16 November 2019

On today’s show we talk to Jack Vogel about factor-based investing.

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  • What is factor investing?
  • Which factors have historically performed best?
  • Which factors perform best in bear markets?
  • Should you invest in one or multiple factors at the same time?
  • Ask The Investors: What is the Relative Strength Indicator, and how do I use it?


Disclaimer: The transcript that follows has been generated using artificial intelligence. We strive to be as accurate as possible, but minor errors and slightly off timestamps may be present due to platform differences.

Preston Pysh 0:00

When Stig and I look back at guests that have been enormous influencers on our show’s growth and impact, Jack Vogel and Wes Gray from Alpha Architect are two people at the top of the list. Today, Stig and I had a chance to sit down with Dr. Vogel to talk about factor based investing. Dr. Vogel is the CEO and CFO at Alpha Architect where they manage an excess of a billion dollars. Jack is the co-author of multiple books on value and momentum investing. And so without further delay, we bring you this insightful interview with Dr. Jack Vogel.

Intro 0:37

You are listening to The Investor’s Podcast where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected.

Stig Brodersen 0:57

Welcome to today’s show! My name is Stig Brodersen. And as always, I’m accompanied by my co-host Preston Pysh. Today, as we said in the introduction, we have Jack Vogel from Alpha Architect with us. Jack, thank you so much for coming on the show!

Jack Vogel 1:11

Thanks! I’m really excited to be on and appreciate you having me on.

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Stig Brodersen 1:14

So Jack, the topic for today’s episode is factor investing. Now, my first question to you would be: if you could please provide a framework for today’s episode? And then, please briefly elaborate on what factor investing is and why it works.

Jack Vogel 1:32

Yeah. So factor investing, I think one way to think of it, is it’s a systematic approach to being a somewhat more active investor as opposed to simply buying just market cap weighted index of stocks, right? So an example, and why I say systematic and active is, for example, the most known factor that a lot of people talk about is value investing. And so value investing is a strategy, whereby you simply try to buy cheaper stocks. Now, you know, a traditional active manager will just say that they, you know, read fundamentals, and examine the stock, and when they think it’s under priced, they will buy it. And then, when they pour (*inaudible*) in their model, you know, think it’s expensive; get rid of it. Whereas factor investing is a way to simply say, “Hey, every 12 months, for example, I’m going to look at all stocks; buy the cheapest 50 or 100; and then, I’ll wait, and in 12 months, I will do the exact same process.” So it’s a systematic way to make active decisions and bets within investing.

Preston Pysh 2:36

So Jack, you’ve done extensive research on factor investing. Between you and Wes, I mean, it’s just, it’s somewhat mind-blowing the amount of research that you guys do. Which factors have historically performed best and why?

Jack Vogel 2:50

So on discussing factors like one thing you want to look for obviously is that they work not just in like one market so such as like the US market, but also maybe in other markets such as international markets; even across other asset classes. And so all of those factors like it’s still kind of mine, and I would say our belief that value and momentum are the two biggest factors. Value, which is, you know, by just buying cheaper stocks and momentum, which is buying recent winners seem to continue to win. There are other factors that have been pretty well documented such as quality, or profitability, investment, and then low volatility. But if they asked me say, you know, “Which ones do I think I expect to possibly work in the future?” I would say value and momentum. And then, kind of getting into your question of, you know, why did they work? This is a discussion, and academics have been investigating and researching this article for probably almost 30 years now. Right?

The question is, Why? Why would value investing work? Why would buying cheap stocks relative to expensive stocks work? And it kind of comes down to there’s arguments back and forth of it’s either one of two things. The first could be risk. That strategy, you know, the certain stocks are inherently riskier. Then, like value would be riskier than growth. Or the other one is behavior. And on the behavioral bias, which is fun to talk about. It’s, you know, what’s your bias, right? So for value it’s people over extrapolate. So on value stocks, you look at them you say, “All these things are all going to zero.” Conversely, on growth stocks, you look at them and say, “Hey, these things are going to infinity.” Right? And when people over extrapolate, what happens is value stocks get too cheap; for stocks, get too expensive; and historically, there was a premium to buying value over growth.

