Factor Investing

# Factor Investing

• Understanding Factor Investing:

Factor investing is an investment strategy that involves choosing securities based on attributes that are associated with higher returns. This type of investing aims to reduce risk that may otherwise be hidden in a portfolio of securities with similar exposure. Proponents of factor investing argue that this strategy allows investors to make better decisions.

• Figuring Out Factor Investing:

Factors are quantitative characteristics shared across a set of securities.
For decades, evidence-based investors have been structuring their investment portfolios to tilt toward factors that are expected to drive investment returns, without the need to rely on random stock-picking or market-timing.

Source: ChatGPT¹:

• Profitability Factor (RMW - Robust Minus Weak)
  • Stocks of companies with high profitability (high operating profits relative to equity) tend to outperform those with low profitability.
• Investment Factor (CMA - Conservative Minus Aggressive)
  • Stocks of companies with conservative investment policies (low asset growth) tend to outperform those with aggressive investment policies (high asset growth).

• Videos
  • Má investiční strategie a portfolio (2025) - Investiční brambora
    • He copied it from the Rational Reminder Forum
  • Is Small Cap Value Worth It? Ben Felix Explains the Truth About AVUV & Factor Investing
    • Good and pointy questions about factor investing answered by Ben Felix

  • Bogleheads University 501 2023 - The Case Against Factor Investing with Rick Ferri

• Factor Investing Discussion - Inspired by Andrew Chen
  • ChatGPT conversation drawing an analogy between LLMs replacing Chomskyan linguistics and ML/AI methods reshaping (but not invalidating) factor investing theory

• The Cross-Section of Expected Stock Returns
  • Research on factor investing emerged in this paper. The authors observed that small stocks outperformed large stocks i.e. Small Minus Big (SMB) and value stocks outperform growth stocks over time i.e. High Minus Low (HML). Explanation for the return differences is that both SMB and HML are inherently riskier and investors should expect higher returns for owning riskier assets.
• Common risk factors in the returns on stocks and bonds
  • This paper laid the foundation for and introduced the three-factor model, which expands on the Capital Asset Pricing Model (CAPM) by incorporating size (SMB) and value (HML) factors along with the market factor.
• A Five-Factor Asset Pricing Model
  • This paper builds upon the Three-Factor Model by adding two additional factors: Profitability Factor (RMW - Robust Minus Weak) and Investment Factor (CMA - Conservative Minus Aggressive).