Why does value investing work? Why do other factor strategies work? For that matter, why does any active strategy — meaning, any strategy other than cap-weighted indexing — “work” in the sense of having a reasonable chance of beating the cap-weighted index other than by random variation?
The Classical Answer
The answer could arise in classical finance, or behavioral finance, or both. Classic finance posits that all investors are rational and fully informed. This starting point seems to lead to a recommendation to index all assets, but that is not necessarily where it leads.Click Here to Read the Article