Dan Rasmussen, founder of Verdad Advisers and author of "The Humble Investor," discusses compelling market insights. He explains why high bond yields may not equal high returns and the potential in undervalued international stocks. Dan explores how private equity performance hinges more on portfolio construction than manager skill. He highlights positive changes in Japanese corporate governance and assesses UK market valuations post-Brexit. With a focus on humility in investing, he challenges prevailing market assumptions, offering valuable perspectives for all investors.
High bond yields may not signify higher returns, as they often reflect default risks rather than genuine investment opportunities.
The U.S. equity market's outperformance prompts a reevaluation of international stocks, which are currently undervalued and present diversification opportunities.
Japanese corporate governance reforms are enhancing shareholder value through initiatives like buybacks and dividend increases, creating a favorable investment climate.
Deep dives
The Nature of Market Analysis
Investing requires a focus on meta-analysis rather than mere analysis. The key is to evaluate how one's perspective compares to market consensus, as individual opinions are less significant than collective market views. For instance, questioning why a bank would not lend money at a lower interest rate highlights how market perceptions influence investment decisions. Acknowledging this dynamic helps mitigate hubris and guides investors to make more informed and less risky choices.
Contrarian Investing and Writing
Writing serves as a valuable tool for investors to crystallize their thoughts and challenge prevailing market opinions. The approach emphasizes identifying unique insights that contradict mainstream sentiments, which can uncover investment opportunities. Through disciplined writing, investors can articulate their positions more clearly, fostering an environment where sharing ideas is welcomed rather than feared. Ultimately, effective writing enhances the investment decision-making process and can lead to more successful outcomes.
Corporate Bond Yields vs. Actual Returns
The correlation between corporate bond yields and actual returns is often distorted by market perceptions. A high yield does not inherently equate to high returns, as it may reflect a higher risk of default rather than a legitimate opportunity. For instance, investing in lower-rated bonds may tempt investors with attractive yields, but the potential for loss often outweighs the perceived gains. This misconception, termed 'fool's yield,' emphasizes the importance of evaluating risk-adjusted returns rather than chasing yield alone.
The Great Rotation in Investment
The U.S. equity market has experienced substantial outperformance, leading many investors to overlook opportunities in international markets. As valuations in the U.S. reach historical highs, the potential for a 'great rotation' toward cheaper overseas equities becomes increasingly plausible. The significant undervaluation of international stocks offers a compelling case for diversifying investment strategies. However, it is crucial to remain patient and maintain realistic expectations regarding market dynamics and timing.
Emerging Opportunities in Japan
Japanese corporate governance reforms have initiated a notable shift in capital allocation toward increased shareholder value. The government's influence is fostering corporate actions such as share buybacks and dividend increases among companies trading below tangible book value. This trend illustrates a growing alignment with shareholder interests, creating an attractive investment landscape. As companies begin to embrace these changes, a self-reinforcing cycle of improved corporate performance and valuation can emerge.
In this episode of Excess Returns, Jack Forehand and Justin Carbonneau sit down with Dan Rasmussen from Verdad Advisers to discuss his firm's top research pieces from the past year.
They explore several fascinating market insights, including:
Why high bond yields don't necessarily translate to high returns
The dramatic outperformance of U.S. markets post-financial crisis and the potential opportunity in cheaper international stocks
How private equity return dispersion may be more about portfolio construction than manager skill
The promising changes happening in Japanese corporate governance
Britain's market valuation in the wake of Brexit
Dan also announces his upcoming book "The Humble Investor" which challenges common assumptions about predictability in markets. Throughout the conversation, he offers thought-provoking perspectives on market efficiency, the limitations of forecasting, and why humility is crucial for investment success.
Whether you're an institutional investor or individual market participant, this discussion provides valuable insights into contrarian investment opportunities and challenges prevailing market narratives with data-driven analysis.
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