Stig Brodersen 4:40

Okay, so let’s talk about value investing. Here’s an example because historically, one of the most used factors in investing is the price-to-book ratio, which most value investors would be familiar with. Now, I’ve looked at some of your research, and in the time period from 1974 to 2011, the cheapest price-to-book stocks returned 13.11% compared to the S&P that performed 9.52%. Now, back in Episode 258, I talked to our mutual friend, Tobias Carlisle, about just that. And he pointed out that to him, it looked like the price-to-book might not be relevant anymore, which might come off as a bit of a surprise to all listeners to hear how much it has outperformed in the past. And he brought up arguments such as the significance of intangibles in today’s economy. That’s one reason. Another reason he brought up is the counting rules around share buy back where companies buying back stocks aggressively have high artificial price-to-book ratios. But what does your research say about price-to-book in more recent years? And do you think it’s still a relevant metric to look at?

Jack Vogel 5:51

That’s a great question. So yeah, the, the numbers you say they were from, we had a paper, it was in Journal of Portfolio Management, and it was the whole idea or premise behind that article was to examine value investing at a high level is to simply try to buy stocks that are cheap. And so to say, if a stock is cheap, you have to then come up with some sort of multiple. So price-to-book or book-to-market was the historic academic definition of value. And what we found in there is book-to-market over that time period beat the market. But we actually found, you know, there’s other ways to measure value that did better. Now, examples of those would be like earnings to price or our favorite, which is enterprise multiples.

Now, specifically answering your question about book-to-market, you know? Since about 2007, past 10 years, you know, it has underperformed growth, meaning cheaper stocks on a book-to-market basis have done worse than expensive stock. Some of the other value metrics, maybe not as much that Delta there. So a natural question is, you know, should we, should we not use book-to-market? I think it’s hard to definitively that one should not use book-to-market. But I think Toby does highlight some of the downsides, potentially to using that measure. And there’s going to be a downside to every single measure, right? So if we use, you know, a P/E multiple, which I think most of your listeners would understand. So a P/E multiple is just price divided by earnings per share. So you could alternatively use that, and there’s pros to using that, but one potential con of using that is it doesn’t account for maybe some inherent risk on the debt side, right? So enterprise multiples, which account for the total enterprise value like if you wanted to buy the whole firm. That would be like, you know, your market cap plus your debt minus cash. And so an example of just, you know, a Delta would be if you go back and look at General Motors in 2007. That was a very cheap stock on earnings to price. But on enterprise multiples, it was actually very expensive, right? Because it had a lot of debt. So I think every value metrics going to have its pro and con. We would prefer to use other ones, but I think it’s really hard to definitively say book-to-market’s dead. But at the same time, I will say we don’t use that.

Preston Pysh 8:22

So Jack, as a follow up question to that: What metrics would you prefer to use instead?

Jack Vogel 8:27

Yeah, so we prefer enterprise multiples, which is just EBIT, you know, earnings before interest in taxes divided by the total enterprise value of the firm. And again, total enterprise value is if you wanted to go today and buy the entire firm, how much would it cost you? And so I’ll use a quick example like for Apple, what would you have to do? You would have to buy all of the debt. You would have to buy all of the stock and minority interest. But then, if you bought the entire company, you subtract off cash because if you, if someone said, “Hey! I have, you know, whatever it is, one, $1.2 trillion. I want to buy Apple.” Well, you know, once you buy it, you’re going to receive their cash because you would be the owner of Apple, so you subtract cash up. So we’re fans of enterprise multiples.

Stig Brodersen 9:14

Now, Jack, whenever we look at the historical performance of factor investing, for a good reason, you’re looking at your time periods decades over decade because you want to see what’s the true out performance here, you know? Whenever the markets go up and whenever they go down. Now, male listeners think that the market will crash soon, you know? They, they’ve seen that the market has been pushing all time highs, and that’s a concern. How should they position themselves? They might also think that for that reason, stocks will very near (*inaudible*) results, even if it doesn’t just plummet in itself. So as a follow up question to that, I will ask: Which factors perform better in a bear market?

