Wednesday, October 24, 2018

Cliff Asness: "The George Costanza Portfolio "

From AQR's Cliff's Perspectives, Oct. 22:
This is a follow-up to my unintendedly long magnum opus on this quite painful year. It’s been only a few weeks, but things have continued to stink. I somehow feel that when I write a cathartic tome that I’m proud of, the universe is supposed to notice and immediately turn things around. Nope. Unfortunately, that’s just not how this works. These last few weeks have been particularly hard as systematic value, still the cause of much of our year-to-date pain, has in fact had a decent bounce back (though now fading again as I write this). While my description of this year to date was, and is, accurate, I have always been clear that we’re very much not a pure value investor. In fact, in the long piece I wrote:

Long-short systematic value investing (only a subset of what we do in individual stocks) is quite bad this year. In fact, it has been doing quite poorly since a little after the GFC ended. What's different this year versus prior years is that until 2018 other systematic long-short factors more than made up for it (after all, we only really care about the net).

That was me highlighting the good side of not being a one-factor bet (i.e., that we could do well for what’s been nearly a decade of poor value returns because the rest of our process was working more than enough to offset it). Of course, this also means the opposite can occur, particularly at short horizons. 1  In the last few days/weeks value has had a bit of a surge, again now fading, but the other factors (momentum and others) have done worse than value has done well. 2 This is, of course, particularly difficult in an already trying year. But it’s also endemic to the process we believe in and that’s worked for us long-term. We are not just one bet. Again, had we just been a single bet on value, the last near decade would’ve been one of fairly steady pain, and not the overall success we’ve seen.

As I discuss in my giant essay, we are admittedly hard to characterize with one liners (“the market is up/down so of course this happens!,” “value is up/down so of course this happens!,” “momentum is up/down so of course this happens!,” etc.). That’s much of the idea. But during very tough times, many want simple explanations, even though we’ve designed a process that can be frustrating to that end. 3 Frankly, I often want simple explanations too! But only for a moment, until my more level-headed colleagues explain to me again what I’m now writing about to you… (often sending me excerpts of my own work!)

Another thing I wrote in the original tome was:

As a blunt example, in general we believe in choosing individual stocks with good value, good momentum (both price and fundamental), low risk, high quality (e.g., profitability, margins), and positive views from those we think are “informed investors.” We like to under-weight or sell their opposites. When it doesn't work, or even hurts a lot for a while, we don't suddenly prefer expensive stocks with bad momentum, high risk, low quality, and negative views from informed investors. What I'm saying is, admittedly, our base case is to rely on the (in our humble opinion) overwhelming evidence we started with.

In line with the above, two different clients came up with the idea for this short blog (one in fact coming up with the title). In one episode of the greatest sitcom ever, 4 George Costanza, a perennial loser at all things (love, work, etc.) decided he must, in all things, “do the opposite” of what he’d normally do, as his normal way clearly wasn’t working out for him....

HT: FT Alphaville's Further Reading post.