3 
3 WHEN PEOPLE ASK WHAT THE MARKET DID TODAY, THEY USUALLY mean the stock market. This is because, for better or worse, the stock market remains the investment choice for those investors looking to save for long-term goals like retirement—this despite the fact that by one measure equities only make up 25% of the value of the global capital markets.1
Investors these days are in a desperate search for returns. That is in part why asset classes and themes seem to go in and out of fashion so rapidly nowadays. For investors unable to access other more exclusive and esoteric asset classes, equities remain the one opportunity to generate real returns over time.
In a certain sense, governments at present are not giving investors much of a choice. The compression in interest rates has made the potential returns on all manner of government bonds decidedly negative after taking into account inflation and taxes. Equities at least offer the prospect for future growth in earnings and dividends that investors hope can offset the costs of increasing longevity. Growth is certainly important, but investors should recognize that growth is a more nuanced story than it seems on the surface.
It is common wisdom that the stock market and the economy are inextricably linked. When the economy does well, the stock market does well, and vice versa. As Bradford Cornell writes: “The long-run performance of equity investments is fundamentally linked to growth in earnings. Earnings growth, in turn, depends on growth in real GDP.”2 This relationship makes intuitive sense. If the economy is doing well, people are working, sales are strong, and presumably profits are up. Higher profits imply higher stock prices.
Our understanding of economic history bolsters this simple story. The worst time for the U.S. stock market was during the Great Depression. On the flip side, the decades of the 1980s and 1990s were filled with falling inflation, consistent economic growth, and rising stock prices. The challenge is that the links between the stock market, corporate earnings, and the economy play out over time horizons that are longer than most investors’ time horizons. This simple story also leaves out two important pieces of the puzzle. The first is that the companies that make up the stock market are only a part, albeit an important part, of the overall economy. Second, research shows that only current economic growth and the stock market are related. That means that economic growth today tells us nothing about future stock market returns.
The U.S. economy today is a poster child for the disengagement of the corporate sector from the economy. While the U.S. economy continues to operate with generally tepid economic growth, headline unemployment rates well in excess of 9%, and a budget deficit well in excess of a trillion dollars, the stock market has not (yet) collapsed. There is increasing frustration among many Americans who see corporate America profiting while so many workers continue to struggle. Why then is there such a disconnect between Wall Street and Main Street?
First, corporate profit margins are at record highs. Companies have optimized their workforces for lean economic times. Unfortunately these high profit margins are coming at the expense of workers. Second, a large part of corporate America today is made up of multinational companies that generate significant portions of their profits from overseas sales. These sales (and profits) have little bearing on what is going on in the U.S. economy today. There is little doubt that the U.S. economy at present represents a historical outlier.
The long arc of economic history shows that the recent example of corporate earnings growing faster than GDP is an anomaly. Why is that? Over the long run, measures of earnings growth have to trail GDP growth. Bernstein and Arnott make the point that much of what constitutes economic growth comes not from the already existing (and publicly traded) sector, but rather from new companies.3 While the economy as a whole benefits from innovation, advances in technology, and the formation of new companies, much of this occurs outside the existing universe of publicly traded companies. Ritter says it another way: “The point is that economic growth does result in a higher standard of living for consumers, but it does not necessarily translate into a higher present value of dividends per share for the owners of the existing capital stock. Thus, whether future economic growth is high or low in a given country has little to do with future equity returns in that country.”4
This phenomenon is not unique to the United States. Bernstein and Arnott show that in a broad cross section of countries over a century a measure of corporate profits, i.e., dividend growth, trails a measure of economic growth, GDP. So while over shorter periods of time the stock market can disengage from the economy, over the longer term this dilutive effect eventually weighs on the stock market.
While this result is interesting, it does not tell us whether investing in high-growth countries leads to higher stock market returns. This is what we would expect. Faster growth should lead to a higher stock market. But that is not what history tells us. In a study that covers over a century of stock market returns, Ritter explains that there is in fact a negative relationship between equity returns and per capita GDP growth.5 Paradoxically, slower-growing countries had better returns.
