The Case Against Factor Investing

About this Episode
Investing in “smart beta” was the rage in the early 2000s, as small-cap-value stocks vaulted over large-cap-growth stocks. But like all supercharged investment strategies, it didn’t last. Factors premiums have not materialized since the financial crisis. For most of the last decade, value has underperformed growth, driving the underperformance of the largest category of smart-beta strategies. Bob Huebscher dives into the case for and against factors in this interview with long-term investment adviser, Rick Ferri.
Show Resources
Rick’s firm, Ferri Investment Solutions: rickferri.com/
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[@nicholas5396]

Great video. Loved Ricks debate with Paul Merriam at Bogleheads conference this year.

[@M43782]

Great talk

[@Bobventk]

22:22 why then, Rick, have valuation spreads between scv and lcb WIDENED???

[@Bobventk]

22:50 “when you look at the paper discovering small cap premium in 1980, maybe 1979, it hasn’t happened since”
1. It was 1981- Rolf Banz.
2. YES IT HAS. Both in the US and internationally, the size premium has been very robust since 1980. Internationally, small cap performance has more than doubled MCW. In the us, small cap has beaten S&P 500 by over 60%.
Repeating a lie doesn’t make something the truth.
BTW his point about value disappearing post discovery (he also gets that date wrong) is also false. Globally, value HAS had a realized premium (a pretty big one too) since discovery (whether you use the real date or the date he gives)

[@_emh]

CAGR on a $10K initial investment:
1983-2023 - US Total Mkt: 11.09% LCB: 11.40% SCV: 12.45%
1993-2023 - US Total Mkt: 9.94% LCB: 10.03% SCV: 10.74%
2003-2023 - US Total Mkt: 10.59% LCB: 10.40% SCV: 10.15%
The premium has diminished in the US market, which is where the majority of capital resides. Perhaps international SCV such as AVDV merits an allocation in the portfolio of a die-hard factor-investor, but nothing here undermines Rick's assertion.

[@Bobventk]

@@_emh my lord you’re clueless. Unfortunately it seems like you don’t have the mental capacity to comprehend these matters.

[@Bobventk]

27:00 impressive how Little Rick knows about how bad non DFA/ Avantis value funds are

[@_emh]

Avantis didn't exist until 2019 so it would have been surprising to see Larry Swedroe and Jack Bogle discuss it at a conference in the mid-2000s. Eduardo Repetto left DFA to lead Avantis and Rick Ferri's interview of Repetto on the Bogleheads podcast is quite worth a listen for anyone interested in factor-based investing.

[@Bobventk]

@@_emh just listened- thanks for the reference. Rick’s ignorance was tough to suffer through like usual

[@Bobventk]

At 16:00, Rick commits a logical fallacy called sunk cost fallacy

[@_emh]

No, choosing not to realize an unrealized loss or underperformance and instead adhere to the investment theory that prompted the purchase is not an example of the sunk cost fallacy. Unrealized losses/underperformance are not sunk costs, precisely because the expected return remains positive in the long run.

[@Bobventk]

@@_emh nah, you’re wrong here (and all of your other comments today). This is, quite literally, sunk cost fallacy.

[@_emh]

@@Bobventk If you say so… lol.

[@Bobventk]

@@_emh yeah it is, by definition, sunk cost fallacy. Like 1+1=2 stuff.

[@_emh]

@@Bobventk No, Bob, it's not the sunk cost fallacy. First, cost basis is not a sunk cost because a sunk cost must be unrecoverable (otherwise it's not a sunk cost) and cost basis is recoverable, in whole or in part, upon sale of the securities at issue. Second, inherent in the Fama-French CAPM is the understanding that it may take a very long time (20, 25, 30 years) to realize the premium. So when an investor doesn't realize the premium after ten years and the portfolio lags the total market, that investor has two choices: Hold the position and stick to the investment thesis, or sell and lock in the underperformance forever. The investor's decision need not rely on the cost basis (what you're erroneously calling a sunk cost): Instead, the investor's decision can and should be informed by their continued belief, or change in belief, in the investment thesis and by asset-liability matching to their desired time horizon. That's Finance 101. Like 1+1=2 stuff.