Jack Vogel 9:55

Yeah, so I guess two answers there. One thing is that it’s probably true given that the market’s trading at higher multiples than it historically has. That returns in the future are going to be low. That’s just somewhat of a fact based into…that, that’s just the math, right? If you pay a higher multiple for a company, you should ex ante expect lower returns. All else being equal. So I think that’s a, a true point. Now, trying to time factors and kind of say, you know, which factor should I use given that my thesis is this, is, you know? We’re, we’re generally wary of that just cause it can be, can be difficult. I would say, you know, two factors that may come to mind specific though, if you think, “Hey, the market’s gonna blow up, right? And then, I’ll give caveats.

So one, you know, would just be value investing. And you know, one thing about value investing is, obviously, you’re buying stocks that are inherently cheaper than the market. So, you know, if you believe that there’s going to be, you know, whenever a recession or those types of events occur, generally there’s multiple compression, meaning that of your earnings, your multiples get compressed, and value stocks trade at a cheaper multiple. So they might be one thing that an–a caveat there is obviously the assumption is the earnings for all stocks decline at the same rate, right? So if value stocks, earnings decline at a higher rate, you may just get similar returns to the market. The one factor, which I know we’re going to talk about that actually seems to do very well on a long short basis is the quality minus junk or quality factor in recessionary periods. But a recent (*inaudible*) quality, which we’ll talk about could be good, is one thing that’s interesting about the quality metrics, depending on how you measure it, is that quality seems to be persistent. Like if a company has persistent profitability or quality minus junk, depending on how you define it. That seems to be persistent across time. So the quality minus junk or profitable companies tend to do slightly better in recessionary periods.

Preston Pysh 12:05

So I think this is a great segue into the next question because sometimes you’ll find some factors that perform better in a bull market, and then other factors that perform better in a bear market. So is a person to change their factors as the market changes? Or are you sticking with the same approach throughout all market cycle types?

Jack Vogel 12:26

You know, investing is hard, right? So you’re trying to say, first off, you’re going to pick the winning factor strategy. Then, you’re also gonna pick exactly when the market’s gonna turn. It’s just, that’s just hard, right? So natural caveat. But specific to factor investing, you know, we generally don’t recommend trying to time factors. I think that’s a difficult thing. The one exception, you know, if you look back in time was like the internet bubble. There was a natural divergence there, where value stocks were so cheap relative to grow stocks. Neat thing showing that, you know, factor timings can be difficult and specific to that, in that example, when value was historically cheap compared to growth. That was a good time to time it. So we generally don’t recommend factor timing. If you’re gonna do it, I would use like a momentum strategy. There’s a lot of momentum of factors. There’s some new papers highlighting that. Even factors themselves kind of have momentum.

Stig Brodersen 13:29

Now, Jack, much of factor investing is built up around picking cheap stocks that we expect to revert back to the main, you know? That’s generally the premise for value investing that we talked already about during this interview. Now, we might pick stocks based on price compared to earnings; price compared to free cash flows. However, it might emotionally be easier to have stocks of “high quality” when times get tough. So unlike the standard factors such as value, momentum, and size. Quality lacks a more common accepted definition. So how do you define quality whenever it comes to stocks?

Jack Vogel 14:10

Yeah, that’s a good question. So, you know, when we talk about momentum, most people understand that’s, you know, it’s pretty standard definition. It’s like, “Hey, what was your returns over the past 12 months or 9 months?” You know, pick your, pick your month. That look back period, but that’s pretty standard. “Whereas quality, there’s no perfect definition of quality,” is what I would say. So I’ll pass along a neat little study that was done recently; paper called “What is quality?” They get actually specifically said, “Hey, we hear about all these, these firms and these smart beta products that specifically are mentioning quality, what exactly is it?” And they go through and identify multiple definitions of it. And they try to investigate and say, “Hey, which of these definitions can actually help on a quality side?” And what they find is generally profitability is good; investment is good, which is, you know, like firms that are investing less than more; share buybacks are good; accounting quality, kind of like accruals, are good. So there’s a lot of ways you can measure quality, which is kind of hard to say, “What’s the, what’s the perfect definition?” But in general, you know, profitability is at least a good place to start; like how profitable the firm is.