On the face of it, this makes no sense. Why should slower-growing countries experience better returns? What this analysis leaves out is valuation. Countries that grew the fastest tended to have higher starting valuations. So the faster economic growth was weighed down as those valuations normalized. In that sense, growth countries are not all that different from growth stocks. The past decade in the U.S. stock market can be viewed in this light, in which many large, well-known U.S. companies have spent the past decade working off excessive valuations from the turn of the century.6
These results are still widely ignored in the investment community. It is a common refrain that investing in emerging markets makes sense because that is where the growth resides. The rise of the emerging markets, particularly China, India, and Brazil, has reinforced in people’s minds the link between economic growth and stock market returns. However, this story is now well known. What really mattered is that these countries started with relatively modest equity market valuations and surprised everyone with increasingly rapid growth.
These recent high-profile examples should overrule research that shows a more tenuous relationship. A more recent study by Dimson, Marsh, and Staunton that takes into account the experience of the emerging markets over the past 20 years again shows a negative relationship between economic growth and equity market returns.7 The authors note that in this regard countries are a lot like companies: value countries tend to outperform growth countries.
A great deal of effort is expended trying to forecast growth rates in the United States and around the world. Wall Street is awash in economists who are more than happy to provide detailed economic forecasts for the entire globe. There is little reason to believe that economists have the ability to accurately forecast economic growth, and even if they did, these forecasts leave out a big part of the equation. What this means is that chasing growth in the emerging markets, or any other market, is a recipe for disappointment. Simply think of the emerging markets as another pond in which to fish for bargains.
Rapid economic growth can serve a country’s interests in many ways, but for investors the importance of valuation should not be ignored. The stock market is not the economy, and so when a commentator comes on the air discussing economic forecasts, don’t think, “How fast?” Think more along the lines of “How much?”
We previously discussed how the ERP is an example of how modern finance is still dealing with really basic questions. If market participants can’t come to terms with the ERP, maybe it shouldn’t be all that surprising that the relationship between risk and return within the equity markets themselves is jumbled as well.
A strand of research has been consistently showing that, however measured, lower-risk stocks tend to outperform higher-risk stocks. To anyone steeped in the idea of risk and return being positively related, this is a real puzzle. In academic finance, this finding is called the low-risk anomaly. One could call this the high-beta anomaly as well. Baker, Bradley, and Wurgler show that over a 41-year time period low-risk stocks trounced high-risk stocks. No matter how you slice the data, this relationship held up.8
The biggest effect was the particularly poor performance of the riskiest stocks. For whatever reason, the stocks with the highest risk stood out for their market-lagging performance. Two other points are worth making. First, Baker et al. found that the return path for the lowest-risk stocks was much smoother, or as they write, “genuinely lower risk.” Second, unlike with other anomalies, this inverse risk-return relationship is holding steady, if not getting a bit stronger, over time.
A skeptic may wonder if this is simply an isolated example of U.S. equities behaving in some unique fashion. A good test is to see if these sorts of results show up in other markets as well. Even though the U.S. capital markets are the biggest and deepest, it is useful to see if these kinds of findings also hold in other equity markets.
Luckily for us, Frazzini and Pedersen have conducted similar research on a global basis.9 They found that the high-beta and low-risk anomalies were present in the global equity markets too. Whether they looked at global equities pooled, that is, all together, or looked within 19 individual markets themselves, these results held up. Lower-risk stocks outperformed higher-risk stocks.
The big question in all of this is why. One would think that this sort of phenomenon would have been eliminated or at least reduced over time. Baker et al. put forth two explanations for the persistence of this phenomenon. The first is that individuals have an unexpected preference for high-risk stocks. The so-called lottery effect shows why it is that investors would be interested in taking on these risky stocks. In addition, the existence of overconfidence helps explain why overoptimistic investors help set the price of the riskiest stocks.
The second explanation Baker et al. put forth is that there are real institutional impediments to managers trying to exploit this effect. Most institutional managers, and the vast amounts of money they manage, are judged by their performance against a benchmark like the S&P 500. The risk they are concerned with is not the high-beta anomaly but rather career risk, that is, the risk that they underperform their benchmark for an extended period of time.
Ideally, to take advantage of the low-risk anomaly, a manager would systematically short high-risk stocks. Absent that, a manager would have to avoid certain stocks and load up on low-risk stocks. This portfolio will perform in a fashion substantially different from that of the benchmark. Although a “low-risk” portfolio should outperform on a risk-adjusted basis, a portfolio manager could very well experience periods of underperformance against the benchmark, thereby making this strategy in an ironic fashion risky.
