May 13, 2021
Today’s guest is Professor Robert Novy-Marx, the Lori and Alan
Zekelman Distinguished Professor of Business Administration at
Simon Business School of the University of Rochester. Professor
Novy-Marx is best known for his articulation of the profitability
factor and has also done a ton of great work on momentum and low
volatility. We kick our conversation off with Professor Novy-Marx’s
thoughts on how profitability should inform portfolios. From there
we hear why Professor Novy-Marx has a problem with evaluating the
performance of a multi-signal strategy the same way that we would a
single-signal strategy. He then talks about the trade-off between
concentrated versus diversified factor exposure for capturing
premiums. Next, we discuss why there is no good empirical evidence
that we can time premiums. Professor Novy-Marx makes a great
argument for why the regressions people use to say that the value
spread works to predict the value premium can't be taken seriously.
Our conversation moves to focus on how our guest defines price
momentum and what drives it, and the nuances of investing in
momentum. We then hear his perspectives on the low volatility
anomaly and how profitability helps to explain it. After that, we
talk about whether investing in a low-vol fund is a way of
accessing value and profitability, and why the five-factor model is
a trustworthy factor model for regular investors. In the last part
of our conversation, we talk to Professor Novy-Marx about his
approach to critiquing other methods before ending off with his
definition of success. Tune in for this excellent evergreen
Key Points From This Episode:
- We introduce today’s guest, Professor Robert Novy-Marx, and his
- The significance of the relationship between profitability and
stock returns for asset pricing.
- How the risk-based story around profitability is completely
- The best way to go about using profitability in portfolios.
- When to target premiums individually and then combine them
after the fact.
- How profitability is different from quality.
- Risks of building strategies that draw insight from different
signals to identify a premium.
- The trade-off between concentrated versus diversified factor
exposure for capturing premiums.
- Whether the recent decade’s run of underperformance impacts
Professor Novy-Marx’s view of the value premium.
- The vagueness of the equity premium and if it is possible to
- How Professor Novy-Marx defines momentum and what drives it.
- Whether investors should be using momentum in portfolios.
- Professor Novy-Marx’s perspectives on the low volatility
- Whether investing in a low-vol fund is a way of accessing value
- Why regular investors need factor models and how to choose one.
- Whether it is reasonable to pursue factor premiums in a smaller
market like Canada.
- Professor Novy-Marx weighs in on writing papers that critique
- Why Professor Novy-Marx consults for Dimensional Fund Advisors.
- Insights Professor Novy-Marx has carried over from his years as
a professional triathlete.
- How Professor Novy-Marx defines success.