The 2-century investment mystery

Factors work, but the explanation why remains elusive

John Rekenthaler 1 April, 2019 | 2:00PM

A Common Practice
First and foremost, most investment researchers seek positive (or negative) conclusions. Confirming the null hypothesis does no good at all. The aim is either to be published or to arrive at a new investment scheme. Neither goal is achieved by learning that the factors are unrelated. What matters are results!

No surprise, then, that investment analysts are adept at discovering "anomalies"--investment oddities that can be discussed in a paper, used as an exchange-traded-fund strategy, or both. (If such anomalies did not exist, one might say, it would be necessary to invent them.) Analysts scour for data that support their views, but they tend to be much less diligent with disconfirming evidence.

This enterprising mindset has its merits. It can identify temporary conditions. Its speculations lead to hypotheses that might otherwise go unexplored. And often, its findings are robust, to use the statistical lingo. For measuring powerful effects, such as the relationship between fund expenses and future returns, the back of the envelope works just as well as econometrics' calculations.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Amazon.com Inc2,134.87 USD-0.70
CVS Health Corp71.37 USD-0.87

About Author

John Rekenthaler

John Rekenthaler  John Rekenthaler is Vice President of Research for Morningstar.