Like fashion, some investment strategies become stylish for a while and then fade away. A hot strategy over the last few years is called "factor-investing."
It is based on the notion that investment performance can be improved by slavishly adhering to certain base beliefs. For instance, there are several studies that show small-cap stocks perform better than large-cap stocks over time (but don't ask about risk). There are other studies that show dividend-paying stocks (value stocks) perform better than non-dividend-paying stocks (growth stocks). And, there are other studies that indicate stocks are more likely to appreciate if they have already appreciated (momentum stocks). Therefore, they buy small-cap stocks that pay dividends and are already more expensive. That leaves a relatively small universe of stocks to study. This is also known as "Smart Beta," suggesting it is the smart way to get stock market performance.
Indeed, one particular family of mutual funds has recruited a ragtag army of financial gurus, who are "true believers" and speak with complete confidence that factor-investing is the secret sauce for better investing. And, don't argue with these disciples. They are evangelical, indeed.
One of the grand old minds of investing remains the 86-year-old curmudgeon called Jack Bogle, founder of Vanguard, who is noted for his succinctness. He said "Smart beta is stupid; there's no such thing. It's an idiotic phrase. Quoting Shakespeare, I guess: It's a tale told by an idiot, full of sound and fury, signifying nothing." Any questions?
My understanding of Bogle's argument is that Smart Beta assumes that whatever relationships have existed in the past will continue to exist in the future. My argument is that slavish devotion to any particular strategy over long periods leaves investors blind to reality. Jack is right!
It is based on the notion that investment performance can be improved by slavishly adhering to certain base beliefs. For instance, there are several studies that show small-cap stocks perform better than large-cap stocks over time (but don't ask about risk). There are other studies that show dividend-paying stocks (value stocks) perform better than non-dividend-paying stocks (growth stocks). And, there are other studies that indicate stocks are more likely to appreciate if they have already appreciated (momentum stocks). Therefore, they buy small-cap stocks that pay dividends and are already more expensive. That leaves a relatively small universe of stocks to study. This is also known as "Smart Beta," suggesting it is the smart way to get stock market performance.
Indeed, one particular family of mutual funds has recruited a ragtag army of financial gurus, who are "true believers" and speak with complete confidence that factor-investing is the secret sauce for better investing. And, don't argue with these disciples. They are evangelical, indeed.
One of the grand old minds of investing remains the 86-year-old curmudgeon called Jack Bogle, founder of Vanguard, who is noted for his succinctness. He said "Smart beta is stupid; there's no such thing. It's an idiotic phrase. Quoting Shakespeare, I guess: It's a tale told by an idiot, full of sound and fury, signifying nothing." Any questions?
My understanding of Bogle's argument is that Smart Beta assumes that whatever relationships have existed in the past will continue to exist in the future. My argument is that slavish devotion to any particular strategy over long periods leaves investors blind to reality. Jack is right!
