Cliff Asness of AQR has some gripes about what people believe and think about investing. In this blog post, he summarizes and links to a recent paper of which he is a co-author about factor investing. Factor investing is when a data point, such as price-earnings ratio, is used to choose investments. Asness says factor investing is harder than many authors indicate, it’s important to use multiple factors. He also says it is harder to do factor investing well and that most analysts make the same types of mistakes.
Of course, price matters. Still, for instance, those truths don’t make timing the overall stock market based on historical CAPE an easy exercise. Similarly, it doesn’t make factor timing based on the value spreads we established in 1999 a walk in the park. Market timing (predicting and trading on these predictions for the overall stock market) is instructive for factor timing, a similar exercise. Adding value from market timing is very hard even though the aggregate market price (e.g., the CAPE) matters and varies a lot over time. In our latest paper, we again show that factor timing is likely even harder than market timing.