Professor Robert Novy-Marx: The Other Side of Value (EP.149)

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 conversation.

Key Points From This Episode:

• We introduce today’s guest, Professor Robert Novy-Marx, and his work. [0:00:17]
• The significance of the relationship between profitability and stock returns for asset pricing. [0:02:45]
• How the risk-based story around profitability is completely counterintuitive. [0:08:51]
• The best way to go about using profitability in portfolios. [0:12:34]
• When to target premiums individually and then combine them after the fact. [0:14:48]
• How profitability is different from quality. [0:16:26]
• Risks of building strategies that draw insight from different signals to identify a premium. [0:18:10]
• The trade-off between concentrated versus diversified factor exposure for capturing premiums. [0:23:33]
• Whether the recent decade’s run of underperformance impacts Professor Novy-Marx’s view of the value premium. [0:25:10]
• The vagueness of the equity premium and if it is possible to time premiums. [0:27:58]
• How Professor Novy-Marx defines momentum and what drives it. [0:32:32]
• Whether investors should be using momentum in portfolios. [0:38:47]
• Professor Novy-Marx’s perspectives on the low volatility anomaly. [0:44:19]
• Whether investing in a low-vol fund is a way of accessing value and profitability. [0:32:32]
• Why regular investors need factor models and how to choose one. [0:51:58]
• Whether it is reasonable to pursue factor premiums in a smaller market like Canada. [0:57:45]
• Professor Novy-Marx weighs in on writing papers that critique other methods. [0:58:44]
• Why Professor Novy-Marx consults for Dimensional Fund Advisors. [1:01:15]
• Insights Professor Novy-Marx has carried over from his years as a professional triathlete. [1:01:15]
• How Professor Novy-Marx defines success. [1:01:15]