First, I must issue a disclaimer. This is for wonks already immersed in the factor literature. There's lots of inside baseball, assumed terminology, etc., in this one. I explain what I’m doing along the way, but rarely from scratch. If this stuff is brand new to you and you still understand it all you are way smarter than me (you are allowed to find that to be faint praise). There’s nothing more mathematical here than a regression model but there is lots of shop talk. So, if "factor wonk" doesn't describe you, you probably have friends and a social life, so that’s nice, but this piece won't make much sense (consider it even).
Cliff argues that certain well-known classic strategies that have worked over the long term will continue to work going forward, though perhaps not at the same level and with different risks than in the past. He focuses on classic “factor”-type strategies, things like value, momentum, carry and quality/defensive.
In its normal form the small firm effect is, on a host of dimensions, weak to possibly nonexistent. Once adjusted for quality exposure it is real and spectacular.
If you’re still hawking the story that the original results of Fama and French, Jegadeesh and Titman, Lakonishok, Vishny and Shleifer — and even yours truly and others — were the result of data mining, you have been completely defeated on the field of financial battle, and you must stop.
I’m taking a break from the factor timing wars to demonstrate something really important – that hockey’s New York Rangers not winning the Stanley Cup from 1940-1994 was a greater achievement (“achievement” being, you know, really bad in this context) than baseball’s Chicago Cubs not winning the World Series from 1908-2015. Besides a break, it’s also a nice math/probability reminder about looking at everything, not just headline numbers that seem applicable to investing. Furthermore, it’s apropos now as my New York Rangers just got eliminated from the hockey playoffs (after a very sad effort versus the Penguins) extending their latest, now 20+ year streak of no Cups, while the Cubbies are among the early favorites for this year’s World Series.