Frazzini and Pedersen note that the low-risk anomaly is consistent with investors preferring risky, unleveraged assets—for example, high-beta stocks—compared with leveraged low-risk assets. Institutions and individuals are often loath to take on leverage, or borrowing, to buy any financial asset, even those that are generally believed to be safe. Leverage, both explicit and implicit, is abundant in the financial markets, but so long as large swaths of the investment industry are constrained, these low-risk anomalies could continue for some time to come.
How can investors take practical advantage of this anomalous situation? For investors who have the capacity, creating portfolios that systematically short risky assets and go long less risky assets is the preferred route. This allows investors to target how much exposure they want to any particular market. In contrast, Eric Falkenstein proposes two relatively straightforward strategies to exploit the low-volatility and high-beta anomalies.10
The first is described simply as a low-volatility portfolio. This portfolio owns a basket of stocks with the lowest volatilities. This portfolio from 1962 generates both a higher return and a lower risk, as measured by volatility, than the S&P 500 does. In fact, ETF providers have already launched funds that follow this very approach.
The second strategy is what Falkenstein describes as a beta 1.0 portfolio. This portfolio is constructed with stocks that have betas approximately equal to 1.0. Since 1962, this portfolio has generated substantially higher returns, roughly 2.0% per annum, than the S&P 500 with a little bit more risk. For an investor looking for an approach to the high-risk anomaly, with market risk, this is an interesting solution.
Whatever the explanation, markets are generating returns that fly in the face of standard finance. Given the returns involved, we are not talking about money machines here. We are talking about subtle market effects that provide some additional return with limited additional risk. These strategies are not risk free. They are risky in the sense that they generate returns that are different from standard benchmarks. Could these trends dissipate in the future? Sure, but it would involve a concerted effort on the part of institutional investors to reverse this inverse risk-return relationship. The introduction of low volatility ETFs may be the first step in this process.
Dividends matter. Historically dividends have generated a substantial part of the return of owning stocks. Dividends matter in how a company is managed. Companies that pay dividends to their shareholders are forced to think more carefully about their cash flows and the projects they choose to fund. The last thing a company wants to do is cut its dividend.
Some of the most recognizable companies in the United States show up on the list of companies that have maintained or increased their dividends over the years. However, somewhere along the way it became trendy for companies to not pay dividends. Maybe we can blame the market’s infatuation with all things Warren Buffett, whose company, Berkshire Hathaway, has never paid a dividend. The prevailing market belief is that companies should use their cash to buy back shares instead of being forced to pay out regular cash dividends. We can trace this attitude to the rise of the widespread issuance of executive stock options.
Unfortunately there is little evidence that these share buybacks do much for shareholder value. There is evidence that those companies that use the largest percentage of their cash flow on share buybacks tend to have the lowest shareholder returns.11 Share buybacks these days are used in large part to sop up the shares created on the exercise of executive stock options. It is therefore in the interest of company management to play up the role of share buybacks relative to dividends as a way of “enhancing shareholder value.” Companies that actually reduce the number of shares outstanding via buybacks are a rarity.
Investors focused more on their own bottom line, instead of management’s, should see through this facade since the evidence points toward the importance of dividends to investors. Investors who ignore dividends, due in part to the market’s relatively low (sub 2%) dividend, are ignoring stock market history. From 1900 to 2010, the U.S. stock market with dividends reinvested returned 9.4% per annum; without dividends reinvested it returned 5.0%.12 Over this time period, the dividend yield averaged around 4%. So dividends have made up a substantial part of investor returns. To simply ignore dividends is to ignore the history of the stock market.
Not only have dividends mattered over the long run for investors; they have also played a role in the relative performance of stocks within the stock market. The superior performance of the highest-yielding stocks generates what researchers call the yield premium. The yield premium is evident in U.S. stock market history but also seems to be a universal phenomenon. Dimson et al. find convincing evidence of the yield premium in 20 of 21 markets studied.13 Not only does the yield premium exist, but high-yield portfolios also accomplish this with less risk than the stocks with no yield.
The yield-premium phenomenon is likely related to the low-volatility anomaly we discussed earlier. Both these findings show a portfolio of lower-risk stocks outperforming in both absolute and relative terms. This gives us some comfort that we are onto something real and enduring here. Another likely explanation for the yield premium is that it is another manifestation of the value effect. High dividend yields proxy for other measures of fundamental value—yet another indication that the value effect is something we should pay attention to.
