A Rebuttal To The Money Guy Show’s Awful Take on Factor Investing

My long comment on their video got flagged or removed automatically, presumably because I included several links as evidence. It can’t fit in a tweet, so I’ve pasted it below.

Here’s the video in question. The factor discussion is the first 15 minutes or so.

And here’s my comment, composed mostly of disjointed thoughts I had as the video progressed:

Felt compelled to comment here because the attempted rebuttal of factors misses the mark so badly. This is an example where if you’re going to be disingenuous and also not bother to do adequate research on an idea you’re trying to refute, then don’t even bother trying. 

3 minutes in I could tell this was going to be a trainwreck.

Where to begin…

The analogies are pretty ridiculous. Systematic, rules-based factor investing is a far cry from recruiting in sports and individual stock picking. Something like AVUV from Avantis, for example, is no more “active” than VIOV from Vanguard that tracks an index created by an S&P committee. After all, “passive” is a myth anyway, and “active” is just a sliding scale, not a binary on/off switch.

“Growth” is not a factor. Throwing around the term “factor” way too cavalierly and broadly.

Factors are what we think are independent sources of risk and expected return, not arbitrary feelings about individual stocks. The premium is defined by an explicit long/short portfolio, e.g. Value is stocks with high book to market values minus those with low book values, literally written as HmL for “high minus low.” Even so, why only look at 12 years using VOOV and VOOG? Here’s nearly a century.

Savvy factor investors don’t try to time them.

The mispronunciation of Fama’s name is evidence enough that your argument isn’t well-researched. Also, why use an old model from the 90’s and not the newest FF5 from not even a decade ago? Most importantly, though, you somehow didn’t even define the model correctly. It’s Beta, Size, and Value. Not sure where you got “historical performance” as one. You also mentioned the word “momentum,” which has nothing to do with FF3.

Citing the Callan table tells us what? Different market segments perform well at different times. Yep. Nothing to do with long-term total return.

FF3 is not “U.S. Small Cap.” Ridiculous characterization, either purposely or accidentally. A better comparison, if we’re reducing it to that, would obviously be U.S. small cap value. Here’s that for you for the last 30 years using live fund data.

Just the last 20 years, you say? Here’s that.

But more importantly, the portfolio is probably not going to be 100% U.S. small cap value. Furthermore, few factor investors are going “all in.” Ironically, the VOO or VTI investor is “all in” on market beta, which is 1 single factor. 

The “periods” and “seasons” argument is the precise reason for factor diversification, which reduces the dispersion of outcomes.

Identifying independent sources of risk =/= “chasing top performers.”

Ironically, I’m a pretty die-hard factor investor and A) I submit that global market cap with VT is the best approach for MOST people, and B) I only factor tilt with 50% of the portfolio.

“Domestic” is not a factor. “International” is not a factor. “Large company” is not a factor. Again, aim to have at least a basic understanding of what you’re talking about.

“Charts can be misleading.” Yes. Like all the ones you chose to show to support your argument.

Any factor worth its salt has a risk explanation and/or strong behavioral basis. Look into Swedroe’s criteria for inclusion. Nothing to do with simply “being correlated.” The margarine graph was just silly.

“People can arrive at very misleading conclusions when it comes to factor investing.” Yes, you did.

If you want a real guide to factor investing with real research, you can find mine here.

Disclaimer:  While I love diving into investing-related data and playing around with backtests, I am not a certified expert. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational, educational, and entertainment purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. I always attempt to ensure the accuracy of information presented but that accuracy cannot be guaranteed. Do your own due diligence. All investing involves risk, including the risk of losing the money you invest. Past performance does not guarantee future results. Opinions are my own and do not represent those of other parties mentioned. Read my lengthier disclaimer here.


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