Economics: But this is not the Efficient Market Hypothesis!:
Market Sentimemnt: Alpha Letter #4: Factor Investing: ‘The current Fama French model is the combined effort of 40 years of research…. The past six decades of data show that five factors explain 95% of the differences in returns between diversified portfolios (all figures are annualized).
Market Risk (MKT-RF): The market beat one-month treasury bills by 5.37%.
Size (SMB — small minus big): Small stocks beat large stocks by 2.04%
Value (HML — high minus low): Value stocks beat growth stocks by 2.68%
Profitability (RMW — robust minus weak): Highly profitable companies outperformed weakly profitable companies by 2.8%.
Investment (CMA — conservative minus aggressive): Companies that were conservative in asset growth beat aggressive growers by 2.93%.
This shows us, in simple terms, that even if we believe in the Efficient Market Hypothesis, certain factors would get us better results through long-term exposure than if we just stuck to market-cap-weighted index funds… <public.hey.com/p/GBfPdt…>
The EMH is that the market is efficient—given people’s rational preferences for more stuff with a declining marginal utility of wealth, the typical investor cannot boost expected returns above the market average without widening the distribution of their returns so much that declining marginal utility of wealth makes the game not worth the candle. The four additional factors—small vs. big, value vs. growth, profitable vs. not-so-much, & conservative vs aggressive asset growth—are not pieces of but rather modes of failure of the EMH.
And as for factor (1): market risk? This looks to me like the biggest failure mode for the EMH of all, although some people do contest it. More on that anon…
