Lots to unpack here but below are some high points from Kenneth French’s talk on his Five-Factor Asset Pricing Model:

“There’s no magic here; it’s really, really simple,” is how he opened the discussion. And to his credit, he seemed every bit a professor and his efforts to educate were largely a success based on audience engagement. He made sure folks weren’t lost in a largely equation-based presentation.

In a recap of his Three Factor Model he confessed that the unusually high return of small cap growth companies has “plagued” him for 22 years.

French was quick to also recognize that no model is perfect, but the driver for abandoning a model should be that a new, better model exists. In other words, it’s OK to use a flawed model if you understand its gaps. The shortcoming of the Five-Factor Model as stated in his presentation:

Specifically, small stocks whose returns behave like those of relatively unprofitable firms that invest aggressively tend to have much lower average returns than the model predicts.

I found his word choice particularly interesting. He interchanged the words “distressed” and “value” a number of times when speaking of stocks. He also made the observation that it’s not an investment manager’s job to determine if a “low” price is simply a misplacing or a reflection of risk. It is, however, our job to analyze the expected return of an investment.


Andrew Hall is the Vice President of Narwhal Capital Management.

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