Laws of attraction, dating and factor-based investing

THERE are laws of attraction when we seek a partner. We often find ourselves gravitating towards people with certain characteristics. These traits could range from physical attributes to personality traits. It's most likely due to a mix of evolutionary and social reasons, and some research even shows that we are most attracted to someone who is a lot like ourselves - similar height, similar build, similar intelligence.

Factor-based investing is in many ways a similar concept. It involves finding characteristics (or factors) of stocks that will lead to higher expected returns over the long term. The investor then takes a systematic and rules-based approach to target stocks with these desired factors. Each stock would still have its own company-specific idiosyncrasies and risks. But by owning hundreds or thousands of stocks with these desired factors, the noise of individual stock characteristics would cancel each other out, and you can capture the benefit of these factors.

It is less about guesswork and picking individual stocks, and more about systematically picking hundreds or thousands of stocks with the desired traits.