Why might dividend-related strategies work? There may be a really simple explanation. Dividends are pretty sticky. Companies try to maintain or increase their dividends on an annual basis. Therefore, the volatility of dividend returns is rather low. Capital gains that make up the other part of an investor’s total return are much more volatile. Imagine a case where you could choose to earn the same annual return, in one case a mix of dividends and capital gains and in the other case only capital gains. The first set of returns is, by definition, going to have a lower volatility than the capital gains–only case. Therefore, the risk-adjusted returns are going to be higher. The antidividend investor would have to generate higher annual returns to offset this volatility drag.
The argument against dividends would make more sense if there were evidence that when dividend payouts were low and retained earnings were high, corporations subsequently grew faster. This would give some ammunition to those who argue that companies should retain cash flow for their own use. Unfortunately the evidence shows just the opposite. In a paper they coauthored, Arnott and Asness show that for the aggregate U.S. stock market when dividend payout ratios are high, future earnings growth is fastest, and vice versa.14 When dividend payout ratios are low, future earnings growth is at its slowest.
This result is surprising, but was replicated by ap Gwilym, Seaton, Suddason, and Thomas in research covering 11 international markets. They found once again that when aggregate dividend payout ratios were high, earnings growth was subsequently faster than when payout ratios were low.15 Unfortunately for investors, this provided little benefit when it came to trying to forecast future returns.
These findings all used broad market indexes. For stock investors, an important question is whether the findings on payout ratios also hold for individual stocks. Zhou and Ruland looked at individual U.S. companies over a 50-year time period and found the relationship between high payout ratios and subsequent earnings growth held.16 They argue these findings are likely related to a company’s tendency to overinvest when management has ample free cash flow.
There is no theory of the valuation of corporate equities that does not rely on a company’s ability to generate cash flow distributable to shareholders. Whether a company actually distributes that cash to shareholders, and in what form, is another question entirely. Historically the way in which companies distributed cash was in the form of dividends. And dividends remain an important indicator for individual stocks and for the market as a whole both in the United States and internationally. Don’t be surprised if dividends recapture investor imaginations. When more Americans are reaching retirement age in search of investment income, dividends are once again likely to rise in importance in investors’ eyes.
There is an important aspect of equity returns that we oftentimes overlook. The return to equities is asymmetric. Returns are asymmetric because equity returns characteristically have a downside floor of −100%. An unleveraged investor in a stock can lose his or her entire investment, but no more. On the other hand, there is no cap on the potential returns over time.
This fact has very important implications not only for how individual stocks perform but also for how the broader stock market averages perform. This property is also becoming more important as the very nature of what it means to be a company in the Internet age is changing. As companies become more virtual and rely less on brick-and-mortar infrastructure, it is possible to generate returns on capital that were unheard of in the industrial age.
We have so far only talked about the return on equities in relation to broad market averages. Within those broad market averages, thousands of stocks are generating returns therein. The returns to stocks over time do not follow a neat, normal bell-shaped curve. Stocks actually generate a set of returns that are far from normal. It is what Wilcox and Crittenden call the “Capitalism Distribution, a nonnormal distribution with very fat tails that reflects the observed realities of long-term individual common stock returns.”17
What they found is that on one end of the return spectrum, a significant percentage, roughly 20%, of stocks are significant losers. And on the other end of the return spectrum, a significant percentage, again approximately 20%, of stocks are significant winners. Over the time period 1983–2006, some 39% of stocks in the Russell 3000 actually had negative total returns, and 64% of stocks underperformed the index. Some 25% of stocks were responsible for all the market’s gains.18
This is a remarkable finding when you think about it. If you threw a dart at a list of stocks, on average the stock the dart hit would have underperformed the market. In fact, there is a pretty good chance the stock significantly underperformed the market. On the flip side, if you miss out on those stocks that are the big winners and drivers of overall market returns, you are in for disappointing returns. We can now see why Wilcox and Crittenden call the spectrum of returns the capitalism distribution. These results demonstrate the competitive forces at work in the economy that make it difficult for most companies to succeed. In a certain respect, the spoils are accruing to a small subset of companies and their investors.
Just in case you thought this was a U.S.-only phenomenon, in further research Wilcox and Crittenden found similar results with U.K. and Canadian stocks. That is, the bulk of each market’s return was driven by just a handful of stocks.19 The fact that this observation is consistent across markets gives us some comfort that this phenomenon is genuine and worth relying upon when investigating investment strategies.
