Head over to the Mebfaber.com website and listen to a master class on factor investing (smart beta). Two of the best quantitative researchers on the subject do a deep dive into their findings and how most investors don’t implement the strategy correctly.
Larry believes there are 5 rules to help you evaluate factors: 1) Is the factor “persistent” across long periods of times and regimes? 2) Is it “pervasive”? For instance, does it works across industries, regions, capital structures and so on. 3) Is it “robust”? Does it hold up on its own, and not as a result of data mining? 4) Is it “intuitive”? For instance, is there an explanation? 5) Lastly, it has to be “implementable,” and able to survive trading costs.
The guys then switch to beta. Larry mentions how valuations have been rising over the last century. He references how CAPE has risen over a long period, and points out how some people believe this signifies a bubble. But Larry thinks this rising valuation is reasonable, and tells us why. Meb adds that investors are willing to pay a higher multiple on stocks in low-interest rate environments such as the one we’re in.Next, Meb directs the conversation toward a sacred cow of investing – dividends. He asks about one particular quote from Larry’s book: “Dividends are not a factor.” Larry pulls no punches, saying, “there is literally no logical reason for anyone to have a preference for dividends…” He believes investors over overpaying for dividend stocks today. He thinks it’s unfortunate the Fed has pushed investors to search for yield, inadvertently taking on far more risk. Dividend stocks are not alternatives to safe income. There’s plenty more on this topic you’ll want to hear.
