Probabilities for Size and Value Premiums

Who better to have on the Rational Reminder Podcast than Professor Ken French? Ken has been a massive inspiration to us and has remained a guiding light for sensible, evidence-based investors over the last few decades! His work with Eugene Fama stands as the seminal work on the subject of passive investment portfolios and we are so delighted to have him on the show today as we talk through some of his thoughts on a variety of subjects. This conversation was recorded near the beginning of the coronavirus outbreak on this side of the world and although Ken does mention the crisis, the situation has developed considerably since then. We start with the basics, with Ken giving us some helpful definitions and perspectives on asset pricing models and active management before we dive into the current market volatility and familiar topics such as risk tolerance and equity premiums. We also get the chance to hear Ken's reflections on a number of his papers, home-country bias, and the value of a good advisor. Some listeners may be surprised to learn that Ken still relies heavily on a financial advisor of his own and he explains exactly what functions this person performs for him and why he values their help so highly! We also discuss better strategies for long-term portfolio allocation, sustainable investing options and more, so be sure to join us for this very special episode, it is not to be missed!

Key Points From This Episode:

• Ken's description of asset pricing models and their importance to investments. [0:02:37.2]
• Reasons why most people should ignore and avoid actively managed options. [0:04:50.7]
• Why the same rules that apply to mutual funds apply to hedge funds too. [0:08:36.3]
• Reasonable approaches to the market volatility we are currently experiencing. [0:11:01.7]
• The potential impacts of the move away from active into passive investments. [0:18:22.2]
• Realistic expectations for collecting a positive equity premium. [0:21:12.8]
• The probability of negative premiums and the most helpful time horizons. [0:25:25.5]
• Findings from the Fama and French paper, Value Premium. [0:28:47.4]
• Better and worse ways of measuring value and Ken's personal preference. [0:34:06.7]
• Factoring in the 'momentum effect' and keeping it in perspective. [0:37:36.1]
• Defining and evaluating home-country bias. [0:41:06.5]
• Ken's view of buybacks and the possible penalization of companies administering them. [0:43:50.4]
• Environmental and sustainable investing and how this can play into a strategy. [0:46:02.7]
• Who should business management work for? Shareholders or corporate stakeholders? [0:49:25.5]
• Ken's valuable relationship with his own financial advisor! [0:52:41.8]
• The most important factor that Ken considers in his investments: the unexpected. [0:54:27.2]