#121 - Pim van Vliet - The Reality Is High-Risk Stocks Earn Low Returns

59 minutes

In Episode 121, we welcome fellow quant, Pim van Vliet. If you’re a low-vol investor, or having been wanting to learn more about low-vol, this is the episode for you.

Meb dives straight in, opening with a quote from Pim: "The low-volatility effect is perhaps the largest anomaly in finance, challenging the basic trade-off between risk and return, as higher risk does not lead to higher returns. Still, it remains one of the least utilized factor premiums in financial markets." He asks Pim to explain.

Pim tell us that low-volatility is the biggest anomaly of them all. People have trouble embracing the concept. We’ve been trained to believe that higher risk should be rewarded with higher returns, but Pim walks us through some counterarguments. He goes on to explain that CAPM (Capital Asset Pricing Model) is great in theory, yet bad at describing reality. He tells us that “the reality is high risk stocks earn low returns.”

Next, Meb brings up a paper Pim wrote called “The Volatility Effect” and asks Pim to walk us through it. Pim tells us one of the broad takeaways is that low-vol works cross borders (unlike some other factors). It’s not just effective in the U.S. – it’s also been proven out in Europe and Japan. In addition, this alpha seems to be getting stronger now rather than waning as have other factors when their visibility has increased.

Meb asks about Rob Arnott and factor-timing/factor valuations. Does factor valuation matter?

Pim agrees with Rob in that valuation does matter. If you only look at low-vol, you might end up buying “expensive defensive”. If so, then yes, your expected returns will be lower. That’s why Pim includes a value filter. He looks at “multi-factor defensive”. Pim mentions Cliff Asness and notes that he likes incorporating momentum into his approach as well.  

The conversation bounces around a bit: where is Pim finding opportunities around the world now… additional details on how low-vol works across countries, sectors, and asset classes… and how low-vol complements a CAPE approach, pointing toward some effective defensive market strategies.

Next, Meb asks about potential biases. For instance, if you focus on low-vol, could that mean you’ll end up with a basket of, say, utility stocks and no tech? Pim tells us that, yes, if you focus purely on low-vol, you could get more sector and country effect. But he goes on to tell us how investors might mitigate that.

There’s plenty more in this fun, quant-driven episode – a discuss of the definition of risk (volatility versus permanent loss of capital)… factor fishing and data mining… how low-vol works from a portfolio perspective… Pim’s forecast of the future… and Pim’s most memorable trade. This is a great story, highlighting how an early loss delivered such a powerful learning lesson, that it probably ended up making Pim money in the long run.

Get all the details in Episode 121.

More episodes from The Meb Faber Show

#170 - Bill Martin - On The Short Side, Position Sizing Is The Biggest Driver Of Success

In episode 170, we welcome our guest, Bill Martin. Bill and Meb start the conversation by diving into Bill’s early entrepreneurial experience running …

The Best Investment Writing Volume 3: Aswath Damodaran – The Perils of Investing Idol Worship: The Kraft Heinz Lessons!

Last year when we published The Best Investment Writing Volume 2, we offered authors the opportunity to record an audio version of their chapter to …

#169 - Jeremy Jacobson - We Ended Up Saving Roughly 70% Of After-Tax Income For About 10 Years

In episode 169, we welcome our guest, Jeremy Jacobson. Jeremy begins with his backstory of being an engineer by trade, and after paying off his …

#168 - Brian Livingston - What’s True Is That We Have To Adapt To Modern Markets

In episode 168 we welcome Brian Livingston. Brian discusses his background and eventual transition into the world of investing out of a need to invest the money he had from the proceeds of …

The Best Investment Writing Volume 3: Rob Arnott – Yes. It’s a Bubble. So What?

Last year when we published The Best Investment Writing Volume 2, we offered authors the opportunity to record an audio version of their chapter to …

#167 - The Cannabis Opportunity

Episode 167 is a Meb Short. In this episode, you’ll hear Meb discuss a fresh opportunity…The Cannabis Opportunity. Meb covers some of his thoughts on thematic investing and how we arrived …

How you can listen to this podcast

You can listen to episodes right here on the website, or if you prefer, in a podcast app. Listening in an app makes it easier to keep track of what you’ve already heard, listen without using your data plan and many other conveniences.

Recommended apps
Start listening to #125 - Tom Barton - The Biggest Problem Investors Have is Things Change...and They Don't Change
1:24:56
Start listening to #125 - Tom Barton - The Biggest Problem Investors Have is Things Change...and They Don't Change
1:24:56