A while ago I mentioned the inaugural Evidence-Based Investing Conference, which is taking place in New York City in November. Over the next couple of months, I’m going to be helping to promote the event with a series of interviews with some of the speakers.
The first interview is with Larry Swedroe, the well-known investment writer and Director of Research at Buckingham Asset Management.
Larry, you’ve been a prolific author over the years, writing nine different books on evidence-based investing. How did it start?
When I joined Buckingham in 1995 there were no good books on the subject that were accessible to the average retail investor. And I thought it was important to provide one that would present the compelling case for passive investing. So in 1996 I started to write my first book, The Only Guide to a Winning Investment Strategy You’ll Ever Need. It was published in 1998 at about the same time as Charles Ellis’ classic Winning the Loser’s Game.
Your latest book, which is due for publication in the next few weeks, is Your Complete Guide to Factor-Based Investing, which you’ve co-authored with Andrew Berkin. How does the book add to the body of knowledge already out there?
I’ve always been interested in the latest academic research on which factors have produced excess returns and why investors should expect that to continue into the future. We’ve made major strides since the publication of the Fama-French paper in 1992, The Cross Section of Expected Returns, which changed the way we had thought about investing in the previous 30 years. The workhorse model until then had been the single-factor CAPM.
But advances didn’t end there, and now we have multiple factors that deserve consideration by investors, as well as new and innovative ways to gain exposure to them (some good and some not so good). And there is no reason to think that advances will not continue, because the incentives are so great and there’s so much talent attacking the problem. But any advances now I believe will be only marginally incremental as we can already explain the vast majority of the differences in expected returns.
The book sorts out the wheat from the chaff in what John Cochrane has called a “zoo” of factors. There are now more than 600 factors identified in the literature, but we show in the book that there are only a small number that warrant consideration. Our criteria are persistence, pervasiveness, robustness, implementability and intuitiveness. Only a few factors meet those criteria and are not subsumed by other factors.
Everyone seems to be talking about factor investing, smart beta, or whatever you prefer to call it. Are we making too big a thing of it?
Most of what’s called smart beta, in my opinion, is just marketing hype. Beta is just beta, or loading on some common factor. So there’s really nothing smart about it. On the other hand, there can be intelligent (or dumb) portfolio construction rules used to implement factor strategies. So an example of a smart strategy would be to accept random tracking error and avoid pure indexing so that you can be a provider instead of a taker of liquidity, using algorithmic programs to make the trades. And some indices are more intelligently designed than others in terms of turnover and transparency.
Presumably you would urge investors not to be blown off course by that other big event happening in the US in November, the Presidential Election?
Most importantly my advice would be not to let your political views impact your investment decisions. We have good research on this which shows that when the party you support is in power you are a better investor simply because you are more confident and thus tend to trade less. You’re also less likely to panic and sell.
You work for Buckingham Asset Management and its network of advisory firms, the BAM Alliance. Why do you think the business has been so successful?
I’d say there are few key things. First, our commitment to provide a high level of client service and always do the right thing for clients. Second, our commitment to give advice that is not based on our opinions, but on peer-reviewed academic evidence. And third, by building a real community of firms that makes the whole greater than the sum of the parts.
Finally, what are your ambitions now?
I plan to enjoy my life and help to train the next generation of Buckingham thought leaders.
You can hear Larry speak at the Evidence-Based Investing Conference in New York City on November 15th. For sponsorship and booking information, follow this link.