Proponents claim this approach is quantitative and based on observable data, such as stock prices and financial information, rather than on opinion or speculation.
[7] Critics of factor investing argue the concept has flaws, such as relying heavily on data mining that does not necessarily translate to real-world scenarios.
[11] The roots of value investing date to decades earlier, and were formalized by Benjamin Graham and David Dodd as outlined in their 1934 book Security Analysis.
The opportunity to capitalize on the value factor arises from the fact that when stocks suffer weakness in their fundamentals, leading the market to overreact and undervalue them significantly relative to their current earnings.
A systematic quantitative value factor investing strategy strategically purchases these undervalued stocks and maintains the position until the market adjusts its pessimistic outlook.
[8] They assert that due to data mining, very few of hundreds of identified factors have statistical significance in real-world scenarios.
In a 2016 paper, Arnott and colleagues noted that many factors become popular among investors, leading to high valuations among such stocks and subsequent expected poor returns.