These findings have two very important investment implications. The first is that these results provide a logical foundation for momentum, or trend-following, strategies. The companies that make up the bulk of the market’s returns in a certain respect have to undergo periods of momentum. A stock cannot get to new 52-week highs without having already reached 52-week highs. Strategies that focus on stocks that are experiencing momentum are likely to find those stocks that go on to have extended periods of outperformance. That is not to say that this is some sort of money machine. We have seen that momentum strategies are costly to follow in terms of turnover and can undergo periods of notable underperformance.
Ironically these results that show an asymmetric return pattern to stocks also support an index-centric investment approach. If the returns to the stock market are driven by a small percentage of stocks, it is risky to undertake a strategy that potentially misses out on those stocks. Ideally, a profitable strategy would filter out these underperformers, but that is by no means guaranteed. A capitalization-weighted index will capture the returns to these multiyear high fliers along with the majority of stocks that underperform. This approach assures the investors that they will capture these returns with minimal turnover and, if done correctly, minimal costs.
What if this pattern of returns not only holds in the future but also becomes even more pronounced? There is evidence that in the Internet age companies that are able to generate high returns for extended periods of time are becoming more prevalent. Michael Mauboussin writes: “In addition, the data show that the distribution of economic return on investment is wider in corporate America today than it was in the past. The spoils awaiting the wealth creators, given their outsized returns, are greater than ever before. As in the St. Petersburg game, the majority of the payoffs from future deals are likely to be modest, but some will be huge.”20
The point is that building a web business, like a Facebook, with hundreds of millions if not billions of users, is a very different animal from building a traditional industrial business, like an automobile manufacturer. A company that can scale indefinitely has potentially a very different return pattern from that of a more traditional, capital-intensive company. The challenge for investors in the public market is when, or if, they will ever get a crack at investing in these types of companies. If a company does not need much in the way of capital, it may also have little need to come to the public markets. Therefore, the people who profit from the company’s growth are the founders, employees, and venture capital firms as opposed to the general public.
Equity investors should be aware of this return pattern for stocks. These findings do not necessarily imply every investor should focus on momentum. Rather they should highlight the fact that the tails of the distribution matter a great deal. An equity strategy that plays in the mediocre middle of the return distribution is prone to have below-average returns. If you believe that the future is going to see more companies with the potential for extended periods of high growth, then it becomes all the more important to have a strategy that takes this into account.
If momentum is helpful in identifying market winners, then the flip side should also hold. Those stocks that are underperforming should lead to profitable short-selling strategies. Unfortunately in practice it has not worked out that way for short sellers.
If investing is hard, then short selling is really hard. Selling short a stock is not simply the opposite of buying a stock. It is something altogether different and markedly more complicated. That is why when you scan the list of the Forbes 500, you find plenty of investors who made their fortunes going long stocks, but very few, if any, who made their money on the short side.
The best analogy to describe short selling is to liken it to vomiting. As everyone knows, the digestive system is built to reliably move food one way. When that food chooses to reverse course, it is a violent and unpleasant act. The financial markets were built to facilitate transactions among investors seeking to profit on the rise in equity prices, not their decline. This is why blogger Joshua Brown writes, “For anyone looking to get into the game of outright short-selling, my advice is to go in with eyes wide open, it’s a real bloodsport.”21
Short sellers are perennial villains on Wall Street and around the world. Whenever markets decline, short sellers are targeted as being a prime mover behind the declines. When markets become really unhinged, authorities have historically banned short selling outright or made it so difficult that it was impossible. It does not matter to the general public that short sellers are often the first to identify companies with major issues like Enron or Lehman Brothers. As blogger Eddy Elfenbein writes: “Short-selling is crucial to an orderly market. It’s difficult to overstate how important this is … I find it interesting that regulators continue to blame short-sellers. The fact is that regulators overwhelmingly failed in finding problem spots in the economy and that’s exactly what the shorts did.”22
One reason why short selling is so difficult is because the mechanics of doing it are more complicated than purchasing stocks. To sell short a stock, it first has to be borrowed. Your broker must identify and borrow the stock in question. Once the short sale is in place, it is also more difficult to keep in place because at any time the lender can call in the stock. That is in part why short squeezes occur, where short sellers are required to repurchase the stock to satisfy these demands. Even when short sellers are correct in their assessment, as has been the case with a number of Chinese reverse-merger stocks. Short sellers can still lose, as has been the case when trading in these stocks has been halted for an extended period of time.23 There simply is no short equivalent of buying a stock and forgetting about it.
