When thinking of factor investing, it’s easy to think of a rigid rules-based selection screen, or a cold, academically proven but rational indicator, free of human influence.
But factor investing is not immune to the impact human behavior can have on investment plans.
The challenge—and the opportunity—lies in quantifying that behavior and identifying its influence on different factors and outcomes. On Tuesday, April 13, at 2 p.m. ET, we will be hosting a webinar with New Age Alpha that will dive into this topic.
Assessing Risks Of Beating The Market
The beauty of investing is you can make it as easy or complex as you like. Trillions of dollars are sitting in plain vanilla index funds, playing the buy-and-hold passive game until the cows come home. But trying to outperform the market—be it through factors or fundamental investing, or through all sorts of smart beta approaches—is an effort that only grows more challenging every year.
The pursuit of alpha is alive and well in the predominantly passive world of ETFs. But by definition, seeking outperformance involves taking on different risks.
(Sign up for our upcoming webinar with New Age Alpha here: “Uncover A Hidden Risk Lurking In Your Portfolio,” on Tuesday, April 13, at 2 p.m. ET.)
Right now, we’re in the middle of a rotation into value from the go-go growth factors many had been riding in this bull run. The size factor, too, has had its day in the sun in recent months, while low volatility has dragged. Factor investing is all about harvesting and managing risk premia. That’s well-known.
What’s much lesser discussed—or even seen—is that human behavior or personal biases are essentially another layer of risk in a portfolio, and one that can improve or often derail your results.
For example, New Age Alpha will discuss specifically factors and to what degree, if any, they are influenced by humans that add risks unforeseen to many investors. Hear why New Age believe the quality factor is not subject to human behavior
What moves a price of stock higher or lower? No two stocks behave the same, so there is no standard force. What moves GameStop is a far cry from what lifts and lowers Amazon. The key is to understand the forces behind those process moves and how you can measure the true value of a stock.
The poster child for irrational price moves, GameStop is not alone in seeing its shares move by forces that are not on a spreadsheet. The nonfundamental and ambiguous information can create the divorce between true share value and hyperbolic and temporary spikes that draw the headlines. Is it cash flow, returns of assets price to book, or something as simple as artificial factor such as market exuberance?
With stocks breaking record after record, many companies have been caught up in the high tide, with the fundamentals to justify their valuations. And when the tide goes, those stocks will sink further than peers carrying fundamentals that justify the price.
We hope to see you Tuesday to participate in an interesting discussion on the human factor.
Drew Voros can be reached at [email protected]