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Alpha - the holy grail of excess returns. Unfortunately critically endangered.

March 28, 2017

If I make 7% in a year on my MSCI World and you get 8% return on carefully selected stocks from large international companies, then your alpha is 1%.
If, on the other hand, I keep telling everyone that my MSCI World has devastated your overnight money account, then that is not alpha, but the wrong benchmark. Hence the question: what is this alpha?

Definition of alpha factor

The alpha factor indicates how a portfolio has fared compared to the appropriate, risk-adjusted benchmark. If the alpha is positive, it is called excess return, if it is negative, it is called a low return.

The holy grail of every investor: the consistent, predictable, industrially produced alpha. All active funds promise it, only to then collect it again in light gray asterisk text. You already know: past results, etc. pp ...

The alpha problem

The problem with this alpha: everyone wants it, but it's getting harder and harder to capture. The Alpha Hunters are faced with the following problems:

  1. The gold mining problem: The amount of exploitable alpha is falling.
  2. Part of the alpha breaks down into beta.

The result: Alpha still exists, but it is becoming increasingly uneconomical to exploit the alpha mine.

  1. A steep thesis finance vizier.
  2. What is beta

Definition of beta factor

Beta is a measure of the market risk that you are taking with an investment. Market risk is the systematic risk that you cannot diversify away. With a broadly diversified fund, you reap beta.
More market risk means more beta. That’s why there’s more returns for the roller coaster in the emerging countries than for the trip with the big ships of the MSCI World.
In other words, the rate of return that I get just sitting around is beta.

How did the beta come into the world?

  • In the beginning, the market was free of math. The cowboys on Wall Street acted in their sleeves and with a lot of shouting.
  • At the beginning of the fifties of the last century, Harry M. Markowitz appeared on the floor and he had his efficient portfolios with him. The Wall Street guys were only so moderately impressed. How are you going to make dollars with this theory stuff?
  • In the early 1960s, John Lintner, William Sharpe and Jack Treynor laid the foundations for today's financial alchemy. They took an efficient portfolio and created CAPM. And see, with CAPM came beta too.

CAPM and its developments

With the help of C.capital A.sset Pricing M.odells - in German price model for capital goods - it was possible for the first time to calculate theoretical equilibrium prices for individual securities. These courses come about when risk-averse market participants put together efficient portfolios in accordance with portfolio theory.
The equilibrium prices can be used to assess the performance of equity funds. The CAPM shows whether a risk - based on the average additional return - is appropriate.
For the first time, this model offered a mathematically precise definition of risk and how expected returns depend on it. Like all first works, the CAPM was a very rough model.
CAPM knows only one risk factor: the beta.
This beta is calculated from the typical risk for a share, a fund or a custody account compared to the general market risk. The “general market risk” is represented by an index that is capitalized as broadly as possible, such as the S&P 500.
In the course of time it has been found that in a third of all cases, reality does not behave as CAPM predicts. That is why the economists launched a recall campaign and thoroughly revised the CAPM.
The new version not only looks at the beta, but has also been given two additional factors and is now called the “Fama-French 3-factor model”.

  • The well-known beta. Defined in the Fama-French model as the average return on the entire US stock market minus the return on one-month US Treasury bills (that is, the risk-free return). Analogously transferable to other regions.
  • The size factor. All companies on a stock market are sorted by market capitalization. This list is then halved. The size factor is defined as: the average return of half with the small firms minus the average return of half with the large firms.
  • Value factor. All companies on a stock market are sorted according to the book-to-market ratio. Book-to-market = book value divided by market capitalization. The value factor is defined as: Average return of the 30% of the companies with the highest B / M-ratio minus the average return of the 30% of the companies with the lowest B / M-ratio.

So far so good. But reality still refused to bow. Therefore, at the end of the nineties of the last century, another recall to the economists' workshop and installation of the momentum factor.

This is how we calculate the momentum factor: We look at the returns for the last 12 months, but leave out the most recent month. The momentum factor is then the average return of the top 30% of all stocks minus the average return of the worst 30% of all stocks.

This Fama-French 4-factor model is currently the workhorse of economists when it comes to assessing returns and risks. But who knows what's next.
In 2012, Kwei Hou, CHen Xue and Lu Zhang proposed a new 4-factor model (market beta, size, investment factor and profitability) that should be even better adapted to reality.
With each optimization step, economists are driving more wedges into the once massive alpha block and breaking out more beta.

Why Beta?

Everything that can be explained by factors can be industrialized. And all that can be poured into a formula is beta.
It's similar to how it used to be with the shamans and herbal women. They knew: If you harvest the yarrow umbels in August, when the sun is at its zenith, and then dry them and recite this and that saying, then a tea made from these umbels will help with stomach pain.
Then the pharmacists came in the wake of the Enlightenment and the shamanic journey into the soul realm of the plants was over. No more mysterious alpha ritual but a simple beta: "Please ten drops three times a day before you eat."

Important: This does not diminish the performance of the herbalists or the fund managers, who have poked important insights out of the fog through experimentation and reflection. But they - like the lady from the office - have made research and progress to a large extent superfluous.
The run of the world: The scientists research something, the engineers make a product out of it and again a professional group has to reorient itself.

In the past, a fund manager could put a lot of small caps in the portfolio so that they could beat the S&P 500, present it as alpha and charge a hefty bill for it.
Today it is clear: This is simply because the fund manager has exposed himself to the size factor. You don't need a manager for this, a specialized ETF can do it cheaper.

Interim conclusion

Too bad: we actually wanted to produce alpha industrially. Now we find out: We are getting industrially manufactured beta and that at the expense of the alpha.

Nice, that would be "Alpha becomes Beta". But the steep thesis consisted of two parts: The alpha amount is decreasing. Why?

The density of fools is getting smaller

What idiots? Well, for example me. Matured from active alpha hunter to passive beta collector. Already William Sharpe put it in a paper "The Aritmetic of Active Management" in 1991:

"Active management is a zero-sum game before costs and a negative-sum game after costs."

In other words, my alpha is your loss. An active manager needs sacrifices. The best pool of victims is undoubtedly the private investors. If you google "private investors do worse than the market", you get almost 10,000 results. In this study by the University of Frankfurt you will find the following sentence:

"On average, in the years prior to our offer, our investors performed around 6 percent worse per year than the market, adjusted for risk."

6, in words six percent per year - that's what I call a fat alpha mine. Bonus you are sure of me!

But something is also happening with the institutional sector. The Robo-Advisor Scalable works with Siemens Private Finance. Scalable is now part of the Siemens pension scheme. And again the pool of victims is shrinking. This thing boils down to the story of the wanderer and the bear.
Two hikers are followed by a bear and run away. One of them stops and puts on sneakers. Says the other: "That won't save you either, the bear is faster." Says the sneaker wearer: "It's enough if I'm faster than you."
The problem of the alpha managers: More and more people refuse to tour the bear territory and instead passively stay at home. Those who come along are trained runners.
So the arms race continues until only special forces are on the way. The bear still tears its victim, because even if the skills of a Special Forces soldier go far beyond the skills of a normal person: It remains a zero-sum game - the worst of the best still has to give up his alpha.

From an interview with Tim Buckley, Vanguard's Chief Investment Officer:

Active management “could have a bright future if fund managers would only accept lower margins,” says Buckley. "They didn't realize that they were in a more competitive environment - that they were no longer competing with amateurs, but were in a zero-sum game with other professionals."

Factors - not like that!