Stig Brodersen 15:25

So a natural question that comes up in this situation would be the volatility. Few investors like volatility. And no one thesis could be that because these stocks have higher quality, they will be appreciated differently by the market. For instance, it might be so that whenever the market takes a downturn, they won’t be punished as much. So, but that’s just one thesis. What is your research tell us about volatility compared to the quality of a stock?

Jack Vogel 15:53

That’s a good question. These higher quality firms add higher Sharpe ratios relative to lower quality firms. And so all else equal that generally would tend to indicate that, you know, higher quality firms probably have a lower volatility. Just due to the fact that, you know, the return, obviously, on Sharpe ratio, you know, volatility comes into effect there. So, in general, high quality firms probably are gonna be slightly lower, lower, less volatile than just the market or low quality firms. But I guess the one thing I would say is if someone is specifically worried about volatility, they could also just allocate towards low volatility stocks, right? Which would be a more direct measure of attempting to, I would say, mitigate the exact risk that they are concerned about, which is volatility. But it is true that quality generally is less volatile.

Stig Brodersen 16:50

Yeah, it’s, it’s interesting, you would say that, I mean, I guess we as investors are ungrateful that way, you know? We want to have our cake and eat it too. We want the high expected return, but we don’t want too much volatility. So that was also to capture what you talked about before the Sharpe ratio, which is basically just that, you know, you have the expected return, then you divide it with the volatility. Now, Jack, many of our listeners are using stock screeners in their process. And our audience who are familiar with factor investing might include 10 or more factors in their screeners that have historically outperformed. Would it be a valid strategy to invest in the basket of stocks with multiple factors? And whenever we talk about multiple factors here that could be, you know, price-to-book, price-to-earnings, price to free cash flow, whatever it might be. Now, would it be a valid strategy to invest in a basket of stocks with multiple factors? Or would you recommend our listeners to just focus on one factor to get the highest expected outperformance?

Jack Vogel 17:53

So in general, using multiple factors, I would never recommend people. Don’t do that, but I’d actually you’d probably smartly think about how you are using your factors. And this comes into effect with the sequencing, the weights, and then how often you rebalance. So for example, let’s just say you wanted to use value in momentum. You’re like, “Hey, I, those are my two factors. I want to use value, and I want to use momentum.” Well, a natural question becomes, okay, well, how often do you want to rebalance your strategy, right? And if you’re like, “Hey, I want to use momentum, and I only want to rebalance this once a year. Those are my two factors. I’m doing it once a year. That’s it!” Well, in that instance, you probably want your strategy to be a value strategy, which would mean your primary screen would be value and the secondary screen maybe within the value firms, you’re going to use momentum. Why? Because value as a factor, it works frequently like doing it every month or even going down every day. But it also worked out to like five years like if you just buy cheap stocks; hold for five years. No, that historically, actually did well. Whereas momentum, you need to turn it over a lot. So if you’re saying, “Hey, my rebalance frequency is 12 months.” Well, then you need to use the factors in a smart method or a smart sequence that actually fits your rebalance frequency. I mean, I wouldn’t recommend investors to not use it, but I think I would recommend them to think about how they’re using it; why they’re using it. You know, if you’re going to really be rebalancing it every month, you know, maybe momentum as a primary screen makes sense.

Preston Pysh 19:32

So you often hear investors say that if you don’t have time and the skill to pick individual stocks, you should buy low cost ETFs tracking the market. In fact, Warren Buffett has been quoted saying that numerous times in the last decade or two. More and more investors, though, are looking to do something in between that approach and one in which they’re also picking individual companies. The problem a lot of people run into is the time that’s required to do these individual stock picks. So if a person were to only do a factor-based investing approach, what would that portfolio construct look like, Jack?

