"Exactly. Systems beat trends every time. In my view, building a rule-based engine that cash-flows steadily is what works for me to ignore market noise and maintain a true forever-hold mindset."
When referring to long periods of factor underperformance, I think it is important to distinguish between the traditional long/short factor portfolios and long-only factor-tilted ETFs.
The classic factor premia are typically constructed long/short, which largely neutralizes market beta. This is precisely what can make factors such as value and momentum attractive portfolio diversifiers.
With a long-only ETF, however, the factor exposure is combined with substantial market beta. The factor tilt is there, but it is not the same thing as the underlying factor premium.
In effect, much of the variation in the ETF will still be driven by the equity market itself. So I think it is important to distinguish between owning a factor and owning an equity index with a factor tilt.
Hi Peter. Yes! Actually, there are lots of multifactor ETFs available. Historical results are good, but they haven’t really managed to outperform market benchmarks over the last 7-8 years. Check this link for instance: https://www.msci.com/documents/10199/856b861e-c444-46ba-978d-8b53a7d629a9
Multifactor investing was actually one of my last failing attempts, before I moved into systematic strategies (as described in many of my other articles).
Thank you very much. Considering your article, I would have guessed better results. I just discovered your account, I'm adding it to my to-read list :)
This breakdown does a fantastic job making quantitative factor research accessible to retail investors without drowning in academic jargon. According to AQR Capital Management's long-term research, systematic exposure to Quality and Value explains over 80% of Warren Buffett's historical alpha, showing that discipline often outweighs stock-picking intuition. As young investors learning to navigate the markets, understanding these factor premiums helps us focus on empirical data rather than short-term noise.
Excellent piece on factor DNA. Sticking through a decade-long factor underperformance slump is definitely the ultimate psychological hurdle.
I try to insulate myself from this by barbelling my global exposure: holding VT for raw market-cap drift and PAYG for an active, covered-call overlay.
Because PAYG focuses on cash-flowing global leaders and distributions are paid twice a month, it satisfies the behavioral need for constant returns even when specific growth factors stall.
In your rotation model, how do you handle periods where multiple factors are highly correlated, like Quality and Momentum blending together during mega-cap bull runs?
This behavioral need for constant returns is a good point, but also a very individual matter - for some it is strong, while for others (myself included) it’s not there at all.
You are right that in some periods factors can be highly correlated, but rarely all 4 of them. Blending with sector momentum also adds diversification to my system, and I don’t change any of the rules because of a period with high correlation.
The other comment nailed half of it. Discipline matters more than selection. But discipline isn't really a personality trait that you have or don't. It's an output of how the rest of the portfolio is engineered. The investor who sits through ten years of value underperformance can do that because their cash buffer covers the unplanned sale, their income sleeve pays the bills, their dependents aren't being asked to wait. Strip that architecture away and even the most disciplined investor folds, because life forces the hand that conviction alone can't hold. The factor literature treats discipline as a willpower problem. It's mostly a funding problem.
Great piece.
What stands out is that factors are not really the hard part—sticking with them is.
Most investors abandon a sound strategy during the years it looks broken, only to chase what recently worked.
In investing, discipline often matters more than selection.
"Exactly. Systems beat trends every time. In my view, building a rule-based engine that cash-flows steadily is what works for me to ignore market noise and maintain a true forever-hold mindset."
Interesting read!
When referring to long periods of factor underperformance, I think it is important to distinguish between the traditional long/short factor portfolios and long-only factor-tilted ETFs.
The classic factor premia are typically constructed long/short, which largely neutralizes market beta. This is precisely what can make factors such as value and momentum attractive portfolio diversifiers.
With a long-only ETF, however, the factor exposure is combined with substantial market beta. The factor tilt is there, but it is not the same thing as the underlying factor premium.
In effect, much of the variation in the ETF will still be driven by the equity market itself. So I think it is important to distinguish between owning a factor and owning an equity index with a factor tilt.
Very true, and a good point. Thanks for bringing this up, they are indeed different!
Do you have any studies or results on multifactor investing (ex: value and momentum)?
Seems like having a quality-value-momentum would be better if it happens to exist.
Hi Peter. Yes! Actually, there are lots of multifactor ETFs available. Historical results are good, but they haven’t really managed to outperform market benchmarks over the last 7-8 years. Check this link for instance: https://www.msci.com/documents/10199/856b861e-c444-46ba-978d-8b53a7d629a9
Multifactor investing was actually one of my last failing attempts, before I moved into systematic strategies (as described in many of my other articles).
Thank you very much. Considering your article, I would have guessed better results. I just discovered your account, I'm adding it to my to-read list :)
Appreciate it :) And yes, I know what you mean. You can check out this article to learn how I use factors for outperformance: https://www.marketfighter.com/p/my-investment-approach-that-outperformed
This breakdown does a fantastic job making quantitative factor research accessible to retail investors without drowning in academic jargon. According to AQR Capital Management's long-term research, systematic exposure to Quality and Value explains over 80% of Warren Buffett's historical alpha, showing that discipline often outweighs stock-picking intuition. As young investors learning to navigate the markets, understanding these factor premiums helps us focus on empirical data rather than short-term noise.
Thanks for the kind words, I appreciate it!
Impressive understanding of quantitative factors for a 16-year old 😁
Excellent piece on factor DNA. Sticking through a decade-long factor underperformance slump is definitely the ultimate psychological hurdle.
I try to insulate myself from this by barbelling my global exposure: holding VT for raw market-cap drift and PAYG for an active, covered-call overlay.
Because PAYG focuses on cash-flowing global leaders and distributions are paid twice a month, it satisfies the behavioral need for constant returns even when specific growth factors stall.
In your rotation model, how do you handle periods where multiple factors are highly correlated, like Quality and Momentum blending together during mega-cap bull runs?
Thank you! 🙏
This behavioral need for constant returns is a good point, but also a very individual matter - for some it is strong, while for others (myself included) it’s not there at all.
You are right that in some periods factors can be highly correlated, but rarely all 4 of them. Blending with sector momentum also adds diversification to my system, and I don’t change any of the rules because of a period with high correlation.
Value Factor
= Opportunitu Cost
=
P/E ÷ G
or
= P/E ÷ √(G × ROIC)
Or
= P/E ÷ √(G × ROA)
Or
= P/E ÷ √(ROIC × ROA)
Or
....
...
The other comment nailed half of it. Discipline matters more than selection. But discipline isn't really a personality trait that you have or don't. It's an output of how the rest of the portfolio is engineered. The investor who sits through ten years of value underperformance can do that because their cash buffer covers the unplanned sale, their income sleeve pays the bills, their dependents aren't being asked to wait. Strip that architecture away and even the most disciplined investor folds, because life forces the hand that conviction alone can't hold. The factor literature treats discipline as a willpower problem. It's mostly a funding problem.