What are the critical factors driving investment success? How can investors balance profitability and risk? In this episode, we sit down with Dr. Sunil Wahal, the Jack D. Furst Professor of Finance and Director of the Center for Responsible Investing at the W.P Carey School of Business at Arizona State University, to delve into the intricacies of financial science. With over 25 years of academic and practical experience, Dr. Wahal shares his unique perspective on factor investing, profitability premiums, and how to approach value investing in today's complex financial environment. He talks about the joint distribution of value and profitability, explains how profitability premiums work, and discusses the challenges faced when integrating academic research into practical investing strategies. Dr. Wahal also touches on common misconceptions in financial theory, the long-term benefits of maintaining a diversified investor base, and why understanding the nuances of financial risk is key to avoiding costly mistakes. Gain insights into building a successful investment portfolio grounded in the principles of financial science and how to avoid common pitfalls in factor investing. Join us to hear actionable strategies for balancing risk, understanding factors, and applying academic research to real-world scenarios with Dr. Sunil Wahal!

Key Points From This Episode:

(0:04:15) Dr. Wahal's work on profitability, data sourcing challenges, and its significance.

(0:08:01) The impact of controlling the value of the profitability premium.

(0:10:08) Correlations between value and profitability and the benefits of "tilted" portfolios.

(0:14:48) Steps for unleveraged long-term investors to build profitable portfolios.

(0:17:27) How the joint distribution of value and profitability differs from a profitability screen.

(0:20:43) Approaches of large financial firms to implementing value and profitability in portfolios.

(0:24:41) Time horizons for tiled portfolios and their expected returns after cost.

(0:30:53) Insight into how institutions decide on which investment managers to hire and fire.

(0:38:00) Exploring how the hiring and firing of managers affects institutional performance.

(0:40:16) Ways the relationships with institutions influence hiring decisions and performance.

(0:44:35) Uncover how institutions select which private market firms to invest in.

(0:48:58) Key takeaway lessons from Dr. Wahal's research for institutional investors.

(0:50:52) Why frequently hiring and terminating managers may not be the best approach.

(0:52:32) Advice for retail investors and the importance of cost in managing portfolios.

(0:59:22) Reasons that institutions avoid indexing and the competitiveness of mutual funds.

(1:02:29) How diversification among mutual fund investors affects performance.

(1:09:19) Performance overview of actively managed global equity mutual funds.

(1:12:35) The role of practitioner interaction and his concept of success.

Links From Today's Episode: Meet with PWL Capital: https://calendly.com/d/3vm-t2j-h3p

Rational Reminder on iTunes — https://itunes.apple.com/ca/podcast/the-rational-reminder-podcast/id1426530582. Rational Reminder Website — https://rationalreminder.ca/

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Rational Reminder Email — [email protected]Benjamin Felix — https://pwlcapital.com/our-team/

Benjamin on X — https://x.com/benjaminwfelix

Benjamin on LinkedIn — https://www.linkedin.com/in/benjaminwfelix/

Cameron Passmore — https://pwlcapital.com/our-team/

Cameron on X — https://x.com/CameronPassmore

Cameron on LinkedIn — https://www.linkedin.com/in/cameronpassmore/

Sunil Wahal on LinkedIn — https://www.linkedin.com/in/sunil-wahal/

W. P. Carey School of Business — https://wpcarey.asu.edu/

Avantis Investors — https://www.avantisinvestors.com/

Dimensional Fund Advisors — https://www.dimensional.com/

UpWork — https://www.upwork.com

NVIDIA — https://www.nvidia.com

Episode 316: Andrew Chen — https://rationalreminder.ca/podcast/316

Books From Today's Episode:

The Interpretation of Financial Statements — https://www.amazon.com/dp/0887309135

Papers From Today's Episode:

'Long-Term Shareholder Returns: Evidence from 64,000 Global Stocks' — https://doi.org/10.1080/0015198X.2023.2188870

'Long-Run Stock Market Returns: Probabilities of Big Gains and Post-Event Returns' — https://dx.doi.org/10.2139/ssrn.3873010

'Prudential Uncertainty Causes Time-Varying Risk Premiums' — https://dx.doi.org/10.2139/ssrn.2176896

'A Five-Factor Asset Pricing Model' — https://dx.doi.org/10.2139/ssrn.2287202

'Do Institutional Investors Exacerbate Managerial Myopia?' — https://doi.org/10.1016/S0929-1199(00)00005-5