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Last week’s podcast was in a new special-edition format, jointly hosted with Wesley Gray, CEO of Alpha Architect. Gray is a Philadelphia-area PhD and investment manager. He plans to join me in our Wharton School studio to help profile academic work that is most relevant to investors. 

Introducing this week’s guest, Dr. Lu Zhang of Ohio State University, Gray described him as one of the world’s premiere experts on asset pricing who is examining the “factor wars” that are raging in academic circles. 

Zhang and his team spent three years assembling SAS code to test 447 different investment anomalies—that is, investment strategies or investment factors found to deliver excess returns—in the finance literature to see if he could replicate the results.1

His controversial conclusion: most anomalies can’t be replicated. 

The table below shows the category and number of investment strategies that Zhang tested. 

Category and Investments

The general categories can be described like this: 

1) Momentum: The tendency of stocks that are appreciating to continue to appreciate

2) Value versus growth: The tendency of stocks that have lower price multiples relative to some fundamental measure of value like book value, or earnings or dividends to show outperformance over higher multiple stocks

3) Investment: The tendency of firms that expand their assets and invest less to outperform more rapidly expanding firms

4) Profitability: The tendency of firms that have higher levels of returns on capital such as return on equity or return on assets to have higher returns than firms with lower returns on capital

5) Intangibles: The tendency of firms that have high levels of R&D or invest in branding/advertisements (i.e. high intangible value) to outperform firms with low intangible value

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