A word about the factors: In my coaching sessions I sometimes have to clear up the following misunderstanding:
A factor is not a feature that you can simply add to it. Beginners in particular are often mistaken:

  • Beta: Yield 8.2% per year
  • Size factor: 3.1% per year
  • Value factor: 4.9% per year

All values: Average annual return of the US market between 1927 and 2013.

I choose a mix of 50% large caps, 25% small caps and 25% value. My return is calculated as follows:

  • Large cap proportion: 50% * 8.2% = 4.1%
  • Small cap proportion 25% * (8.2% + 3.1%) = 2.83%
  • Share Value 25% * (8.2% + 4.9%) = 3.28%
  • My total return: 10.2%

That's not how it works. You may find yourself five, six, or seven years worse with this mix than you would with a pure beta portfolio.
Because these factors are not employees, but free spirits. They don't drag themselves to the stock market every day and make a profit there. They come and go as they please.
It is possible that the good Sir Value will have a good time on the Cayman Islands for years. One day the stock market tracks him down and, annoyed, holds the contract under his nose: “Hey, colleague, it says here that you have to deliver 4.9% above the market return in the long-term statistical mean. The decade is almost over. Either you step on the gas now or I'll put the regression on the mean on your neck. "
This threat works wonders. Sir Value went to New York and on Wall Street, within three years, knocked up the returns for a decade.
Best of all, all those investors who bought Value stocks just before Sir Value's arrival in New York actually think they are ingenious stock market checkers. Sir Value is only afraid of regression.
And as far as small capines are concerned: they are not a bit better.
Very nicely visualized in this periodic table of returns.

Alpha conclusion

As an investor, do you really want to be Ahab's captain of the alpha? Hunting it across the seven seas and tracking it down wherever it might be? Cost what it may!
What speaks against living free of forecasts and simply treating yourself to a portion of solid market return garnished with a few smart beta ETFs?

Inset: Explanation of the term Smart Beta

Because it sounds better, the financial industry has renamed the factors Smart Beta. The MSCI World is an index, the derived factor index MSCI World Value is Smart Beta. Still rule-based, but no longer market capitalized, that's the general definition of Smart Beta.
The boundaries between rule-based and financial alchemy are fluid. In the gray area of ​​multifactor ETFs, one sometimes asks: "Is this still an index or is it already active management?"

How do I invest in the four factors in practice?

  1. Value: Undervalued stocks
  2. Momentum: stocks with a positive trend
  3. Low volatility: stocks with low price fluctuations
  4. Small Cap: Small, undervalued stocks

You are looking for a suitable index. I picked the MSCI World. The following questions need to be clarified

  1. In which variants is this index available?
  2. How does the index provider define its variant? A value sticker can be stuck on quickly, but how much value is there in the index? Is that a value according to French-Fama or does the provider calculate its value completely differently? Do you think this definition is useful?
  3. Which of these variants make sense at all? The industry offers what is bought, not what makes sense.
  4. Are there any ETFs that track this index?
  5. Do I even want to buy these ETFs? The index may only be available as a synthetic accumulator, but I want a replicating pourer. What compromises do I make?

For the MSCI World, the answer is

  1. There is the index in the value and the momentum variant
  2. MSCI defines the Momentum Index as follows:

"It is designed to reflect the performance of an equity momentum strategy by emphasizing stocks with high price momentum, while maintaining reasonably high trading liquidity, investment capacity and moderate index turnover."

What is noticeable: Reality sneaks in through the back door. French-Fama theorize the values ​​with Excel. The poor fund managers have to buy and need liquidity to do so. They also want to conserve the return and therefore avoid friction losses when shifting as best they can.
Of course, they would like to be synthetic, but the sales force vetoed that: swappers are bad, we don't get them that well placed.
Your job: Find out what “stocks with high price momentum” means in numbers. Which increase in which period? Is this the industry standard for calculating momentum or is the ETF provider doing its own thing?

Value starts with this definition:

"The value investment style characteristics for index construction are defined using three variables: book value to price, 12-month forward earnings to price and dividend yield."

Is that right for you?

  1. The MSCI World relies on the big ships of the industrialized countries. Value can still be imagined, but is there such a thing as momentum? Finding that out is your job.

  2. There are two momentum ETFs and two value ETFs. Both from db-x trackers and iShares. It's not a choice, eat or die. Just as a comparison - there are 13 ETFs on the classic MSCI World.

Pitfall factor definition

You have to be particularly smart when checking the factor definition.
Would you describe a 6-foot man as short? Now place him between the Harlem Globetrotters and he becomes a dwarf. This is exactly what can happen to you with a small-cap index. They want small companies and not the smallest of the largest. Therefore, it is important to take a closer look if a subsegment of a larger index is offered for sale to you.
The STOXX is such a candidate. There is the STOXX Europa 600, which - who would have guessed it - consists of 600 companies. Then there is the single decoupling, the STOXX 200. This is where the smallest 200 companies come together.
Are these small companies or companies that seem small?
Now the bickering starts. What is a small cap anyway? I found the following definitions

  • A market capitalization of less than half a billion euros
  • A market capitalization between 300 million and two billion euros
  • Anything up to a billion euros
  • Between 100 million euros and one billion euros
  • Everything is relative: one person's small cap is another's micro or mid cap. Therefore: The 15% of the stocks with the lowest market capitalization of the respective market are the small caps of this market. That makes the Burmese large cap the German small cap.

The industry is in the process of further differentiating the French-Fama factors. "Stocks with low price fluctuations" are now "Minimum Variance" and "Low Volatility". Do you know the difference? More on this in this interview.

How to weight

Two boundary conditions must be observed

  1. With a portfolio volume of less than € 50,000, two ETFs are sufficient. For reasons of efficiency and cost, assets of around EUR 50,000 and less should not be invested in more than two ETFs.
  2. No deposit position below 10%.Otherwise, you will rebalance with peanuts and ruin the purchase cost.

Is it all worth it?

You have to decide. I have brought you a comparison here - as an example for the MSCI World.

indexCompany numberTop 3 companiesTop 3 countriesTop 3 sectors
MSCI World1.652Apple 2.09%
Microsoft 1.34%
Amazon 0.96%
USA 60.5%
Japan 8.7%
Great Britain 6.5%
Finance 17.9%
IT 15.2%
MSCI World Momentum348Microsoft 4.91% instead of 1.34%
Amazon 3.82% instead of 0.96%
Facebook 3.37% instead of 0.89%
USA 60.9%
Great Britain 12.3%
Canada 5.6%
IT 23.5%
Consumer goods 13.6%
Health 10.6%
MSCI World Value884Microsoft 2.64% instead of 1.34%
Exxon Mobil 1.88% instead of 0.95%
Johnson & Johnson 1.86% instead of 0.95%
USA 60%
Japan 9%
Great Britain 7%
Finance 30.2%
Industry 9.4%
Health 9.2%
MSCI World Enhanced Value399Cisco 2.65% instead of 0.49%
Pfizer 2.44% instead of 0.59%
Intel 2.39% instead of 0.48%
USA 39%
Japan 26.8%
Great Britain 7.8%
Finance 18%
IT 15.1%
durable consumer goods 12.3%
MSCI World Value Weigthed1.652Apple 1.67% instead of 2.09%
JPMorgan Chase 1.42% instead of 0.93%
Exxon Mobil 1.21% instead of 0.95%
USA 49.38%
Japan 14%
Great Britain 8.2%
Finance 27.8%
durable consumer goods 11.6%
Industry 10.6%

Fascinating: banking and insurance are value! And I keep getting reader emails asking whether it wouldn't make sense to reduce the oversized financial part of the MSCI World. Well, that's not entirely true. In the World Index with the improved value, MSCI weights the financial sector in the same way as in the classic World Index.
Find your way around there!

