We Study Billionaires - The Investor’s Podcast Network - TIP269: Factor Based Investing w/ Jack Vogel (Business Podcast)

Starting point is 00:00:00 You're listening to TIP. When Stig and I look back at guests that have been enormous influencers on our show's growth and impact, Jack Vogel and West 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 CIO and CFO at Alpha Architect where they manage in 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. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most.

Starting point is 00:00:45 We keep you informed and prepared for the unexpected. Welcome to today's show. My name is Stick Broderson, and as always, I'm a company by my co-host, Preston Pesh. Today, as we said their introduction, we have Jack Vogel from Alpha Architect with us. Jack, thank you so much for coming on the show. Thanks. Really excited to be on and appreciate you having me on. So, Jack, the topic for today's episode is factor investing.

Starting point is 00:01:19 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. 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. 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 price, they will buy it. And then when they, according to their model, you know, think it's expensive, get rid of it.

Starting point is 00:02:17 Whereas factor investing is a way to simply say, hey, every 12 months, for example, I'm going to look at all stocks by 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. 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?

Starting point is 00:02:49 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 U.S. market, but also maybe in other markets, such as international markets, even across other asset classes. And so 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 just, you know, by just buying cheaper stocks and momentum. And 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 ask me say, which ones do I think I expect to possibly work in the future, I would say value and momentum? And then kind of getting your question of, you know, why do they work? This is a discussion and academics have been investigating and researching this article for

Starting point is 00:03:47 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 than like value would be riskier than growth.

Starting point is 00:04:09 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-executive. extrapolate. So on value stocks, you look at them, you say, oh, these things are all going to zero. Conversely, on gross 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, gross stocks get too expensive, and historically there was a premium to buying value overgrowth.

Starting point is 00:04:40 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 SMP that performed 9.52%. Now, back in episode 258, I talked to our mutual friend, Tobias Kyle, 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 up as a bit of surprise to our listeners who would hear how much it has outperform in the past. And he brought up arguments such as the significance of

Starting point is 00:05:30 intangibles in today's economy. It's one reason. Another reason he brought up is the accounting rules around share buyback 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? That's a great question. So, yeah, the numbers you say there were from, we had a paper, it was in journal 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

Starting point is 00:06:18 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 favor, 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.

Starting point is 00:07:16 And there's going to be a downside to every single measure. So if we use 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.

Starting point is 00:08:08 So I think every value metric is 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. So Jack, as a follow-up question to that, what metrics would you prefer to use instead? 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

Starting point is 00:08:54 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 off. So we're fans of enterprise multiples. Now, Jack, whenever we look at the historical performance of factor investing, for a good reason, you're looking at, you know, time periods, decades, over decade, because you want to see what's the true art performance here, you know, whenever the markets go up and whenever they go down. Now, many of our listeners think that the market will crash soon. They've seen that the market has been pushing all-time highs, and that's a

Starting point is 00:09:38 concern. How should the position themselves? They might also think that for that reason, stocks will very me results, even if it doesn't just plummet in itself. So as a follow question to that, I will ask, which factors perform better in a bare market? 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 lower. 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 X Annie expect lower returns, all else being equal. So I think that's 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 generally wary of that just because it can be difficult. I would say, you know, two factors that may come to mind, specific though, if you think, hey, the market's going to blow up, right? And then I'll give caveats. So one, you know, would just be value investing.

Starting point is 00:10:48 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, and 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

Starting point is 00:11:33 or quality factor in recessionary periods. But a reason 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 quality minus junk or profitable companies tend to do slightly better in recessionary periods. 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.

Starting point is 00:12:16 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. You know, investing's hard, right? So you're trying to say, first off, you're going to pick the winning factor strategy. Then you're also going to pick exactly when the market's going to 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.

Starting point is 00:12:47 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 gross stocks. Neat thing showing that, you know, factor timings can be difficult and specific to that in that example, when value is historically cheap compared to growth, that was a good time to time it. So we generally don't recommend factor timing. If you're going to 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. Let's take a quick break and hear from today's sponsors.

