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Turning Investment on its Head by Robert Haugen

Last update on: Jun 18 2020

You have to take more risk to achieve a higher return. That’s one of the great investment myths, and it’s widely believed. We recently lost the man who almost singlehandedly fought to expose this as a myth through research. Robert Haugen passed away at age 70. Here’s a fine tribute that discusses his best contributions.

He railed against capitalization-weighted indexes — which account for most index mutual funds, exchange-traded funds and the benchmarks that active money managers try to beat. In this type of index, the largest stocks by market value are the biggest contributors to performance. But to Haugen, this approach essentially traps investors in high-priced stocks with low expected return and the potential for a big decline.

“It’s totally wrong,” he fumed. “It’s totally wrong on all stock markets. It’s upside down. There’s no risk-return reward in the stock market.”

Instead, investors should buy the lowest-volatility stocks that no one expects to do much. Said Haugen: “They become underpriced and produce terrific returns.”

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