Challenging a Cherished Belief

Thursday, I wrote about research from Robert Haugen and Nardin Baker that blows an enormous hole in one of the investment world's most cherished beliefs. We have been taught that risk equals reward in the markets and that to earn higher returns, one must take additional risks. This is not the case. Lower risk, lower volatility stocks actually outperform higher risk, more glamorous issues. The researchers found that this is because of what they call "agency issues." Everyone believes the same thing, and everyone wants higher returns. As a result, everyone owns the same high-multiple, more volatile stocks with subsequent substandard results.

I believe that unpopular stocks that trade cheaply based on asset value also outperform glamor stocks, as well as the broader market, over time. Today, let's combine these two factors to fund stocks that can beat the market over time. I ran a screen for cheap stocks with lower volatility than the broader stock market to see if I could reach any valid conclusions that might make money over the next few years....490 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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