Jack Vogel 20:08

Yeah, good question. So at a high level, in general, factor investing, ETFs, or mutual funds, you know, you might hear them called smart beta. But essentially, at a high level, in my opinion, for a lot of investors, they’re pretty good. Why? Because it’s going to give you at some level baseline diversification, right? I think one of the worst things you can do as an individual investor, going back to your previous question about stock screener, is not having a diversified portfolio. Now, on this question, using a smart beta ETF or mutual fund will kind of generally give you broad baseline diversification. So that’s good! Right at the outset, you’re given that. And then, what I would say is it depends on the investor. And they can actually be very beneficial to lot of investers. So let’s say, you’re an investor in you’re seating here, and you’re saying, “Hey, the market looks expensive. I don’t believe in time in the market just cause I just don’t believe that. But I think it’s too expensive. So what should I do?”

Well, you have a couple options. One is you just go to cash, which I just don’t know what’s going to happen in the future. But generally, equity markets have a positive premium. So an alternative option as you say, “Hey! Well, maybe I like to buy cheaper stocks.” Right? Cause if your whole reason for being out of the market is you just kind of believe that it’s too expensive, you could buy cheaper stocks. And there’s tons of factor ETFs and mutual funds out there that can give you access to strategies and maybe keep that investor in the market. When all on (*inaudible*) sequel, they were just going to bomb me out and go to cash. Alternatively, you could do low volatility or quality. We’re still fans of value, and I think that’s good. And then, the last thing is for, especially, you know, US investors, you know, ETFs are very tax-efficient as opposed to doing stock screening, which again I’m not saying is bad. But one thing that’s true is that if you use an ETF that can rebalance the cheap stocks or quality stocks within the ETF itself, it’s more a tax-efficient vehicle than buying and selling individual stocks. So on average, I would say, you know, factor investing smart beta stuff can be beneficial and helpful to investors.

Preston Pysh 22:26

And so you don’t think 100% of what you have allocated to stocks would be a bad strategy if it’s allocated into the various factors?

Jack Vogel 22:36

Yeah, I mean, I think you could say, “Hey! As opposed to buying the market, I’m gonna buy just value stocks, or I’m going to do value and momentum.” I think that can be done. Now, one of the issues or questions is, “Hey, how is Joe Schmoe’s value strategy different than Jim’s value strategy, right?” So, so that’s a hard thing. And then, the other hard thing is just naturally if you don’t buy the market, well, then what that means is that your strategy is going to not look like the market from a return standpoint. So you need to understand that, you know, if you buy a more active value strategy, and one way to measure that is like active sharing. You’re like, “Hey, I’m buying a fund that’s 95% active, which means it’s only 5% the market. Why is the market up 2%, and you guys are down 3% this month?” Like, well, that’s because you bought a strategy that is not the market. So I think that becomes the behavioral thing that can be difficult for some investors to stick with, is, they just naturally compare to the market. It’s a behavioral challenge and investors will need to overcome.

Stig Brodersen 23:40

So another behavior challenge that a lot of investors are facing, and have faced, and probably always will face is what happens whenever we buy a stock, and then it tumbles. That’s definitely not a good feeling. I guess, I as well as many other investors could testify to that. Now, we previously quoted Guy Spear here on our show, and we also had Guy on the show, and we talked about the two-year rule. And basically, the two year rule is that if you do buy a stock after extensive research, and sometimes it will tumble, you don’t sell it. You give it at least two years. And you’re very focused on giving it at least two years. And part of the reason is that you want to punish yourself for doing it, so you…and, and you don’t want to punish yourself. So you want to really, really sure of your investment thesis before you do invest in it. But it’s also because you don’t want to be a slave to, you know, the fluctuations that you just have all the time in the stock market. And then, after those two years if the stock hasn’t performed as well as you hoped, that is whenever you really go to scrutinize yourself, and be like, “Have I just been wrong?” Like is the market still wrong two years in? Or have I just been wrong? And as guy said very often, you know, it’s, it’s him being wrong. It’s not, it’s not everyone else. But Jack, how much time would you recommend a factor investor to invest before evaluating if a factor still works? Is there even such a thing as a two-year rule for the factor investor?

