Your Complete Guide to Factor-Based Investing

1. Persistent – Works across long periods of time and in different economic regimes.
2. Pervasive – Holds across countries, regions, sectors, and different asset classes.
3. Robust – Holds true for various definitions.
4. Investable – Does not just work on paper but also in actual implementation (accounting for trading costs).
5. Intuitive – There are logical risk-based or behavioral-based explanations for its premium and why it should continue to exist.

The opposite of a value stock.

Key characteristics:

• Market anticipates rapid earnings growth relative to the overall market
• High P/E ratio (price-to-earnings)
• Low book-to-market ratio

• Bull economic conditions: Small companies outperform
• Bear economic conditions: Small companies significantly underperform

Key insight: The size premium is cyclical and tied to economic conditions, making it a riskier factor during downturns.

Factor investing is all about improving the base rates of investment performance.

• Not an easy way to get rich
• Not a sure-shot way of making it happen
• Not a "build once, use forever" framework
• Not uniform across practitioners – different AMCs might have different implementations

1. Size – Smaller companies tend to outperform larger companies
2. Value – Buying undervalued companies gives you better returns
3. Momentum – Stocks that have done well in 6–12 months will continue to do well in 6–12 months
4. Beta – High beta should give higher returns; low beta should give lower returns

Note: Quality matters across all the other factors.