For 30 years, Japanese firms retained profits instead of returning capital, accumulating huge cash and asset piles on their balance sheets. Now, the Tokyo Stock Exchange is pushing for buybacks and dividends, creating a powerful catalyst for value realization that is independent of new earnings generation.
Instead of hiring dozens of PhDs to analyze clinical trials, a quantitative firm can use the 13F filings of top specialist biotech hedge funds as a proxy for deep domain expertise. This "approved list" from experts can be modeled as a quantitative factor that has been shown to outperform.
The dominance of low-cost index funds means active managers cannot compete in liquid, efficient markets. Survival depends on creating strategies in areas Vanguard can't easily replicate, such as illiquid micro-caps, niche geographies, or complex sectors that require specialized data and analysis.
High-growth stocks that miss expectations get punished severely. In contrast, low-growth stocks that merely meet low expectations only slightly underperform, but the 50% of them that deliver an upside surprise massively outperform. This creates a favorable asymmetric risk/reward for betting on low-expectation companies.
Market efficiency increases with company size and liquidity. Therefore, the excess returns (alpha) from investment factors like value are significantly larger in the inefficient micro-cap space. For large-caps, the market is so efficient that factor premiums are minimal, making low-cost indexing a superior strategy.
Investors are drawn to PE's smooth, bond-like volatility reporting. However, the underlying assets are small, highly indebted companies, which are inherently much riskier than public equities. This mismatch between perceived risk (low) and actual risk (high) creates a major portfolio allocation error.
PE firms are struggling to sell assets acquired in 2020-21, causing distributions to plummet from 30% to 10% annually. This cash crunch prevents investors from re-upping into new funds, shrinking the pool of capital and further depressing the PE-to-PE exit market, trapping investor money.
Academic studies show that company growth rates do not persist over time. A company's past high growth is not a reliable indicator of future high growth. The best statistical prediction for any company's long-term growth is simply the average (i.e., GDP growth), undermining most growth-based stock picking.