"I want value!" Yes, everyone wants value, because “we're not stupid”. What value should it be? The classic value, the improved value or the weighted value?

It was just Value now. You need to practice this for each of the other three factors as well. Or you really step on the gas and put an ETF on the MSCI World diversified multiple-factor index in your portfolio. As an egg-laying woolly milk sow, this index combines the factors value, momentum, quality and low size.

Some graphics directly from the MSCI page

Holding period: 2 years
Value pulls itself up and overtakes the base index, momentum wastes the entire lead. Two years is simply not a holding period for a factor ETF.

Holding period: 5 years Everything in sync until mid-2014, after which Value is slurping in front of itself, momentum can take off a little.

Holding period: 1994–2017 (maximum) Anyone who has children born in 1994 can now be a grandpa. And without having to complain about a teenage pregnancy. So much for "Factor ETFs need time".
From a momentum perspective, value and basis have been identical over the past 23 years.
But even an arrogant momentum does not always have momentum. In 2008 momentum took just as much beating as its relatives. Then in 2009 he lost his courage.

yearMSCI World ValueMSCI World MomentumMSCI World
2008-39,85 %-39,92 %-40,33 %
200927,70 %14,76 %30,79 %

Holding period: 2003–2017

For this period I have the course developments and the performance

Course history
Are you sure that you would have been calm about the momentum plummeting in the subprime crisis? At that point, you would not have known anything about the summit storm until 2017. In relative terms, the index did not lose more than its peers, but as it rose higher, the fall was more severe in absolute terms.

In 2004 and 2005 momentum was able to take off, in 2009 value and basis were ahead, from 2012 they were pretty much in sync.

If you want to know more about factor investing, MSCI has put everything you need to know here.


Let's assume the simplest combination of 70% MSCI World plus 30% MSCI Emerging Markets.
How do we accommodate our factors?

  • Only in MSCI World or do we split both base indices?
  • Do we completely dispense with the basic indices and only invest in factor ETFs? If not:
  • What portion do we reserve for the factor ETFs?

I googled my way through new territory with search terms such as “Faktor-ETF Musterdepot” or “Addition of Value ETF” and came across the strangest constructions. 50% in dividend stocks, innovative 8-ETF portfolios with dividend campaigns on small caps and an emerging market equity ETF that is trimmed for minimal fluctuation. Unfortunately, the whole thing without any concrete weighting. Nowhere a well-founded derivation. That didn't convince me.
What remains is the use of Kommer.
There it says in a nutshell

  1. 55% of equities developed markets half in large cap value and half in small caps blend (blend = value and growth), which means twice almost 28% in factor ETFs.
  2. 25% equities emerging markets: Large caps, mid caps, small caps, with a small cap share of an estimated 15% makes almost 4% (25% * 15%) small cap exposure for the entire portfolio.


Where did the journey take us?
On the one hand: if factor investing is concerned, then it is through inexpensive beta and not through active alpha.
On the other hand, is factor beta really worth the effort? At least before you have € 100,000 together.

Where does this zeal for hunting come from? Warren B., the newspaper deliverer from Omaha, writes in his current letter to the shareholders starting on page 24:

"Over the years, I've often been asked for investment advice, and in the process of answering I've learned a good deal about human behavior. My regular recommendation has been a low-cost S&P 500 index fund. To their credit, my friends who possess only modest means have usually followed my suggestion.
I believe, however, that none of the mega-rich individuals, institutions or pension funds has followed that same advice when I've given it to them. Instead, these investors politely thank me for my thoughts and depart to listen to the siren song of a high-fee manager or, in the case of many institutions, to seek out another breed of hyper-helper called a consultant. That professional, however, faces a problem. Can you imagine an investment consultant telling clients, year after year, to keep adding to an index fund replicating the S&P 500? That would be career suicide. Large fees flow to these hyper-helpers, however, if they recommend small managerial shifts every year or so. That advice is often delivered in esoteric gibberish that explains why fashionable investment "styles" or current economic trends make the shift appropriate.
The wealthy are accustomed to feeling that it is their lot in life to get the best food, schooling, entertainment, housing, plastic surgery, sports ticket, you name it. Their money, they feel, should buy them something superior compared to what the masses receive. "

Even if we are not “mega-rich individuals”, we still want preferential treatment. Especially for our money. It was even once a cover story in Capital: “The best for your money”.

Perhaps it is time to recognize the capital markets paradox:

The safest way to outperform is to consistently aim for the average.

For further reading

Why quants don't pick stocks.

"After all, if a manager claims to have a disciplined process for identifying the alpha opportunities, then it can be systematized and factorized."


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Filed under Strategy, Investment, Fundamentals, Returns, Index, ETF

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Michael says on March 28, 2017

Once again, the finance vizier eloquently manages to get me back down to earth.

Even with the basic knowledge of financial pornographers, especially at the beginning of your own investor career, you are often tempted to cover all factor premiums in a very clear portfolio.

FinanzFux says on March 28, 2017

Again a very good contribution. If you want to deepen the topic scientifically, I would recommend the article "The Surprising Alpha From Malkiel's Monkey and Upside-Down Strategies" by Arnott, Hsu, Kalesnik and Tindall from the Journal of Portfolio Management (can't link the pdf, but you can find it the article easily via google)

Finance vizier says on March 29, 2017

Hello FinanzFux,
thank you for sharing.
This is a really "creepy" document :-), download it here
You'd better stick with factor-free investing.

Small sample:

"How can overweighting high-risk stocks and over-weighting low risk stocks both lead to higher returns versus the cap-weighted benchmark?
An examination of the FF4 factor decomposition in Table 1 reveals the key differences between the risk-seeking and risk-averse strategies: the latter have roughly two to three times as large a loading on the value factor and lower loading on the market factor.
Net of the value effect and other factor tilts, we are left with annualized FF4 alphas that are statistically similar to zero. "

Each medal has 2 sides. Whoever avoids factor A inevitably gets factor B in the depot ;-)

Finance vizier

Daniel says on March 29, 2017

Great article. the message could be made even clearer if one shows the performance from the beginning of 2008 to compare the MSCI variants. Because with the bad year 2009, the momentum index is likely to have performed (minimally?) Worse than the normal world index.

One topic that would be worth a separate article is the topic of risk. Most people look at the graph of how the momentum clearly outperforms the world index over 15 years and think: Sure, the momentum is obviously the better index. But basically this graph is completely worthless without comparing the different risk profiles of the two indices.

How so? Because risk is the product of the probability of occurrence and the potential for damage. And I can easily increase the probability of a positive event if, in return, I significantly increase the damage potential in the (now rarer) damage case.
Simple example: I play French Roulette in the casino. You bet on red and have a 50% chance of winning by doubling the stake, i.e. a zero-sum game with a minimal bank advantage.
But I can also design my roulette stake in such a way that the probability of winning increases to 90%, for example. To do this, for example, I simply put 1 € each on 33 of the 37 numbers. Unfortunately, that's not the secret of beating the bank, it's just a mathematical sleight of hand. Because in 90% of the cases I only win 10%, in the 10% of the loss cases I lose 100%. The bottom line is that nothing has changed in the mathematical expected value.