It is often said that a short position can only earn a profit of 100% when a stock goes to zero, whereas a successful long position can go up indefinitely. Therefore, the dynamics of short selling are more difficult, despite the fact that the same techniques can be used to identify undervalued and overvalued stocks. David Swensen notes one way in which short selling is very different from going long.24 When a targeted stock goes up, i.e., against a short seller, the value of the position actually increases. Errors therefore become magnified. The opposite is true on the long side, where when a stock goes down, its importance to the portfolio declines. For this reason, Swensen notes that short sellers need to maintain well-diversified portfolios and often experience high turnover.
There is another reason why few investors attempt the short side and fewer succeed. Many investors simply don’t like the idea of betting against a stock and, ultimately, that company. It feels wrong to try and profit from the decline in value of a company. There are certainly exceptions, and these may include companies that are out-and-out frauds. But even in the case of frauds, these companies still have employees who are going to suffer from the company’s demise. The vast majority of investors would rather participate in a company’s success than profit from its demise. Despite this disparity, short sellers serve a very important role in identifying and publicizing companies that are at worst outright frauds and at best grossly overvalued.
There is ample evidence that short sellers do a good job of identifying those companies that are most overvalued. Whenever you see a company CEO complain about short sellers, you can be pretty sure that the short sellers are onto something. The market’s perception is most often measured by the short-interest ratio. The short-interest ratio measures the number of shares sold short relative to average daily trading volume. A study by Boehmer, Huszar, and Jordan highlights the ability of shorts to identify overvalued stocks. They write, “Overall, we find evidence that short sellers are able to identify overvalued stocks to sell and also seem adept at avoiding undervalued stocks.”25 Their most interesting finding is that large, liquid stocks with little or no short interest have a tendency to outperform. Therefore, long-only investors can still benefit from the short-selling community’s ability to identify not only overvalued stocks, but undervalued ones as well.
Despite this evidence, it is not clear that short selling will ever become a popular strategy. The stock market has been in the midst of what many call a “lost decade for stocks,” and dedicated short-only funds are few and far between. There are well in excess of a thousand ETFs and only one ETF dedicated to short selling individual companies. Even after what has been an awful time for the stock market, there really is little demand for dedicated short-selling exposure. However, what there is ample demand for is vehicles that allow investors to hedge the value of their broader portfolio.
Shorting can take on this role as portfolio hedge. The whole idea behind hedge funds was to run portfolios balanced between long and short positions to hedge out overall market risk. Hedge funds have moved far beyond this original intention, but the idea of offsetting market risk with short positions is still a common one today. Hedging admittedly does not require shorting individual companies. In fact, most investors who hedge use instruments like futures, options, and ETFs that track broad market indexes. There are even ETFs, called inverse ETFs, designed to provide investors with returns opposite to that of the overall market. Hedging techniques that use these vehicles are easier to implement than shorting stocks and can reduce portfolio risk.
Despite the fact that most stocks end up underperforming the broad market indexes, it is difficult to profit by shorting stocks. This shouldn’t be all that surprising or discouraging. More so than in other areas of the market, the shorts have the deck stacked against them. It is said that the market takes an escalator up and an elevator down. It is difficult for even the most patient, and stubborn, investors to wait for the payoff from their short bets. Fortunately we have seen how long investors can still benefit from the work of the shorts.
Most investors will never short a single stock in their lifetime and probably won’t use various hedging techniques along the way. Most investors will, however, use good, old-fashioned bonds as ballast for their portfolios—a strategy that in light of recent performance looks like a good way to generate more balanced returns over time.
The stock market is not the economy. The two can diverge for extended periods of time. In short, Wall Street is not Main Street.
In contrast with established theory, low-risk stocks have outperformed riskier stocks. Investors can now easily access these strategies but risk underperforming during bull markets.
Dividends matter. The long history of the U.S. and foreign stock markets show the importance of dividends. The increasing desire for yield may make dividends even more important in the future.
Research indicates that the distribution of individual stock returns is not normal. A small fraction of stocks generate outsize returns. This phenomenon may become more pronounced over time.
Short selling individual stocks is a hard way to generate returns. A number of obstacles prevent most investors from reliably profiting on the short side.