A paper and Twitter thread on factor investing. The first half of the paper talks about value investing. Returns are primarily based on the market’s recognition of stabilizing fundamentals and thus multiples expand.
An offshoot is that outperformance for a given security tends to continue for years. This is also consistent with a strategy of buying what’s hated.
Momentum vs. Glamour is also well explicated. In fact, the most successful momentum strategy suffers from multiples *decreasing* every time the portfolio is rebalanced, but earnings growth outweighs that.
The lesson for investors is that if you want to find companies that are going to experience strong upcoming growth, you should look for companies with strong recent returns [Momentum], not companies trading at high valuations [Glamour]. Empirically, strong recent returns are a much better predictor of future growth than simple expensiveness.
An interesting offshoot is that for the momentum strategy, outperformance of a given holding ends after a year.