Let’s start with a little precursor on what factor investing is…
Factor investing (aka smart beta) takes a formulaic approach to selection of stocks. Some of the popular ones are value and momentum. In a value strategy you would select the cheapest decile (10%)
A common factor investing (aka smart beta) strategy would be value. In a value strategy you would select the cheapest stock by some measure. In a simple form, you would buy the cheapest decile (10%) be the price-to-book ratio, and then you would continually in buy into the cheapest decile every quarter. The academic research has shown that a simple, systematic selection of value stocks like that has lead to out-performance (relative to market beta).
It sounds simple. So Simple. But here’s the kicker, it is incredibly hard to stick with something so simple. It’s even harder to maintain conviction.
Sure the academic research has shown an out-performance using such a simple strategy in the past, but will it continue? Know one can say for sure, although the odds are high it will.
Would you be able to stick to such as strategy when it is performing horribly, relative to a passive (do nothing) index? Nearly all investing factors go through, long, horrible periods of under-performance. They actually under-perform most of the time with their large gains hitting hard and rapid. Most investors don’t have the patience or conviction to stay the course.
In business, like factor investing, I’ve found simple and systematic rules work best. Seriously the very simple things like:
- Making sure customer satisfaction is top notch.
- Keeping staff happy.
- Focusing on services products that you can do efficiently.
Admittedly there will be times when you might feel like diligently focusing on these things doesn’t matter ask. There will be time when it feels like no matter how hard you try to keep customers happy, the negative feedback pours in. You might run across a period of time when your most efficient services just don’t seem to be selling well, and another service that brings in short term revenue (with long term headache) looks appealing. You’ll ask “why am I even bothering?”… in the long term, the decision you know are right, will be right.