What does that have to do with the stock market? Well, I would argue that subprime derivatives, tech bubbles or new market IPOs worked according to this principle during the heyday. For a while it looks like the path to secure money-making has succeeded, until one black day then all the coal is gone. Whether you experience this black day is simply a matter of luck.

Basically, this casino comparison fits almost all types of active investing or alpha searching.
Even "dividend aristocrats" have their highs and their lows. With some funds you actually achieve "alpha" for 20 years, but other variants such as the DivDax are also complete blows. And of course you always find reasons why why why that fund was bad and that good.
Nevertheless, until the contrary * is proven, one should always assume that it was pure luck after all. After all, in every casino in the world there are lucky guys every evening who go home with big winnings. And each of them also has a story about why they were so successful. The pretty blonde who blew on the dice, the lucky number 17, the pattern recognized in the permanences ...

* Unfortunately, "proving" in the financial markets is such a thing. Risk is simply not directly measurable or even visible. The best approximation I know would be to recalculate each strategy retrospectively to 1950 and, if necessary, even for different markets. But even that helps.

Julian says March 30, 2017

Dear financial vizier,

great article. Short question does the 10% minimum position relate to the "risky" part of a portfolio or to the entire portfolio (risky + low-risk)?

ChrisS says March 31, 2017

| @ Julian

Do you mean the statement: "2. No portfolio position below 10%. Otherwise you will rebalance with peanuts and the purchase costs will ruin you." ?

Since these rules of thumb are a lot of personal interpretation (e.g. where exactly your individual cost / benefit limit lies when adding and rebalancing small items), it is actually up to you whether you only apply it to the risky part or to the entire portfolio (or, in most cases, your existing capital base already tells you which of the two considerations is more economical - a 10% position in a € 5,000 deposit is something different than having a 10% position in a € 500,000 deposit ;-) )

Articles such as https://www.finanzwesir.com/blog/rebalancing give you more information about such thoughts when it comes to rebalancing and portfolio building
and here for practical implementation

Smart investor says March 31, 2017

No article has exposed the marketing gag Smart Beta in a more understandable way.
Thanks to the financial vizier for this masterpiece! It is thus in line with the financial giants Sharpe ("Smart beta makes me sick", "Smart beta is a way to exploit stupidity.") And Bogle (see Chapter 14: "Index Funds That Promise to Beat the Market - The New Paradigm? “In the" Little Book Of Common Sense Investing ", which can also be found as a PDF using Google Search).
In it he aptly quoted Clausewitz “The greatest enemy of a good plan is the dream of a perfect plan.” And advises: “Put your dreaming away, pull out your common sense, and stick to the good plan represented by the classic index fund. "

volatility says on April 07, 2017

Buffett certainly does not mean single, inexpensive stock picking with the buy and hold approach.

The criticism related to all the active capital managers in the hedge fund industry, to which small private customers have no access anyway. So why Foundation X does not buy the S&P 500 for 0.07% TER, but hires Pershing Squaire for the classic 2/20 - So 2% fees pa and 20% profit sharing, hence his bet at the time against the fund of funds, which is guaranteed by next year Buffett is won.

skyks says on March 2nd, 2018

I can't get the two graphs of the course and the performance together in my head. Can someone help me understand how to read this?

Maybe I have a rough thought and I am missing a few approaches. Regardless of what it is, I have not yet been able to understand why performance should run in sync (all variants more or less), when the performance diagrams that I can display at MSCI paint a similar picture as the price developments. The momentum always wins over a sufficiently long period of time.
Please nudge me in the direction of knowledge. G Thanks in advance.

ChrisS says on March 2nd, 2018

@ skyks

"I can't get the two graphs of the course and the performance together in my head. Can someone help me understand how to read them?"

I guess where the confusion could be:

The last graphic ("Performance MSCI World Variants") should actually have been better called "Annual Returns" - that would be clearer and describe more precisely what this is actually about.
And instead of line diagrams, it is usually shown with bars (also and especially to better distinguish it from the previous price trend graphs).

"Why performance should run in sync (all variants more or less), when the performance diagrams that I display at MSCI can paint a picture similar to the price developments."

The performance (annual returns) looks "pretty much the same" on the surface, but on closer inspection it is so that even small percentage gains can add up to larger price gains over a sufficiently long period of time.

That, too, would have come across better didactically if one had chosen a different form of representation, for example the tabular Excess returns the factor indices normalized to their benchmark.

"Please nudge me in the direction of knowledge"

Smart beta and factors etc have already been discussed several times here on the blog, so if you read through the articles and comments on them, you may find something clearer

Joerg says April 11, 2018

Brief instructions for factor friends at Extra-Magazin:
Nice listing of the factors SIZE EM QUALITY VALUE MOMENTUM including products from iShares and Xtrackers pre-chewed with performance, savings plan capability, etc.

CarstenP says April 11, 2018

Here are a few articles to counteract the blind factor belief, yes, yes, raised index finger ...

And here one more curiosity, the academically defined momentum factor has performed rather poorly in the US lately, strangely, the iShares Edge MSCI USA Momentum Factor ETF has performed very well lately.
Well, that's probably because the ETF used completely different stock picking criteria than those used for the momentum factor and that (coincidentally) worked well. So be careful when choosing a product, there is not always what it says on it:

Trick Question: How is the Momentum Factor Performing YTD?

ChrisS says April 11, 2018

Also a good article that again sensitizes you to some basic things, some of which we have already touched on from time to time


There are significant differences between what is called "factors" and their risk premiums in financial academic research and what is later sold to retail investors as "Smart Beta ETFs". You should be at least fundamentally familiar with it in order to be able to deal with it sensibly and not make any avoidable errors in classification.

"Smart-beta ETFs are essentially index trackers with factor tilts that are expressed in slight overweight and underweight positions. Long-short factor portfolios are created by taking the top and bottom of stocks ranked by factors, which results in more extreme portfolios."

Factors are mostly viewed in the studies as an isolated long / short premium. For example, HML value, expressed as the difference in the return on the X% stocks with the highest book-to-market ratio minus the X% stocks with the lowest BtM. The influence of general market movements is thus neutralized away and you get the pure "factor" return.
The Smart Beta ETF, on the other hand, is just a "completely normal" long-only equity portfolio (well, there are a few real long / short ETFs, but that's still the niche in the niche) - that is, even if I have a "Value" -ETF preselects a certain basket of stocks selected according to "value criteria", but in the end its specific return is still largely determined by the "normal" general market beta, and the value selection only influences the return for one thing little rest.

"And here's a curiosity, the academically defined momentum factor has been performing rather poorly in the US lately, strangely enough, the iShares Edge MSCI USA Momentum Factor ETF has performed very well lately. Well, that's probably because of the completely different Stock picking criteria used by the ETF were considered intended for the momentum factor and that (coincidentally) worked well. So be careful when choosing a product, it's not always what it says: "

The ETF does something different than the "academic" 12-2 l / s momentum, but that is not a secret; it is communicated relatively clearly in the factsheet (i.e. with regard to "not always what it says on it"), well the question is who is the ultimate one Interpretation sovereignty over the definition of a term like "Momentum" belongs?) For everyone who takes the trouble to read the small print again.

