Mar 11, 2021
Where do stock returns actually come from? The answers to this
deceptively simple question might change your investing
perspective. We dive into this foundational investing topic after
sharing community updates and chatting about our books and TV
series of the week. A key concept in understanding where returns
come from, we unpack how stock returns are impacted when companies
migrate across size and value portfolios. While exploring how
migration differently affects value and growth stocks, we also
break down why book equity and growth drive capital gains for
growth portfolios but not for value stocks. Linked to this, we
discuss stock convergence as they relate to growth and value
stocks. Looking deeper into the stock returns, we assess research
on why valuation changes in asset classes are critical in
determining expected returns. We touch on how valuations lead to an
unfair depiction of international stock performance before asking:
how justified are valuation changes to value and growth stocks?
From understanding stock returns, we jump into our mini-planning
topic on Canadian work from home tax reductions, followed by our
Talking Sense segment. We wrap our conversation by sharing some bad
financial advice. Join us to hear what it is, and to learn more
about the anatomy of stock returns.
Key Points From This Episode:
- More updates from the community and co-host Benjamin’s battle
bot building. [0:00:20]
- Hear about The Defiant Ones, our TV series of the week.
- From The Coaching Habit to Elon Musk, we
share our latest book reviews. [0:04:50]
- Introducing our investing topic: the anatomy of stock returns.
- Exploring how changes to a stock type affect value premiums and
- Why small stocks tend to have high returns compared with big
- Understanding the value premiums that underpin stock types.
- What happens when a stock improves in type.
- Factors that lead to price increases in growth and value
- The concept of stock convergence and how convergence impacts
value and growth stocks. [0:28:45]
- Behavioural explanations for the capital gains of value and
growth stocks and the role played by stock drift and convergence.
- Whether historical returns tell us anything about expected
- Why you should always include international stocks when
assessing value stock performance. [0:39:18]
- Using value spread to determine expected value premiums.
- We ask the question, “what if the trend in valuation changes to
value and growth stocks are justified?”
- Diving into our planning topic: Canadian work from home tax
- How renters get a better deal than owners on work from home tax
- Hear our answers to the profound questions posed in our
‘Talking Sense’ section. [0:54:06]
- Courtesy of Forbes, we share our bad financial advice
of the week. [0:57:16]