digest
Short Summary
Main recommendation: Do not assume that buying well-known, admired "good companies" will produce good investment returns; the research Ben Felix reviews points to the opposite, with popular, glamorous stocks tending to earn lower returns than less popular "value" stocks. He supports this with multiple academic studies using brand value, competitive advantage, reputation, and market pricing as popularity measures, plus the valuation mechanics that link high prices to lower expected returns.
Key Points
- Popularity is measured several ways, including Interbrand's Best Global Brands (brand value), Morningstar economic moat ratings (competitive advantage), Nielsen's Harris Poll Reputation Quotient and Fortune's Most Admired Companies (reputation), and high past returns with high price multiples (market pricing).
- In a CFA Research Foundation study (2000–2017), the least popular stocks by brand value dramatically outperformed the most popular, companies with no moat beat those with the widest moats, and the worst-reputation companies beat the best-reputation companies by over 5% per year while being less volatile.
- Statman and Engelhardt (1983–2007) found that increases in admiration were followed by lower average returns.
- Lakonishok, Shleifer and Vishny (1994) attribute the underperformance of "glamour" stocks to investors extrapolating past growth too far and overpaying for well-run firms, and they found glamour stocks are not fundamentally less risky than value stocks.
- Popular, high-prestige "lottery" stocks such as recent IPOs have performed poorly, and "good" stocks tend to do badly in market crashes, while a separate study (Campbell and Sadiq) cited a roughly 3.6% annual risk premium for negative co-skewness, while the Popularity study found positive-skewness stocks trailed negative-skewness stocks by nearly 4% per year.
Details Worth Noting
- Concrete instructions: The video gives no step-by-step investing instructions. The actionable takeaway is to evaluate a stock by the price paid for its future cash flows: a lower price implies a higher expected return (and higher risk), so do not select holdings based on how well-known or admired the company is.
- Fama and French (2006) show that growth stocks' valuations tend to decline over time as profitability and earnings growth fall and cost of capital rises, which largely explains the long-run underperformance of glamorous stocks.
- Hirshleifer and Jiang (2019) found sell-side analysts covering Facebook, Amazon, Netflix and Google exhibit a growth opportunities bias, assuming exceptional growth would last forever, which is not what has historically happened with successful companies.
- Ben Felix notes that some popular companies can deliver high unexpected returns despite low expected returns, as tech did in the U.S. market for about the last decade, but he argues decisions should not be based on that outcome.
- Low expected returns can show up as slow pain (prolonged low returns), fast pain (sharp drops), or a mix of both, and expected returns are described as good long-run predictors of realized returns despite short-run noise.
Bottom Line
Popularity and perceived quality are not reliable guides to investment returns; the evidence suggests that the price paid, not the company's reputation, drives expected returns, with less loved, lower-priced companies often serving as better long-run investments for investors able to tolerate their risk.