"A momentum value is determined for each stock in the MSCI parent index by combining the stock's recent 12-month and 6-month local price performance. This momentum value is then risk-adjusted to determine the stock's momentum score. A fixed number of securities with the highest momentum scores are included in each MSCI Momentum Index, generally covering about 30% of the parent index market cap. Constituents are weighted by the product of their momentum score and their market cap. Constituent weights for broad MSCI Momentum Indexes are capped at 5%. The indexes are rebalanced semiannually; in addition, ad hoc rebalancing may occur, triggered by spikes in market volatility. "

Different lookback periods are used here in connection with the academic theory, and due to the "risk-adjusting" with the standard deviation, there is also a certain low volatility influence.
Academic theory can also carry out its investigations "in a vacuum", that is, without all the practical restrictions that a product that can be invested in concrete terms has to deal with:
Company size, tradability, liquidity, weighting limits, turnover, longer rebalancing intervals, etc.
With all the differences, it is not surprising, rather it is to be expected that the ETF return and the factor return will differ, but as I said, in the end we only end up with the topic of enlightened investors themselves when evaluating them, i.e. whether they make this difference knows at all and can handle it properly for classification.

CarstenP says April 11, 2018


The ETF does something different than the "academic" 12-2 l / s momentum, but that is not a secret; it is communicated relatively clearly in the factsheet (i.e. with regard to "not always what it says on it"), well the question is who is the ultimate one Interpretation sovereignty over the definition of a term like "Momentum" belongs?) For everyone who takes the trouble to read the small print again.

It is of course correct that the MSCI Momentum Index definition is clearly described and that the ETF is not doing anything wrong in following this index. However, the alphaarchitect article shows that the MSCI Momentum variant has little in common with the academic definition; other stocks are selected that have significantly less momentum. So someone who buys this MSCI Momentum Factor ETF actually gets a mega-cap fund.
The irony is that this ETF also performed great while the academic momentum factor wasn't that great. Now imagine what would have happened if it had been the other way around ...

Ultimately, there is a great deal of arbitrariness in how the individual factors are defined and used, which can be seen here in the momentum factor as an example. And of course there will be factor funds that will have beaten the broad market in the future, just as there will be those that lag behind the broad market. The big question is, as always, which one will be the winner.

Joerg says on July 06, 2018

@ Patience & spit on "Which factors / tilts can be used in the medium term"? Ask at https://www.finanzwesir.com/blog/etf-laufende-kosten

1) Overperformance of factors that are simply copied / recognized by the crowd / traceable for large investors will almost certainly disappear.
Value, Momentum, Quality, LowVol are not sustainable (it only worked in retrospect). They are recognized, picked up, covered with money (it takes a while) and evaporated (similar to successful, "good", active funds as long as capital inflows until they are below average - always the same game)

Am I Against Factors? No, it's great! Just like the individual stock investors, the Faktor Hunters ensure a clean index hygiene !: Valuable stocks become more prominent in the index, stocks of popular factors get more weight -> the index adapts accordingly and reflects that!

The broad market is the average. Overperformance can only happen when there is just as much underperformance. All the active "investor ants" out there help in an ongoing battle to keep a broad-index investment halfway "healthy".
What more do you want ...? It's like in the gold rush: everyone tries to find the claim, the vein, the JackPot (few succeed) but we index investors automatically get the mean value from all finders, without risk, effort or stress.

2) (Over?) Performance of other risk premiums, on the other hand, are unlikely to go away:
a) Political risk (do you like to invest in companies that can easily be influenced by autocrats, kleptocrats, dictators?) remains because not everyone has the courage / insanity / indifference to oppose it.
However, with great fluctuations / with long dry spells. So, maybe a serving of EM is not bad in the long run? b) Small caps (size risk) cannot easily be bought on a large scale by large investors (illiquid; goes in, but out becomes difficult). So it remains a playing field for "small" specialists.
In addition, small companies may be more susceptible to "local storms", money supply, economic cycles, etc.

That is why I am relying on around 25% EM and 25% SC in my depot in the medium-term. So far, I have left out all other factors.

Who knows another factor / tilt that has the chance to "stay" in the medium term (Performance Premium) and why?

Smart investor says July 8th, 2018


"Who knows another factor / tilt that has the chance to" stay "in the medium term (Performance Premium) and why?"

This is a very good question. I asked myself exactly 20 years ago and found a reliable answer so far.
However, you can completely forget about factors / tilts. As already discussed, no passive factor that has become widely known can reliably generate risk-adjusted excess return or “performance premium” even in the medium term.
Overcrowding has so far ensured this very reliably after it became known. It makes the financial market more and more efficient and fairer for passive small investors and sooner or later reduces any passively expected premium to zero.

However, before that there may be a few cyclical overshoots in both directions, hyped by the marketing of the greedy financial industry and their journalistic bludgeons such as Swedroe, Kommer and the like.
They then please the alpha hunters. But at some point even the last dumb money notices the rip-off after a number of lossy tracking error regrets, and the greedy caravan moves on to the next marketing gags.
Ten years ago there were still commodity index ETFs and single-factor index ETFs. Now they are gradually going out, and in the backtest over-optimized multifactor index ETFs are all the rage. How stupid must ma be ...

But what about higher returns against more risk?
A lot of people try that too, of course.
This has the well-known consequence that the efficiency curve flattens out towards the top right. This means that the assumption of more risk via riskier high-beta assets is not adequately compensated with a higher return, but is significantly under-proportionally.
Because of this inefficiency, the reverse strategy, namely “Bet Against Beta” (BAB), can generate a bonus. In doing so, high beta is actively shorted and low beta long.

That leaves the diversification return.
But that doesn't have a long half-life either.
Because the medium-term correlations among all beta assets, including long-term bonds, which are interesting for this, have been increasing inexorably for around 20 years due to the mass hunt for diversification.
So overcrowding is reliably at work again, as expected. This means that this premium has also shrunk significantly and with a few 1/10 percentage points p.a. hardly worth mentioning.

For a future-proof, long-term investment strategy with risk-adjusted excess return, approaches only with passive instruments are less and less suitable if you want more.
The situation is different, however, with the combination of passive and hand-picked, active assets. I have been relying on real, pure alpha with fully active, alternative funds for almost 20 years. I have specialized in long-short trend followers and relative value arbitrage with the most cost-effective futures & options. For me, this has so far been + 2% p.a. total portfolio excess return compared to ACWI IMI and almost halved drawdowns were very worthwhile.

But this can only succeed if you understand, find and allocate the very rare, competitive quant funds well.
In my experience, they are only allowed to produce real, pure alpha. That means they have to be uncorrelated to beta.
And their alpha has to be statistically significant. Which funds have succeeded in meeting these tough requirements in the past have built up relevant core competencies over the long term.
If they can then continue to maintain that, then their alpha will not evaporate as quickly. This is very similar to well-run companies from other high-tech industries, such as Amazon, Apple, BASF, BMW, Bosch or Toyota.
They only stay ahead if they innovate very "actively" in order to maintain their competitiveness. "Passively" resting on the laurels of the past soon leads to certain ruin, as is the case with Kodak, for example.
As an employee of such a technology leader, I know that well and know how to identify such skills in any industry.

Overcrowding has not been a problem for at least 70 years since these quant funds have existed.
Because even professional investors can hardly understand them. And the related hedge funds generally have a very bad reputation, which discourages many.
So this is similar to active “deep value investing”. I don't know that well, but I do know a few specs who do it.
Their alpha is likely to be preserved for a long time to come. Because only the tough ones dare to do both. Only if they really "have what it takes" will they be amply rewarded.
But the same applies here as always: “There is no free lunch”. Because of these high hurdles, in my opinion it has a very good chance of "staying" in the long term.

