I have been thinking about an intriguing issue: Where do returns come from?
No, not which Fama-French factors are a source of outperformance, but rather, in the real world, what is it that leads any given portfolio to achieve a satisfactory level of returns relative to all of the surrounding events?
Its a nuanced and intriguing question, one that I have been thinking about a lot lately.
I created my own list — check back here this afternoon to see it — but then asked some of the smartest people I know for their views.
It was an intriguing exercise. You can see some representative answers after the jump…
I think in this order…
Capital market returns
Investor behavior (we calculate about 1.5-2% annual drag from typical investor behavior)
-Large Index Wholesaler
Timing – Hedge fund manager
That depends on the portfolio and the time frame. If we focus on the S&P 500 as a portfolio, then its long-term return is driven by the trend growth in earnings, which has been 7%. A portfolio of high-quality dividend stocks will have more of its return driven by dividends over time. Of course, then there is the alpha/beta story.
In the short term, news (new information not previously widely anticipated)
In the long term, exposure to the broad market (and hence economy) (“beta”)
-Professor (Nobel Prize winner)
Dividend yield + earnings growth +- change in valuation multiples.
-Private Equity investor
Gonna keep this as broad/general as possible so it applies to HFT all the way up to Warren Buffett 20 yr hold investing.
Risk — earn payment for taking on the risk of losing your ass.
Front-running expectations — earning payments for winning the Keynes beauty contest.
Buying things that go up in price after you buy it along with the dividends generated by what is bought.
For stocks, economic growth and current valuation are key factors
For bonds — Treasuries, in particular — it’s largely a matter of
REITs arguably are subject to a mix of the factors that drive stocks and
For commodities, it’s all about supply — expectations about supply.
For portfolios comprised of all of the above, it’s a mix of the factors