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Starting point is 00:17:31 That's Shopify.com slash WSB. All right. Back to the show. Now, Jack, much of factor investing is built up around picking cheap stocks that we expect to revert back to the mean. 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,

Starting point is 00:17:57 price compared to free cash flows. However, it might emotionally be easier to have stocks of quote-unquote high quality when times get tough. So unlike 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? Yeah, that's a good question.

Starting point is 00:18:22 So, you know, when we talk about momentum, most people understand that's, you know, it's a pretty standard definition. It's like, hey, what was your returns over the past 12 months or nine months, you know, 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. I'll pass along a neat little study that was done recently, a paper called What is Quality? It actually specifically said, hey, we hear about all these firms and these smart beta products that specifically are mentioning quality.

Starting point is 00:18:56 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 perfect definition. But in general, you know, profitability is at least a good place to start, like how just profitable the firm is. So a natural question that comes up in this situation would be the volatility. Few investors like volatility. And one thesis could be that because these stocks have higher quality, they would 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. But that's just one thesis. What does your research tell us about volatility compared to the quality of a stock? That's a good question.

Starting point is 00:20:05 These higher quality firms had higher sharp 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 the fact that, you know, the return, obviously on a sharp ratio, you know, volatility comes into effect there. So in general, high quality firms probably are going to be slightly lower. or 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,

Starting point is 00:20:42 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. Yeah, 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 of volatility. So that was also to capture what you talked about before, the shop ratio, which is basically just that, you know, you have the

Starting point is 00:21:19 expected return, and 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 the screeners that have historically outperformed. Would it be a valid strategy to invest in a basket of stocks with multiple factors? Whenever we talk about multiple factors here, that could be 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

Starting point is 00:22:01 outperformance. So in general, using multiple factors, I would never recommend people don't do that, but I'd recommend 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 and momentum. And you're like, hey, 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 value momentum and I only want to rebalance this once a year.

Starting point is 00:22:39 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.

Starting point is 00:23:01 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, you know, 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.

Starting point is 00:23:28 I mean, I wouldn't recommend investors to not use it. think I would recommend them to think about how they're using it, why they're using it. If you're going to be rebalancing it every month, maybe momentum as a primary screen makes sense. So you often hear investors say that if you don't have time in 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

Starting point is 00:24:03 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? 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,

Starting point is 00:24:51 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 a lot of investors. So let's say you're an investor and you're sitting here and you're saying, hey, the market looks expensive. I don't believe in time in the market just because I just don't believe that.

Starting point is 00:25:18 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 is you say, hey, well, maybe I like to buy cheaper stocks, right? Because 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 socks.

Starting point is 00:25:41 And there's tons of factory ETFs and mutual funds out there that can give you access to strategies and maybe keep that investor in the market. When all else equal, they were just going to bomb 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, U.S. investors, you know, ETFs are very tax efficient as opposed to doing stock screening, which again, I'm not saying as 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 a a more 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. 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. Yeah, I mean, I think you could say, hey, as opposed

Starting point is 00:26:49 to buying the market, I'm going to 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 Shimo's value strategy different than Jim's value strategy, right? 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's like active share, and you're like, hey, I'm buying a fund that's 95% active, which means it's only 5% the market.

Starting point is 00:27:30 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 it to the market. It's a behavioral challenge that investors will need to overcome. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your

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Starting point is 00:31:26 I guess I as well as many other investors could testify to that. Now, we previously quoted Guy Speer 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 and you don't want to punish yourself so you want to really, really short any investment thesis before you do invest in it. But it's also because you don't want to be a slave

Starting point is 00:32:04 to 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're really going to scrutinize yourself and be like, have I just been wrong? Like, is the market still wrong two years then? Or have I just been wrong? And as Guy said very often, you know, it's him being wrong. 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. Yeah, so that's a great question.

Starting point is 00:32:44 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 it's formed is, you know, like FOM of 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

Starting point is 00:33:27 you asked me was, what is factor investing? I said, it's a systematic method to taking active bets. You know, ex-annie, 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 going to have a two-year rule if you're running a momentum or almost like trading type strategy, right? That would be very bad rule to do is say, hey, I'm going to buy a high momentum stock and hold it for two years, right?

