After serving as a captain in the United States Marine Corps, Dr. Wesley Gray earned an MBA and doctorate in finance from the University of Chicago, where he studied with Nobel laureate Eugene Fama. Next, Gray held an academic post in his wife’s hometown of Philadelphia and worked as a finance professor at Drexel University. His interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management company dedicated to an impact mission of empowering investors through education.
He contributes to several industry publications and regularly speaks to professional investor groups across the country. Gray has published several academic papers and four books, including âEmbeddedâ (Naval Institute Press, 2009), âQuantitative Valueâ (Wiley, 2012), âDIY Financial Advisorâ (Wiley, 2015) and âQuantitative Momentumâ (Wiley, 2016). He currently resides in suburban Philadelphia with his wife and three children.
Watch the full presentation here:
Key points to remember
Gray kicked off his presentation with a presentation of himself and how he decided to launch Alpha Architect. While working as a professor and running an investment research blog alongside his friend, he was cold called by a billionaire who wanted to control his own capital and start making quantitative investments. From there, the company developed a systematic value investing strategy for high net worth clients, created its own exchange traded funds, and now operates an infrastructure for others to build their own ETFs.
The investor divided his presentation into four key parts, the first seeking to define what he calls value factor investing. Along with his journey to become a supporter of systematic value investing, he explained the concept under the name âMoneyballâ for finance. In short, investors can take different characteristics of a company, data points such as market capitalization and price-to-earnings ratios, and use them to plot a portfolio for expected risks and rewards. He explained that using this system over a long period of time leads to higher returns than passive investment in the market.
Next, he looked at the allure of value factor investing as well as some of the issues he encountered. Over the decades, a value factor strategy shows outstanding performance, but value as a whole concept has encountered many challenges over the past 10 years. He explained a hypothesis that the widespread allure of value investing led to increased competition and, as a result, killed the success he enjoyed. However, value investing has seen many difficulties in the short term, and its concept of value investing simply cannot be considered too easy.
He then looked at the functioning of the markets, which, according to him, is the weak point in the knowledge of many investors. His explanation highlighted two key concepts that illustrate the market as being efficient or inefficient. Gray added that he believed the markets were in fact both and therefore risky and difficult to exploit. All in all, he summarized the ideas into a simple concept that an investor must be able to endure some form of pain in order to make money on the stock market. Even if an investor made the perfect portfolio, they would still see periods of fluctuation in the market, which would make their investments bad.
Finally, Gray explained that these factors, due to their inherent risk and difficulty to mine, are almost guaranteed to work as an investment strategy. By taking additional risks and going through tough times, investors are able to survive and outperform their competition. He added that it may seem like a simple strategy, but it is not easy to use. There are almost endless reasons to abandon strategy and move on.
While Gray did not specifically look at investment examples during his presentation, he did use Tesla Inc. (TSLA, financial) to put forward its ideas of efficient and inefficient markets. He explained that bypassing a company like Tesla can lead to extreme career risk on something that could be a ârunaway trainâ. Companies like Tesla offer unique opportunities, but also high levels of risk that are difficult for most investors to exploit.
Several audience members asked Gray about his tips and advice for individual investors managing their own money. He began his explanation by saying that investors should focus on the acronym FACTS.
The first thing investors should do is seek to reduce their fees, hence the “f” in FACTS. They should avoid paying managers or funds as much as possible.
Then they should focus on affordability, or liquidity as Gray explained. This will allow an individual investor to move their money as they see fit to maximize their profits.
The “c” stands for complexity, which, he explained, usually comes at more cost. A simple strategy is difficult to sell to customers, but generally works much better than a strategy with more moving parts for an individual.
Continuing towards the “t” in the acronym, an investor should focus on strategic tax navigation. This will allow them to maximize their profits and taxes will generally eclipse any fees that might be associated with a fund.
Finally, the “s” stands for search. Here Gray insisted that finding investments takes a tremendous amount of time, which should be appreciated by the individual investor. Most people can make a lot more money by investing their time in things other than stock picking and should focus on a good ETF basket.
Another question asked Gray where to start for someone looking to educate themselves as a value investor. While he believes stock picking is not the most efficient way to invest, he recognizes that it is one of the best ways for an investor to educate himself in the market.
He likened stock selection to learning how to change your car’s oil. Sometimes you’ll likely outsource the process to someone else to save time, but it’s a good place to get a foothold and get some hands-on experience. At the same time, there should be constraints on the resources allocated to stock selection. Gray recommended that an investor start with a basket of ETFs or rational investments, and then use a small amount of money to experiment with stock selection.