Super Stocks – why multi-factor stock selection offers higher returns at lower risk

Regardless of what the marketing departments at some major fund management firms might like you to think, the concept of ‘factor’ investing has been around for decades. The characteristics of Quality, Value and Momentum have long been credited as a source of some of the strongest returns in the stock market – it’s an open secret. But despite validatory evidence from academics and high profile investors who have successfully used these factors, most individual investors fail to do the same. Part of the problem is that despite making so much sense, there are strong behavioural and risk based reasons why many of us struggle to apply them properly.To understand how and why Quality, Value and Momentum work so well together, it’s worth exploring some of the history of these factors. The case for buying good quality stocks that are undervalued dates back at least as far as Benjamin Graham’s 1934 book, Security Analysis. He’d witnessed at first hand the consequences of chasing stocks on stretched valuations and then watching them tumble as confidence evaporated in the 1929 crash. The young Graham nearly lost everything and so built a new Value philosophy that aimed to buy assets as cheaply as possible.Fast…