Factor investing is all the rage. Fama and French showed the way, many have followed, and now it’s all nailed down. It certainly seems that way when we see factors working as we think they should.
Whenever you come up with a new investment idea—whether it’s a new security to buy, a new factor to consider, or a new strategy to implement—you naturally ask yourself whether this new idea will increase your portfolio returns or cause you to lose money (and, of course, how much). Thinking probabilistically involves assessing the probabilities and coming up with a reasoned answer.
Investors compare all day: stocks versus bonds, active versus passive, value versus growth, stock A versus stock B, and now versus later. Humans are quick to compare but not very good at it. Perhaps the most important comparison an investor must make, and one that distinguishes average from great investors, is between fundamentals and expectations.