Jack Vogel 25:08

Yeah, so that’s a great question. And actually, one of the neat and cool parts of factor investing is at the outset, you kind of preset when you’re going to rebalance. And it just takes out all the questioning. For example, like value investing, if you just look at it like the academic perspective, how its formed is, you know, like, like Pharma French and all the academic articles in general. Just say, “Hey! Every single year, on June 30th, we’re going to rebalance our portfolio, right?” So it kind of just takes all the guesswork out of it for, kind of how long should I hold this stock in my portfolio, which is nice because as I mentioned, you know, the first question you asked me was, “What is factor investing?” I said, it’s a systematic method to take active bets. You know X any, if you’re a factor investor, that I’m going to rebalance my portfolio every 12 months, or three months, or one month, whatever it is. And you just run that model; rebalance the portfolio.

So not that there’s anything wrong necessarily with a two-year rule. And I assume there that’s more of the kind of like a value-type strategy, where you think a stock’s underpriced, right? Because value as I mentioned earlier works out to five years. You’re not gonna have a two-year rule if you’re running a momentum or almost like trading-type strategy, right? That would be very bad bull to do is say, “Hey, I’m going to buy a high momentum stock and hold it for two years, right?” It’s just not a good idea. So the assumption there, you know, when you’re talking about Guy’s rule is it’s generally a value strategy. But factor investing is great because it kind of takes one of the big questions or behavioral issues that investors have, which is “Oh, man! I got a loser, should I like double down on it? Should I get rid of it? Like the amount of brainpower spent on that question alone can be pretty high. And factor investing just eliminates it, and says, “Hey, we’re going to rebalance every three months, six months, one year; whatever it is.”

Preston Pysh 27:11

So Jack, since 2007, and I’m sure that date is arguable, depending on who you’re talking to, value investing has underperformed other strategies. Some suggest it’s the result of low interest rates. Others say it’s because the way competitive advantage is being impacted by technology is a major factor. And the list goes on and on. But I’m curious what are your thoughts on value investing moving forward?

Jack Vogel 27:38

Well, the past five years, let’s be clear, value’s done horrible. Like the past five years, it’s just, it’s not even question. No matter how you measure it, it’s done poorly. But something that’s interesting is over the past 10 years or the past, since 2007 if you just said, “Hey, on like simple measures like earnings to price; free cash flow to enterprise value; EBIT to enterprise value. Now, you actually be growth. Like you just split the market in half; held it for a year and rebalanced every month, right? So you make like overlapping portfolios. Value actually won, right? Over the 10, and since 2007.

So to answer (*inaudible) your question is like, “Well, hey, wait! I’m getting a little confused because everyone’s telling me value’s gotten killed.” And I think what happened is a lot of people are looking at S&P value and growth and Russell 1000 value and growth. And actually over the past 10 years value got killed by growth on those factors. So one thing is you kind of have to dig into the details there and highlight. And what happens is if you look at, you know, how S&P and Russell create their value and growth indices, they have multiple metrics. So I wouldn’t say, from my perspective, it’s not just a value portfolio. It’s a value portfolio with some noise and some negative momentum. And we all know momentum is something you want to tilt towards. But they almost implicitly make the value portfolios have negative momentum; those portfolios have loss.

So high level, when I do a one factor split the universe on earnings to price, and just equal wait. Hold it for a year, value actually did better than growth and the market. So I think sometimes like the devil’s in the details, and we get lost in that. So that’s just baseline facts at the outset. But then go into your question it’s like, well, “Hey, is this debt?” I think that’s kind of where you were getting at? And if so, what would you do? Well, a good thing kind of using the monger invert the question is to go to people and say, “Hey, okay, you’re telling me value investing is dead. So are you going to recommend me to buy the most expensive companies with the lowest quality?” I’m just gonna add in quality there, right? And most people will be like, “Well, no, no, no that’s, that’s, that’s not what I’m saying, right? And so, you know, I still think value is going to work in the future at some level, you know, you’re buying whenever you make any investment, you’re buying stocks on a multiple of earnings. Obviously, we’re trying–you project future earnings as well, right? You’re just counting future cash flows. But, you know, I still, I’ll probably take it. You probably need like another 50 years worth of data to say value’s dead, unfortunately; if we want to mathematically say, “Hey, this is statistically insignificant.” So I’ll probably take it to the grave that I think value investing is going to work. But it is interesting, if you just do like a one-factor split value actually beat growth over that time period.