I am currently describing this in detail in the "Onanist Blog". If you are genuinely interested, please report it (offline).
I like to share my experiences with it. In contrast to value investors like “Motley Fool”, there are unfortunately only very few who “have what it takes” and with whom one can talk about it. But it is probably also a sustainability factor.

The recommended "Alpha Bible" with a good general overview is "Capital Ideas Evolving" by Peter Bernstein. Bogle Sr., whose son successfully drives hedge fund strategies, recommends this standard work as the best:

"A lot has happened in the financial markets since 1992, when Peter Bernstein wrote his seminal Capital Ideas. Happily, Peter has taken up his facile pen again to describe these changes, a virtual revolution in the practice of investing that relies heavily on complex mathematics , derivatives, hedging, and hyperactive trading. This fine and eminently readable book is unlikely to be surpassed as the definitive chronicle of a truly historic era. "

Patience + spit says on July 09, 2018

In fact, this thread seems to be a better fit for factor investing.


"I'm skeptical about point 3"

I am too. But don't think it's impossible per se. And if Mr. Kommer is considering this possibility, I don't want to rush to reject it.

@ Jörg
Why do you think value is ephemeral? The value approach has been published at least since Graham (1940s?). Even so, does the factor seem to have worked until recently? Why should he go away from today? Especially when value is linked to a higher risk?

Conversely, if political risk has generated excess returns in the past, why shouldn't investors make it go away as well? Ultimately, the EM fund is just a WKN that you enter into the order mask. You don't type in Putin, Erduan, Orban, etc. ;-) If political risk and value are linked to higher risks, should both survive, or neither?

Smart investor says on July 25, 2018

@ Patience + spit

"And if Mr. Kommer is considering this possibility, I don't want to rush to reject it."

For me that is a very clear counter-argument. Because Kommer completely wrongly assessed the similarly inadequate, empirically determined, alleged diversification benefit of passive commodity futures ETFs and recommended it as advantageous until recently.
Now (only) years after most of the other opinion leaders, including his quote provider Swedroe, he is upset.

When it comes to the extremely difficult assessments in the reflective financial market, however, I have always followed the globally recognized Bogle and have done very well with it so far.
I can highly recommend it to everyone. Because more than 60 years ago in the 1950s (!) He had the vision of passive investing with market-wide index funds, which is now a reality, for purely logical reasons.
Therefore I switched to the one that is very advantageous for me (lowest costs, peace of mind) without hesitation from the availability in Germany around 2000. He also saved me from passive commodity investments in a very advantageous way (no financial damaging implementation of Tracking Error Regret as Kommer now describes in his latest edition of "Sovereign Investing").
With its strict advising against illogical, passive factor investing, Bogle will surely be just as right again and protect against completely unnecessary financial damage and wasted time by thinking back and forth.

"The value approach has been published at least since Graham (1940s?). Nevertheless, the factor seems to have worked until recently? Why should it disappear from today?"

The value factor works to this day, of course, and will certainly continue to do so by segmenting the market through distinguishable characteristics, just as the world market is segmented by regions or industries with distinguishable characteristics. But what does that help a normal investor?
The asset allocation in stocks, bonds and alternatives determines approx. 90% of the long-term, average investment result, ie approx. 4.5% of 5% pa over the last 20 years, ie approx. 0.5% remains for all other influencing factors !
And the value factor is only a very dubious one among many others. So why waste a weary thought on it at all when its low relevance is so obvious? Would you rather hunt safe fee / TD and tax differences in the same order of magnitude, if at all ???

The (active deep) value approach according to Graham is only similar in principle.
However, it only works very actively with the smallest, possibly exotic stocks and direct investments with a sufficiently deep understanding in the long term to systematically achieve risk-adjusted additional returns. Buffett sees m.W. With his giant tanker, there is hardly any chance of outperformance despite very competent, active management based on value investing.
That means passive value factor investing is absolutely pointless and certainly disadvantageous for the normal investor who is ripped off by the greedy financial industry with higher fees and transaction costs!

In my experience, related active relative value arbitrage hedge fund strategies also work relatively well, preferably macro with cheapest futures, which exploit the smallest, short-term valuation differences as pure alpha in a highly leveraged long and short.
I have described this in more detail in the "Onanist Thread" for reading.

"Especially when value is linked to a higher risk?"

For a higher systematic risk, there is usually a higher return on the long-term average.
Likewise for the riskier value segment. But a higher return can be achieved much more efficiently by increasing, for example, the proportion of standard equity index funds in the portfolio.
Because the efficiency curve flattens towards higher risks. This means that the assumption of more risk by investing in a riskier market segment is not proportionally compensated with a correspondingly higher return, but only disproportionately.
Because that is what most market participants try and reduce the additional return below the value that is actually to be expected. This is similar to when you voluntarily work overtime for half the hourly rate.
One is content with more performance (= assuming more risks through a lower wage). So what is the point of following the crowd? That was always disadvantageous in the long term in the reflexive financial market!

Ergo, your skepticism towards. Supposedly easily earned additional return from passive investment in the value factor is well founded. Whenever something sounds too good to be true, it is.

So don't be confused by any self-proclaimed experts. The well-paid physicist, mathematician and economist Fisher Black (valuation models for options) is appropriately described by William Sharpe (CAPM, Sharpe quotient) in "Capital Ideas Evolving" by Peter Bernstein, which is the current state of knowledge in my opinion and that of Bogle and many best describes other recognized financial experts, cited:

"You should put your trust only in logic and theory and forget about statistical empirical results." !!!

I have successfully made this a basic principle for 20 years and can warmly recommend it to everyone.
D h. you should understand very, very well what you are doing in order to achieve risk-adjusted excess returns against an already very efficient market. What Kommer only wants to tell us with passive single investing now with multi-factor investing aka Smart Beta aka Very Dumb Alpha is simply irrelevant, dumb financial pornography for rational investors, just like his recommendation of passive commodity ETFs before and suddenly no longer .
Kommer is clearly spreading confusing, short-lived investment fashions here for whatever reason.
Better to stick to the constant sizes such as Bogle, Swensen or Finanzwesir, who unanimously advise against the junk or at least not confuse normal investors.

Sunnyberny says on July 25, 2018

I think you are going too far with your "commercial hate". Anyone who has read his book (Sovereign ...) should actually know that 95% of it is a plea for passive, broad-based investments that did not exist in the German book market before him.
That is and remains his merit.
Only in the last 5% is it about concrete implementation POSSIBILITIES. The great thing about the book is that, strictly speaking, this 5% would not be necessary and Kommer conveys it that way.
The thinking reader has all the tools to put together "his world portfolio" himself, and can also consciously decide whether certain tilts (eg small caps, overrated EM etc) are suitable for him or not.
I also disagree with Kommer on Smart Beta or could only implement it with stomach ache, but that means not that it should be reduced to this (ie to the 5% of his statements).
Its main merit lies in tearing apart active investing and investing on a scientific basis rather than on "market clamor". If you understand this as investment pornography, it goes too far for a rationally justified criticism.

Smart investor says July 26, 2018


"Only in the last 5% is it about concrete implementation POSSIBILITIES."

Then you have a different edition of "Kommer" than me. I am referring exactly to this current one from 2018. In it Kommer specifically points out in the introduction:

"Section 5.11 (Factor Investing / Smart Beta Investing) has been greatly expanded and modernized."

That belongs to the chapter:

"5 Basic Principles of a Superior Investment Strategy: Indexing".

