets (MSCI FM) ranging from zero to 100% over three-, five- and ten-year periods since the inception of the MSCI Frontier Index in 2002. I also include estimates for the future.

My conclusion is that a 25% weight in frontier with 75% in emerging markets would be excellent, while smaller allocations to frontier can also be easily justified.

Decreased Equity Risk Premium: Estimation Based on Dividend-Equivalent Earnings

2025-03-17T12:16:24+00:00

Using U.S. stock market data spanning from 1871 to 2024, this paper examines whether the equity risk premium required by investors (ERPRQ) decreased in recent decades. Economic models and institutional developments suggest that the ERPRQ should be lower. Ascertaining changes in the ERPRQ, however, is difficult because it is unobservable both ex ante and ex post. The realized equity risk premium can be a misleading measure of the ERPRQ because it depends largely on capital gains which in turn depend on changes in the ERPRQ. To overcome this difficulty, this paper estimates the ERPRQ based on dividend-equivalent earnings which combine hypothetical capital gains and dividends into a single stream of cash flows. The main finding is that the ERPRQ significantly decreased in recent decades, especially in the 1980s. The estimated decrease is over 2.5 percentage points.

A Comparative Analysis of "Winners", "Median" and "Losers" Rotation Strategies with S&P-500 Sector ETFs

2025-02-24T07:05:51+00:00

This paper proposes a simple periodic ETF sector rotation strategy for S&P-500 Unlike most ETF rotation strategies, the proposed strategy does not predict economic cycles. The strategy involves periodic ranking of component sectors based on sector ETF returns and re-investing funds equally into the middle ("median") three sector ETFs. We show that for the S&P-500, the proposed "median" ETF rotation strategy with montly rebalancing is better than focusing on the "winners" or the "losers" sector ETFs with different frequencies of re-balancing. Using historical data from 2000, we show that the proposed "median" monthly rotation strategy significantly outperforms the other two strategies and passive index investment in terms of total return, volatility, and maximum drawdown. An average investor can easily implement the proposed ETF rotation strategy.

A UNIFIED MODEL OF INVESTOR UTILITY AND ASSET PRICING

2025-02-19T06:09:05+00:00

This work develops a new and intuitive expression of investor utility. It starts with an empirical test of a general valuation model applied to three popular publicly traded market composites. The experiment compares the price estimates of the model to a traditional model that reflects mean-variance efficiency. Thereafter, we formally justify the usage of the proposed model. Its derivation is based on maximizing the logarithm of investor wealth. In contrast to prior work with a similar premise, we explicitly incorporate the investor time horizon, discretionary consumption, and potential investor default to determine loss aversion. We treat both borrowing and future expenditure as leverage. The resulting utility objective is finally directly transformed into a valuation model. The model is not limited to a specific probability distribution of asset returns. While it conforms to markets where no-arbitrage conditions exist, it does not require such conditions. This makes it suitable for the valuation of illiquid assets, like private equity and private credit.

The impact of ESG scores on company value and market capitalization volatility: an empirical analysis

2025-03-22T05:24:45+00:00

This study investigates the impact of Environmental, Social, and Governance (ESG) scores on company value and market capitalization volatility in the German stock market. Using daily data from DAX 40 for the years 2022, 2023, and 2024, this study employs various regression models to analyze the relationship between ESG scores, market capitalization, and volatility. The results show that ESG scores have a positive influence on market capitalization in the initial pooled OLS regression analysis, with the effect increasing over the three-year period. However, when controlling for company-specific characteristics using a fixed-effects regression, the influence of ESG scores on market capitalization becomes statistically insignificant. Conversely, this study finds a weak but statistically significant positive relationship between ESG scores and annual volatility, contradicting the common assumption that companies with higher ESG scores exhibit lower volatility. The analysis also reveals a size effect, with larger companies tending to have lower volatility. The study provides an up-to-date overview of the influence of sustainability on market capitalization and volatility, offering opportunities for further research by considering additional factors. These findings contribute to the ongoing debate on the financial implications of corporate sustainability practices and their impact on investor decision-making.