Stig Brodersen 30:31

So in other words, you don’t think there is anything to say about technology basically changing the landscape of value investing. You think it’s kind of like two different discussions that don’t really interact? Those two?

Jack Vogel 30:47

You always want to make sure if there’s like a move or a macro event that’s going to adjust the way things happen in the future, you should consider that. And technology obviously is important. I mean, what you’ve seen recently is a lot of, for a lot of stocks, that were the technology firms specific to an industry, you know? Like one firm has been the winner. You know, if we look at a couple of examples like one I think that’s just…I’ve always been interested. And I’ve learned to never short stocks, right? Because an expensive stocking continuously get more expensive, more expensive, more expensive. One company that I think is cool, I mean, Netflix. You know, I use it here and there. But at the end of the day, right? What you’re seeing now is, well, wait a minute, Disney had provided all their content to Netflix. And I’m like, “Wait a minute, we can do that. Right?” We can just take all our movies and stream them, right? And you’re seeing all, all the providers doing that. So at the end of the day, it comes back to a content strategy, right? Like Netflix provided a neat modicum or a neat way to provide the content, but it still will go back to content. And you know, we’ll see. But I, I do think technology is important, but I’ll probably stop still stick with my cheaper value stocks than the more expensive growth stocks. You know, I think there’s some, some firms that are different like WeWork tried to be a tech company, but really it was just a real estate company. There are other firms that are using unique technology, and I think they’re different. But I was just saying, I think some of these firms when you get down to it, the technology is really just a useful component to an already existing business.

Stig Brodersen 32:27

Jack, fantastic that you want to come on the show! And I’m sure that a lot of our listeners are interested in learning more about factor investing and the whole thought process and execution of that. Do you have any books or other resources that you would recommend to our audience, who are interested in factoring investing?

Jack Vogel 32:47

There’s a good book called, A Complete Guide to Factor-Based Investing. It’s, I would say, very readable. It gives a high level overview; talks about what is factor investing; and it’s really a neat book because it walks through what is factor investing? What are factors? Which ones do we think can work? And why do we think they could work on a go-forward basis? So I think that book is a good place for most people to start.

Stig Brodersen 33:14

Okay, I’ll definitely make sure to link in the show notes to that book. But, Jack, where can the audience learn more about you and Alpha Architect?

Jack Vogel 33:24

Mainly on our website, just alphaarchitect.com. On our site, you know, we have a lot of stuff. I’ll highlight maybe two or three of the things on our site. The first would be our blog. If you go and find blog, what we do is generally we have about three times a week, we post research articles and our summaries of those articles. More importantly, that are somewhat more readable for investors. You can sign up for a weekly email there. The second is we have white papers on our website, and those white papers highlight a lot of the big-picture things that we talked about today like “Hey, what’s value investing?” We discussed that. We have “What’s momentum investing?” So the white papers there. And then the third is, you know, we have some tools on our website for those who are interested in learning more, as well as who want to be factor investors.

Preston Pysh 34:10

Fantastic. And Jack, we will be sure to have a link to all of that in our show notes. So if folks are interested, just go in our show notes, and you guys can click on the links of what Jack was describing there. Jack, it’s always a pleasure, when we have a chance to talk, and we can’t thank you enough for making time to come on our show today. So really appreciate that. All right, so at this point in the show, we are going to play a question from the audience and this one comes from Mike.

Mike 34:35

High, Stig! Hi, Preston! Mike here from the UK. I’m a longtime listener of the show. I recently heard Preston mention the RSI indicator with regards to how it might help an investor decide when might be a good time to buy a stock. I’d love to hear your thoughts on this and any thoughts you might have on using trend following and momentum in addition to your kind of normal intrinsic value calculations. Thanks so much! Keep up the great work.