Below that, this ominous section with 1/3 of the entire length of the chapter is clearly the main focus of Kommer's strange and simply incorrectly described "passive" investment strategy:

"5.11 Factor Investing (Smart Beta Investing) - Passive investing with turbo"

Sorry But I would clearly describe that as typically boisterous, which lacks any serious scientific basis, even for the horribly negligent factor community!
Because a "turbo" (in a car) is commonly associated with a significant increase in performance in the middle two-digit percentage range! In the best-case scenario, however, this is about 1/10 percentage point.
It is also noticeable that the "turbo" is the only non-technical term in the entire table of contents! So that should, without a doubt, trigger precisely this financial pornographic greed, on which Kommer primarily lives with his factor fund from the sect-like US three-letter association "DFA".

Under chap. 5.11 comes tens of pages of hard core financial porn with bonuses over bonuses, just like in the books of his primary quotator and US factor instigator Swedroe:

"5.11.1 What is factor investing? What are factor premiums?
5.11.2 General characteristics of factor premiums
5.11.3 The most important factor premiums for stocks (a) The small-size premium (b) The value premium
(c) Momentum and Quality (Profitability) factor premiums (d) Further factor premiums for stocks that appear less attractive
5.11.4 The political risk premium for stocks and bonds
5.11.5 Factor premiums for bonds
5.11.6 Is it possible to do without factor investing? "

And only then do the "concrete implementation POSSIBILITIES" come, which you probably know from older versions. Of this, exactly 50% (! Not just 5%!) Now consist of factor variants!
And the 2 factor variants of 4 not only contain admixtures as before, but also consist of an unbelievable 75-80% of the turbo factor scrap that has been loudly advertised:

"World portfolio variant 1 without factor investing
World portfolio variant 2 without factor investing, with admixtures
World portfolio variant 3 - simple multi-factor investing
World portfolio variant 4 - integrated multi-factor investing "

Here, too, the ultimate double-turbo multi-factor junk for the dramaturgically crowning conclusion.

With that, a virgin financial soul is very sure to be more enduringly brainwashed and forever corrupted than Kommers after his own DFA brainwashing at a steadier age. It's like the first sex education class in school consists of 1/3 of the best 3D 4k hard core porn.

In the financial onanist thread you will find the expected result of this financial education of the total beginner (!) Tanja (just search for "Tanja" on the page) with hard core financial porn, who, thanks to their contribution, is the 1% tip of everyone's iceberg Beginners brave out:

"I'm a total beginner, I started investing around three months ago." "I want to strike! But" normal "ETFs? Now Kommer has managed to make me want to bet on multifactor. I think that if you just stick to what he finds more or less suitable, you definitely won't do anything wrong."

And that after all the constant sermon of the financial vizier and many other brave financial blog operators and print media that beginners and beginners should first of all stick to the "bread and butter indices". But even against this interference from the hated autonomous bloggers, this Kommer has taken good precautions with his reference:

"Although many financial bloggers publish articles on smart beta topics, most of them are on the surface or contain substantial errors ... are almost across the board, in my opinion, sensationalistic, woodcut and / or biased."

This is a real marketing and sales professional who thinks of all disturbing influences.
Unfortunately, that with Tanja is by no means an isolated incident. I have read similar posts in various financial blogs and forums by beginners who at least had their last doubts about this commercial factor wonder world. But that is only 1% of a presumably small minority of beginners who were still capable of doubts after such formative brainwashing.

I don't know myself whether I would still have been open to doubts with the skillful, pseudo-scientific eloquence, which is very attractive to many of the high-earning and academically educated classes from the predominant MINT subjects in D there.
But in the late 1990s, fortunately for me, there was nothing more sensible than the best that ever existed, the original "Bogle Bible".
So from then on I was safely armed against all such challenges. And I was able to quickly identify the very few really valuable financial innovations (since then only index funds, ETFs and pure alpha funds / LAs) and, as soon as it made sense, I decided to go without much deliberation and never had to regret it Contrasted with Kommer with his nonsensical passive commodity ETFs.

And I would like to pass this decision-making certainty on here as effectively as possible. If this is done in time before the commercial brainwashing, there is sure to be something left to be saved.
And if these conflicts of interest are clarified in a well-founded manner, such as in this top customer review of the latest Kommer work on Amazon, it is very well received.
Because mature readers and investors welcome it very much when they learn how presumptuous bogus authorities first sell them for stupid and then hypocritically rip them off.

Yes, unfortunately that destroys much, if not completely, of Kommer's good development work for investor-oriented, genuinely passive investing.
Or what would you think of a pastor who railed from the pulpit on Sunday against sex before marriage and ran a relevant establishment as a sideline to increase his income?

"His main merit lies in tearing apart active investing, and investing on a scientific basis rather than on 'market clamor'."

From my point of view, with the "picking up", unfortunately, he only throws in a slightly different variant of active investing, demanding trust.
He tries very cleverly to distract from the rip-off by his own, also very dumb variant of active investing with Very Dumb Alpha as an allegedly better, passive investing compared to the really passive original according to Bogle in the tried and tested financial porn style.

Sex sells or greed eats the brain, as is known.
In my opinion, he is abusing HIS selfless work in the most shameful manner. And if you know what billion in profits Bogle has foregone in favor of hundreds of billion profits for small investors in the fighting continuous action against this entire financial mafia until old age, you can perhaps understand a little bit my motivation against these profiteers who ran along .
They make me just as sick as those contemporaries thankfully linked by CarstenP: "Smart Beta Is Making This Strategist SICK"] (https://www.institutionalinvestor.com/article/b16x0v5q14ky2k/smart-beta-is-making-this-strategist -sick).

Fortunately, you are just as critical of the scrap itself as I am.
But it is only there to enrich all the financial intermediaries including Kommer, Swedroe and the like.
So it shouldn't be surprising if it is torn apart in the same way according to its own example. He actually challenges that. In the end credits, there are two central, in their absurdity, consecutive statements on the commercial investment approach:

"Passive investing - no risk- and cost-increasing attempts to“ beat the market ”, so no stock picking and no market timing."

"Generating an increased expected return through the use of so-called factor premiums (Smart Beta Investing)."

After all, what is "generating an increased return expectation" other than "attempts to" beat the market "???
You know what's going on there. This is highly competent marketing for rip-off products. Because if a customer swallows this without asking, or as he may ask about it, the professional salesperson knows exactly what he can do with it.

Gainde113 says on July 27, 2018

@ Smartinvestor
You could post your book review directly on Amazon ;-)

Joerg says on July 27, 2018

@ gainde113 Not read?
Does he have Smarties = Norbert on Amazon

Sunnyberny says on July 27, 2018


I think we are already referring to the same issue.
In my opinion, chapters 5.11 and 7 are only technical implementation, smart beta or not is a detail that does not change the basic statements of the book: stocks should be superior to other asset classes in the long term, investing should be passive, global, diversified, tax-minimizing and inexpensive respectively.

The Kommer book is designed in such a way that those who have understood these basic ideas also have everything to do with the implementation themselves.
In my opinion, this is even essential.
If someone blindly follows a recommendation (be it commercial, financial industry etc), he remains prone to do it again at a later point in time (and then, for example, sell everything in a crash because someone recommends it).
Everyone needs their strategy, of which they are 100% convinced, so that they can follow through consistently (that's hard enough). The Kommer book cannot and does not want to replace the homework of the individual (Kommer himself says that this homework takes a lot of time).

