" Oh, shut up you big queen!"
"Well, I see kitty has claws."
From AQR's Cliff's Perspectives:
A Fanatic is One Who Can't Change his Mind and Won't Change the Subject1
In his latest whitepaper, Rob Arnott is still repeating things like this: “We point out that some of these factors owe much (or all) of their past efficacy to rising relative valuations.” It’s not a minor assertion but one of his central themes. It was the main topic of the first major paper in his recent wave of “most of the factors are overpriced, data mined, and doomed, save only for the value factor which I still occasionally rename and claim as my own” series, and he returns to it here.
I have lots of disagreements with Rob on a variety of topics connected to these issues. But, most of the disagreements are of degree and not of kind, and there are even some important agreements. For instance, I think he overstates the power of pure price-based contrarian factor timing and understates how correlated such timing is to the simple value factor itself. Though, as a related yet separate issue, I have often noted that even if factors are not expensively priced versus history (and most are not right now) simply being more well-known than in the past increases their short-horizon left-tail. I believe I’m a realist and not a cheerleader and Rob and I do share some of these worries. I also agree with much of his firm’s recent work arguing that value investing is far from dead. I would, in particular, also agree with his consistently reminding us that many investors, to their harm, tend to chase 3-5 year performance (what I’ve called momentum timing done at a value time horizon in peeve #3). When Rob tries to talk investors out of chasing 3-5 year factor performance he’s quite simply doing the Lord’s work. Now, where we differ here is I don’t think you should do too much of the opposite either. But, even if I disagree on the power of contrarian factor timing, at least here I think he is getting the sign right.2 Frankly, all considered, on most issues we agree on more than we disagree (though admittedly I don’t always make that clear enough!).For folks who don't recognize the quote at the top, it is from the American television show Frasier:
Which brings us to this important exception: On his assertion that factors “owe much (or all) of their past efficacy to rising relative valuations,” there isn’t, as yet, any such ground for agreement or even reasonable disagreement. Let’s step back. Many worry about too much data mining among academics and practitioners to find factors. Rob worries about it and so do I. If that is all he was saying here we’d be copacetic. But he’s going much further than such general worries about data mining. With this and many other similar statements, he is saying that he has identified and quantified the specific thing misguided factor researchers data mine over — richening valuations — and that this is such a huge effect that much of the quantitative investing community is misled (and thus actually at least a tad incompetent). This is not minor stuff. He says it over and over throughout recent work. He said it in the first and now in this latest paper in this series. He says it in conference talks and webinars 24/6 (on Sunday he rests). Yet, he’s quite clearly wrong, has been shown this, and doesn’t moderate what he’s saying or respond to said evidence. If I seem frustrated by all this I readily admit it!
His repeating (and repeating) this specific, very damning, and very broad accusation against most of the factor researching world really surprises me....MORE
- "Frasier: The Doctor Is Out (#11.3)" (2003)
I had to add something, this edition of Cliff's Perspectives only has three footnotes (and one of those is from the headline) and besides, I always liked Gil.
