A Wendy’s Wednesday Whimsy
I don’t leave my corporate world headquarters (third bedroom) that often, let alone schlep across the country for a one-day gathering. But there are so many signs that evidence-based investing is taking off in a big, exciting, scary, glorious, challenging, amazing, awesome, perfect storm of a way, I couldn’t resist being part of it.
You probably already caught that The Wall Street Journal has labeled the lot of us as Passivists, and are featuring us in a whirlwind series of articles.
Gulp. That’s a lot of change we’re being swept into in a hurry. Central to the tempest is a question I hope to learn more about at the conference, even if the definition is still blowing in the wind:
“There are hundreds of exhibits in the investment ‘factor zoo.’ Which ones are actually worth your time, and your money?”
So begins the introduction to a book that seems to have been perfectly timed to help you begin to answer that question — for yourself and your clients. I’m referring to “Your Complete Guide to Factor-Based Investing,” just published by co-authors Larry Swedroe and Andrew Berkin, with a foreword by AQR’s Cliff Asness. It’s newly available on Amazon in paperback; Larry tells me it also should be available in Kindle format sometime soon.
Whether you’re warming up to attend the conference or you intend to learn more from a distance, this new book should be a good addition to your reference library. It’ll be an important piece to help you think through how to help your clients and other investors make sense of the WSJ’s “passivist” pieces when they ask you about them.
My favorite part comes in the opening pages when the authors explore what factors to consider. Here’s an excerpt of that:
“For a factor to be considered, it must meet all of the following tests. To start, it must provide explanatory power to portfolio returns and have delivered a premium (higher returns). Additionally, the factor must be:
- Persistent — It holds across long periods of time and different economic regimes.
- Pervasive — It holds across countries, regions, sectors, and even asset classes.
- Robust — It holds for various definitions (for example, there is a value premium whether it is measured by price-to-book, earnings, cash flow, or sales).
- Investable — It holds up not just on paper, but also after considering actual implementation issues, such as trading costs.
- Intuitive — There are logical risk-based or behavioral-based explanations for its premium and why it should continue to exist.”
You may not agree with everything you read in Larry’s and Andrew’s book, and there are other resources that are worth mentioning as well. Lots of them. But these criteria seem like a great place to begin any reasonable exploration of evidence-based (factor-based) investing.
Check out the rest of the book, keep an open mind, and if you’re coming to the EBI Conference, I look forward to brainstorming with you some more while we’re there!