In terms of content, I certainly agree with you on some points, and one could also reasonably discuss this, but in the manner (“rip-off”, “commercial”, “scrap”, “very dumb”, “shameful abuse”, “finance”) -Mafia ”,“ profiteers running along ”) in my opinion you are clearly over the target (hence my somewhat provocative accusation of“ agitation ”).
This is not a content-related criticism but purely emotionally and even humanely derogatory.

P.S .: I work for the "financial mafia" myself, but in the non-private sector (ie your general insults are ultimately also directed at people like me).
However, I can assure you that not everything is black and white here either - in the end we are all just human.
Every industry has positive and negative sides: you could just as easily name the “pharmaceutical mafia”, the “auto mafia”, “the food mafia”, “the consultant mafia” etc. - I can think of examples of them everywhere the well-being of a few was placed above the well-being of the customers.

Patience + spit says on July 27, 2018


Unfortunately, many long and hearty accusations against Kommer, which have not been substantiated, for taking advantage of the ignorant novice investor.

Factor investing is certainly not market timing, but neither is it really stock picking. In order to explain:

I think we agree that bonds and stocks differ significantly in terms of their risk / return profile, that is, that a portfolio of bonds performs differently than one of stocks.
Nevertheless, both are somehow securities in securities accounts and part of "the market". But why shouldn't the class of stocks break down further into subgroups, such as small cap and large cap with slightly different properties?
That doesn't mean that every small cap stock performs better than every large cap. But it does seem entirely plausible that stocks with a certain characteristic can behave differently on a statistical average than stocks with a different characteristic.
The open question would still be, and here Mr. Kommer becomes vague in his work, whether the different performance has to be bought with a higher risk. In itself one would expect that.

But dividing stocks into subclasses according to statistical criteria and buying them selectively is different from traditional stock picking a la: "I only buy the good stocks and leave out the bad ones."

Sunnyberny says on July 28, 2018


As a small afterthought: some of your claims seem (carefully worded) at least doubtful. A small example: with the statement "highly competent marketing for rip-off products" you assume (1.) a direct relationship between Kommer and the ETFs mentioned by him in the book (I write deliberately mentioned and not recommended) and (2.) exorbitant fees for these products that exceed those of other ETFs many times over.

Regarding (1.) Kommer names multi-factor ETFs from 3 providers in his book (iShares, Lyxor and Source), and at the same time points out that other providers could offer similar products in the future, which could then also be considered. Accordingly, Kommer remains provider-neutral and does not do any marketing for a specific provider. Or are you alluding to a relationship with DFA, as you also indicated? In any case, this does not play a role in the book (and this is what this is all about), DFA is only used as a data provider (similar to MSCI).

(2.) The specified funds have a TER between 40bp and 55bp. Sure, that is not without it these days, but it is significantly less than most active funds. I also remember similar TERs for EM ETFs a few years ago. There are still many other ETFs with a similar TER today (e.g. the SPDR MSCI ACWI with a TER of 40bp and a volume of 1.2 billion euros, or the iShares MSCI World with a TER of 50bp and a volume of 4.8 billion euros).

Unfortunately it is difficult to follow your argumentation, in my opinion valid criticisms (e.g. "Beginners shouldn't start with Smart Beta") are blurred with general accusations that almost border on conspiracy theories (e.g. "Kommer does highly competent marketing for rip-off products"). I am always happy to discuss things, but only on a factual level.

Smart investor says on July 28, 2018

Have a look here: "Ass-fucked rubber duckling ... double penetration first from the inside and then at some point also from the outside ... your bank around the corner, a financial porn shop of the worst kind ... Fuck you all ..."
So much more is possible - and that is very sensible when it comes to this by far the most mafia of all industries ... :-p

Equating the second most extensive chapter 5 “Basic principles of an… investment strategy” out of a total of 12 with “only technical implementation” is also an interesting point of view.
Why does this Kommer emphasize the strong expansion and modernization of his most extensive section 5.11 (Factor Investing / Smart Beta Investing), if this is supposed to be so insignificant for a normal investor who strives for applicable knowledge?

Sunnyberny says on July 29, 2018


What do you want to say with the link? I really don't get it.
As I said, I like factual discussions, but for incoherent, lengthy posts that are not substantiated by any facts, without arguments but full of generalization through to hearty insults with infantile power words, my time is really too much. Sorry :-(

Smart investor says on July 30, 2018


"Or are you alluding to a relationship with DFA, as you also indicated?"

As is well known, Kommer is a fan of DFA funds, which he is sure to sell. His brainwashing there, which every sales partner has to endure, can be the cause of his regrettable missteps.


I thought my detailed articles on Smart Beta in the "financial onanist thread" are known.
I didn't want to annoy with repeating them.
In the trader thread, I have given my Smart Beta criticism a deeper foundation with complex systems theory, who wants to know exactly. ;-)

Smart investor says on August 03, 2018


"What do you want to say with the link? I really don't understand. "

Sorry I just wanted to draw attention to overlooked grievances and stimulate thought. Because I often come across deposit suggestions from beginners who have suffered from commercial damage and who are screwed up by (multi) factor ETFs. You can usually read similar reasons for this, e.g. from Tanja on June 1st, 2018 in the financial onanist thread:

"If you just stick to what he thinks is ... appropriate, you definitely won't do anything wrong."

He's right on many topics. But that is the root of all evil. Because for certain topics he uses the commercial bonus he has earned in a way that is detrimental to investors. This is the typical approach of smart dealers.

This comer doesn’t dumbfounded in his latest book “Sovereign Investing” with “Passive Investing with Turbo” for Smart Beta in a strikingly irrelevant way.
To this end, he clearly uses financial pornography in his work, which is highly stylized as a passive investment in the Bible. This stirs up the greed for these junk products with the alleged turbo performance in unstable minds! The powerful words linked here are therefore intended to startle those readers who are actually trying to enlighten, and that is true-to-style industry jargon.

This should encourage people to think about the widespread "authority bias". Because disrespect often works wonders, as succeeded surprisingly quickly in the linked thread.
Why did our otherwise absolutely matter-of-fact financier coined the apt term "Very Dumb Alpha" (no, the and all other "infantile power words" collected from relevant financial sources are not mine)? But I have hoped for the healing effect here in vain. Well, then I'll try again to get enlightenment.

The content-related reference to these marketing gags, which are conceived for self-enrichment, can be read in a crystal-clear manner in addition to the Bogle Bible, which has already been linked repeatedly, e.g. also in the article "Smart Beta Is Making This Strategist SICK", which is also repeatedly linked:

"Adding up the facts are lies"

"This is a serious breach of trust"

“The original smart beta factors don't work, and the science behind them is known to be flawed. But nobody says that to the average investor because there is no profit in it. "

The beyond doubt Vanguard article Joined at the hip: ETF and index development should shake up anyone who still needs more factual evidence. It relentlessly reveals how the financial fraud machine, including indexers, designs these stupid financial products in such a way that, on average, they only fake their excess returns in an advertising-effective manner until they are issued.
Then this breaks off suddenly. And underperformance sets in, which corresponds to the excessive costs.

This is very similar to the previous main rip-off products, the active retail equity funds. They are picked to pieces by Kommer, asking for trust, in order to then cheer other rip-off products in green in a pseudo-scientifically complicated way. How transparent is that? Nobody needs to be surprised if that also stimulates the picking of the chopper.

Unfortunately, the dumb money believing in authority and science does not notice this fraud, because Kommer, Swedroe and the like aroused greed for it with financial pornography - abusively embedded in Bogle's financial ratio.