Starting point is 00:34:12 It's just not a good idea. So the assumption there, you know, when you're talking about guys 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? 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. 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

Starting point is 00:34:56 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? Well, the past five years, let's be clear, value is done horrible. Like the past five years, it's just, it's not even a 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 the price, free cash flow to enterprise value, EBIT to enterprise value, value actually be growth. You just split the market in half, held it for a year, and rebalanced every month, right? So you make like overlapping

Starting point is 00:35:41 portfolios. Value actually won, right, over the 10 and since 2007. So a natural 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 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.

Starting point is 00:36:30 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 lost. So high level, when I do a one factor, split the universe on earnings to price and just equal eight holder 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. that. So that's just baseline facts at the outset. But then going to your question, it's like, well, hey, is this dead? I think that's kind of where you were getting at. And if so,

Starting point is 00:37:05 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 going to adding quality there, Right. And most people would be like, well, no, no, 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 the data to say value's dead, unfortunately. If we wanted to mathematically say, hey, this is to. statistically insignificant. So I'll probably take it to the grade 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.

Starting point is 00:38:05 So in other words, you don't think there is anything to set about technology basically changing the landscape of value investing. You think it's kind of like two different discussions. They don't really interact those two. You always want to make sure if there's 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

Starting point is 00:38:38 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 again, I've learned to never short stocks, right, because an expensive stock can continuously get more expensive, more expensive, more expensive. One company that I think is cool, I mean, Netflix, I mean, 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, well, wait a minute, we can do that, right? We can just take all our movies and stream them, right? And you're seeing all the providers doing that. So at the end of the day, it comes

Starting point is 00:39:17 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. I do think technology is important, but I'll probably still stick with my cheaper value stocks than the more expensive gross stocks. You know, I think there's some firms that are different. Like, we work, 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. Jack, fantastic that you want to call on the show.

Starting point is 00:40:04 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 recommend to our audience who are interested in factor investing? 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 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.

Starting point is 00:40:42 So I think that book is a good place for most people to start. 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? Mainly on our website, just Alpharchitect.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.

Starting point is 00:41:12 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 of things that we talked about today. Like, hey, what's value investing? We discussed that. We have what's momentum investing.

Starting point is 00:41:34 So the white papers there. And then the third is, you know, we have some tools on our website who are interested in learning more, as well as want to be factor investors. 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 into 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.

Starting point is 00:42:02 So at this point in the show, we are going to play a question from the audience. And this one comes from Mike. Hi, Stig, hi Preston. Mike here from the UK. I'm a long time 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.

Starting point is 00:42:22 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. All right, Mike. so I really like this question. And the relative strength indicator that you refer to here measures the magnitude of a recent price change. In other words, if it's oversold or overbought,

Starting point is 00:42:48 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 backtesting done showing the our performance 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 write 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 upon graduation. And I know it works. But I don't suggest trend following on individual securities for retail investors, at least not purely

Starting point is 00:43:33 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 upperformance 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 we 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 outperform, and it's a very popular strategy to do both, since most people do not want or can't time the market, and if you have a

Starting point is 00:44:20 good value and a good momentum ETF in your portfolio, it is so that one ETF typically performs better when 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

Starting point is 00:44:48 of individuals stock before I buy it, and I want that trend to be positive. The fundamentals 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.

Starting point is 00:45:10 You know, Mike, it's kind of funny because Stig and I see very eye to eye 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. individual companies. Now, then the primary reason and Stig lightly hit on it is really kind of the

Starting point is 00:45:32 volatility. So when you're dealing with a small cap company, you could have a large substantial buyer come in. They're going to make the price just go all over the place, whether they're a buyer or a seller. It's going to create volatility swings that are not characteristic of maybe something you saw before. Or maybe a corporate buyer comes in 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 a hundred 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

Starting point is 00:46:10 volatility has shifted outside of normal volatility, I think that's a good indicator of something that's either telling you whether it's going to be a green as far as it going up or a 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 going to give you completely for free. Additionally,

Starting point is 00:46:54 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, the investors podcast.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. All right, guys. That was all that Preston and I had for this week's episode of The Ambassadors podcast. We see you, tell her again next week.

Starting point is 00:47:28 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 Investors Podcast Network. Written permissions must be granted before syndication. or recr forecasting.

We Study Billionaires - The Investor’s Podcast Network - TIP269: Factor Based Investing w/ Jack Vogel (Business Podcast)

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