Cliff Asness: The George Costanza Portfolio

From AQR's Cliff's Perspectives, Oct. 22:

This is a follow-up to my unintendedly long magnum opus on this quite painful year. It’s been exclusively a few weeks, but things convey continued to stink. I somehow experience that when I write a cathartic tome that I’m proud of, the universe is supposed to honour too directly plough things around. Nope. Unfortunately, that’s but non how this works. These final few weeks convey been especially hard every bit systematic value, yet the motility of much of our year-to-date pain, has inward fact had a decent bounce dorsum (though at nowadays fading over again every bit I write this). While my description of this yr to engagement was, too is, accurate, I convey e'er been clear that we’re real much non a pure value investor. In fact, inward the long slice I wrote:

Long-short systematic value investing (only a subset of what nosotros produce inward private stocks) is quite bad this year. In fact, it has been doing quite poorly since a picayune afterward the GFC ended. What's dissimilar this yr versus prior years is that until 2018 other systematic long-short factors to a greater extent than than made upwards for it (after all, nosotros exclusively actually assist nigh the net).

That was me highlighting the practiced side of non beingness a one-factor bet (i.e., that nosotros could produce good for what’s been nearly a decade of piteous value returns because the residual of our procedure was working to a greater extent than than plenty to offset it). Of course, this also agency the reverse tin ship away occur, especially at brusk horizons. 1  In the final few days/weeks value has had a fleck of a surge, over again at nowadays fading, but the other factors (momentum too others) convey done worse than value has done well. 2 This is, of course, especially hard inward an already trying year. But it’s also endemic to the procedure nosotros believe inward too that’s worked for us long-term. We are non but i bet. Again, had nosotros but been a unmarried bet on value, the final close decade would’ve been i of fairly steady pain, too non the overall success we’ve seen.

As I hash out inward my giant essay, nosotros are admittedly hard to characterize amongst i liners (“the marketplace is up/down too then of course of teaching this happens!,” “value is up/down too then of course of teaching this happens!,” “momentum is up/down too then of course of teaching this happens!,” etc.). That’s much of the idea. But during real tough times, many desire uncomplicated explanations, fifty-fifty though we’ve designed a procedure that tin ship away survive frustrating to that end. 3 Frankly, I oftentimes desire uncomplicated explanations too! But exclusively for a moment, until my to a greater extent than level-headed colleagues explicate to me over again what I’m at nowadays writing nigh to you… (often sending me excerpts of my ain work!)

Another affair I wrote inward the master tome was:

As a blunt example, inward full general nosotros believe inward choosing private stocks amongst practiced value, practiced momentum (both cost too fundamental), depression risk, high character (e.g., profitability, margins), too positive views from those nosotros recollect are “informed investors.” We similar to under-weight or sell their opposites. When it doesn't work, or fifty-fifty hurts a lot for a while, nosotros don't all of a abrupt prefer expensive stocks amongst bad momentum, high risk, depression quality, too negative views from informed investors. What I'm proverb is, admittedly, our base of operations instance is to rely on the (in our humble opinion) overwhelming bear witness nosotros started with.

In employment amongst the above, 2 dissimilar clients came upwards amongst the thought for this brusk spider web log (one inward fact coming upwards amongst the title). In one episode of the greatest sitcom ever, 4 George Costanza, a perennial loser at all things (love, work, etc.) decided he must, inward all things, “do the opposite” of what he’d commonly do, every bit his normal way clearly wasn’t working out for him....

...MUCH MORE

HT: FT Alphaville's Further Reading post.