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It's all about the numbers on Wall Street. It's all about the numbers on Wall Street. Photographer: Spencer Platt/Getty Images North America By Aaron Brown +Follow January 23, 2023, 12:05 PM UTC Listen to this article 5:56 Share this article Copied Gift this article Subscriber Benefit Bloomberg subscribers can gift up to 5 articles a month for anyone to read, even non-subscribers! Learn more Subscribe Sign In Follow the authors headshot of Aaron Brown Aaron Brown is a former managing director and head of financial market research at AQR Capital Management. He is author of "The Poker Face of Wall Street." He may have a stake in the areas he writes about. + Get alerts forAaron Brown Johannes Kepler is remembered for his seminal contributions to astronomy. However, like most 16th-century astronomers, he supported himself in part by making astrological predictions. His mentor, Michael Maestlin, taught him to always prophesy disaster. If something bad happens, you're celebrated for being right. If not, you're celebrated for preventing catastrophe. Making optimistic predictions either makes you look foolish if bad things happen or be forgotten if nothing bad happens. Which brings us to February 2016, when Rob Arnott and his colleagues at investment firm Research Affiliates, or RA, published a paper titled "How Can 'Smart Beta' Go Horribly Wrong?" This month the team declared victory with "Revisiting Our 'Horribly Wrong' Paper: That Was Then, This Is Now." For investors, "smart beta" means getting exposure to a market selectively rather than simply buying all assets in that market. Popular factors are size (buy stocks with small market capitalization), value (buy stocks with low ratios of price to value metrics like book value or cash flow) and momentum (buy assets that have gone up in price recently). The term "factor investing" is similar except managers also short assets with the opposite characteristics, such as buying stocks with small capitalization and shorting stocks with large capitalization. The 2016 paper claimed that four specific factors - size, quality, momentum and low beta - had very low value characteristics relative to history. In other words, to get exposure to those factors you had to buy stocks with poor value characteristics, such as high price to book value ratios, and that in similar periods in the past those factors had underperformed. The impression given by the paper's title and some of its rhetoric was that factors would crash in the near future, but the actual recommendations were more modest: investors should readjust expectations for lower factor returns from non-value factors and increase emphasis on value. 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