Episode 69: Quantitative Investing: The Solution to Human Bias with Wes Gray

Today we are joined by Wesley Gray who is the CEO of Alpha Architect, a firm in the US that specializes in concentrated factor strategies. Having completed his MBA and PhD at the University of Chicago – the Harvard of the finance world – Wes is an authoritative voice when it comes to quantitative research and factor investing. Incredibly, he took a 4-year break during his PhD, joined the marines and went to Iraq, and has also written several books. He went from value investor and stock-picker to having a strong quant focus and realized that it was possible to eliminate the human biases while still capturing the factor premiums. Our talk with Wes illuminates the nuanced nature of factor investing, behaviour versus risk-based factor premiums and active management versus passive and indexing. He discusses the process of collecting data for his PhD, the rules according to which they structure portfolios, how their boutique firm differs from larger advisor companies and who their ideal client is. Wes also shares his views on selecting the best quant model, hedge funds, value premiums and market-cap indexing. Join us for another insightful episode!

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Key Points From This Episode:

• Wesley’s experience as a stock picker and riding the wave of small-cap value. [0:03:31.0]
• The Value Investors Club as a data source to test stock-picking skills for his PhD. [0:06:43.0]
• From stock picker to a quant and realizing the need to eliminate biases. [0:09:38.0]
• The rules that govern how they build portfolios in his firm Alpha Architect. [0:14:26.0]
• Comparing Alpha Architect to Dimensional Fund Advisors and AQR. [0:17:13.0]
• Understanding reliability in the context of relativity and defining their ideal client. [0:22:28.0]
• Advice for retail investors about quant shops and choosing the best quant model. [0:26:55.0]
• Wesley’s view on hedge funds and their strategies. [0:32:57.0]
• Why education rather than assets should determine the active risk that is included in a portfolio. [0:36:24.0] 
• Thinking about persistence in the context of a behavioural component. [0:38:03.0]
• Why value premiums are not dead and how it relates to behavioural theory. [0:43:22.0] 
• The global explosion of market cap indexing and guidelines for investing. [0:47:28.0]
• And much more!

Tweetables:

“I realized through experience and after getting my ass handed to me that I just need rules. There is no amount of convincing yourself when you are in the fight that you are not suffering from overconfidence, that you’re not believing your own story. So, you just need rules – at least I did.” — @alphaarchitect [0:13:52]

“We are much more concentrated in our factor approach, while the others are more into closet indexing or lower active share, which is fine, it serves a different purpose.” — @alphaarchitect [0:19:17]

“It’s not really about how awesome your quant model is, it’s about how reasonable is your quant model and how much do you help us explain this to clients so that they can actually sit and deal with this quant model.” — @alphaarchitect [0:30:32]

Links From Today’s Episode:

Rational Reminder Website — https://rationalreminder.ca/

Alpha Architect — https://alphaarchitect.com/

Wesley Gray on LinkedIn — https://www.linkedin.com/in/alphaarchitect

Wes Gray on Twitter — https://twitter.com/alphaarchitect?ref_src

Wharton (University of Pennsylvania) — https://mba.wharton.upenn.edu/

Ted Seides on LinkedIn — https://www.linkedin.com/in/tedseides

Download the transcript of this episode here: Rational Reminder Podcast – EP. 69 – Transcript