Stig Brodersen 35:03

All right, Mike. So I really like this question. And the relative strength indicator that you refer to here measures the magnitude of the recent price change. In other words, if it’s oversold or overbought. Everything else equal. I think you can invest accordingly to various price actions. Relative strength indicator might be one of them, but I would be very careful about how to do it. So let me give you a few price examples. There’s been a lot of back testing done showing the outperformance of trend following, and they all come from the same foundation, even though they are slightly different. And they say that it can be profitable to ride a trend without considering the fundamental value. And I am confident that technical training can be done. I used to do that myself for a commodities company in my very first job, post (*inaudible*) graduation. And I know it works, but I don’t suggest trend following on individual securities for retail investors, at least not purely on the price action itself. It’s just too volatile and stressful.

So if you want to invest in a momentum strategy, I would highly suggest an ETF. It’s a lot less stressful, and it typically follows the trends of hundreds of stocks. So you will still get the expected outperformance return but with much lower volatility. Momentum has performed well lately, which is not unexpected given the length of the current bull market. However, I do think that we now see a shift where value would perform better. So I’d rather take a position in that, which is more focused on fundamentals than purely a trend. Both strategies have historically outperformed, and it’s a very popular (*inaudible*) strategy to do both since most people do not want or can’t time the market. And if you have a good value and a good momentum ETF in your portfolio, it is so that one ETF typically performs better than the other one does not and vice-versa. So I think that if that is your strategy, you will perform well in the long run. But if you have to have an opinion about the market right now, I would rather suggest a purely fundamentals ETF. However, to your question, I always check the momentum and price action of individual stock before I buy it. And then, I want that trend to be positive. The fundamental should be great, of course, and it’s still the most important factor for me. But if the fundamentals are great, I would still wait for the price action to indicate that now is the time to buy to make sure that both momentum and fundamentals are in my favor.

Preston Pysh 37:36

You know, Mike, it’s kind of funny because Stig and I see very eye to eye on, on this one. All of his comments, I completely agree with what he’s saying. I want to particularly highlight the idea where he was talking about using ETFs more with momentum than individual companies. Now, and the primary reason, and Stig lightly hit on it is really kind of the volatility. So when you’re dealing with a small cap company, the, you could have a large substantial buyer come in. They’re gonna make the price just go all over the place, whether they’re a buyer or a seller. It’s gonna create volatility swings that are not characteristic of maybe something you saw before. Or maybe a corporate buyer comes in, and, and is adjusting that price in a major way. You don’t have that as much when you’re dealing with a large cap company; a company that’s worth 100 billion dollars. It’s much harder to move that price action on a company like that than a smaller company. And so, therefore, if it’s a substantial basket of stocks, and it has a huge market cap, and that volatility has shifted outside of normal volatility, I think that’s a good indicator of something that’s either telling you whether it’s gonna be a green as far as it going up or red and that it’s going down.

So just some things to think about as you’re implementing a momentum strategy, and I’m with Stig 100%. I focus much more on the fundamentals, and then kind of peek at the…take a peek at the momentum to confirm whether I think that the trend that I’m looking at has reversed, and now it’s in a by long position. And I’m particularly looking at using momentum for long positions. So Mike for asking such a great question, we have an online course called our Intrinsic Value Course that we’re gonna give you completely for free. Additionally, we have a filtering and momentum tool, which we call TIP Finance. We’re going to give you a year-long subscription to TIP Finance, completely for free. Leave us a question at asktheinvestors.com. That’s asktheinvestors.com. If you’re interested in these tools, simply go to our website: theinvestorspodcast.com, and you can see right there in our top level navigation there’s links to TIP Finance and also the TIP Academy, where you’d find the Intrinsic Value Course.

Stig Brodersen 39:47

All right, guys! That was all that Preston and I had for this week’s episode of The Investor’s Podcast. We see each other again next week.

Outro 39:54

Thank you for listening to TIP! To access our show notes, courses, or forums, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decisions consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or report casting.


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