FYI: We believe there are cause and effect relationships in the world — and in investing — that hold true over time. Many are common sense and easily observable – like fire creates smoke – while others are harder to see and understand. With factor investing, true relationships can be hard to see because of randomness and noise in data, and there’s a risk we convince ourselves certain relationships exist that really do not (e.g. smoke creates fire). In much of quantitative finance, data is mined to show a certain effect, but the logic behind the cause and effect relationship is not robust. Then suddenly, because of evidence in noisy historical data, investors begin to believe that smoke creates fire. For us, when historical evidence disagrees with our logic, we always favor applying our fundamental understanding over what a backtest prescribes.
Regards,
Ted
https://alphaarchitect.com/2018/06/08/future-factor-investing-may-different-backtested-past/
