An asset manager and ETF expert shares why 'factor investing' yields bigger returns — and why picking stocks isn't worth it

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  • Gerd Kommer is one of Germany’s best-known financial experts.
  • He practices factor investing and puts all of his money in exchange-traded funds.
  • He told Insider about his investing strategy and why he avoided individual stocks.

This is an edited, translated version of an article that originally appeared on July 13.

Gerd Kommer is one of Germany’s best-known financial experts.

Kommer began his career in the financial industry as an analyst at a consulting firm and later worked at banks in Germany, South Africa, and the UK.

Before setting up his own company, Kommer Invest GmbH, he managed the London branch of an asset-management firm, where he was responsible for about 16 billion euros.

His reputation was mainly built through his book “Souverän Investieren mit Indexfonds und ETFs,” or “Sovereign Investing in Index Funds and ETFs.”

The first edition appeared about 20 years ago and initially “didn’t sell at all,” Kommer said in an interview with Insider. Then came the 2008 financial crash.

“Many people had once again lost money with active, speculative investing, with investments in individual stocks and through following banks’ advice,” Kommer said.

Investors saw that they could have more success with exchange-traded funds, he added, so he suddenly became a best-selling author. Kommer has gone on to write several books on finance, and he said he’d sold about 300,000 books in total.

“ETFs have worked wonderfully for me,” he said, adding that he’d built up a “significant seven-figure” fortune through investing in them.

The basic themes for all of his works, he said, are very similar: Invest rationally and without forecasts.

“You mustn’t think anyone in the stock market can reliably predict the winners,” Kommer said.

It’s “much better” to bet on all stocks through ETFs, he added.

In the long run, the stock market will go up, Kommer said, because companies that make essential goods and services will always recover from any decline. Investors want to invest their capital in the thousands of publicly traded companies that produce such goods and services, he added.

“We’re not picking winners or trying to avoid losers — we’re just investing in everyone,” he said.

For about 25 years, Kommer has been investing his money exactly as he describes in his books. He has a global portfolio with 80% in equities and the rest in short-dated government and corporate bonds with very low risk and high credit ratings. All this is in the form of ETFs.

The equity part of his portfolio is essentially the MSCI World Index with a small difference, he said. The difference is that Kommer practices “factor investing.”

Factor investing “is an investment approach that involves targeting specific drivers of return across asset classes,” according to BlackRock.

In Kommer’s case, he weights small companies, as measured by their market capitalization, higher than larger companies.

Indexes are weighted — the stocks that they track each represent a percentage relative to its perceived influence on the whole index. An overweight investment means Kommer increases the percentage share of small-cap companies in his portfolio compared with the benchmark portfolio that tracks them.

Kommer uses this strategy because small-cap stocks have huge growth potential and historically outperform large caps.

There are many ETFs that focus on small-cap stocks and overweight them in their product, Kommer said. He also gives a higher weighting to value stocks, which are undervalued companies, and to emerging-market stocks. Returns tend to be higher here as well, he said.

At its core, factor investing is passive investing, Kommer said, except that the weighting is different from traditional indexes.

Kommer added that he avoided investing in individual stocks.

“I don’t look at individual companies, financial statements, or analyst reports,” he said.

He said “stock picking” was too much work and too much risk.

He also takes a relaxed view of crises and tells young people, in particular, not to be afraid of the crash.

“I experienced the dot-com crash at the beginning of the noughties. That’s when the world stock market went down by 50%, the Dax by 70%,” he said. 

He used that time to invest, he added.

“I thought to myself: ‘Great, everything is much cheaper now — summer sales,'” he said.

A few years later, he became a millionaire.

“However, I have to say, I had an above-average salary and a high savings rate,” Kommer said.

He added that he was able to afford his investments because he didn’t have children or an “exorbitant lifestyle.”

“I didn’t have a fat Rolex or an expensive car, and I didn’t vacation in the Maldives every year,” he said.

For now, Kommer is still working at the investment firm he set up.

“I can’t imagine retiring, sitting around on the couch, doing nothing,” he said. “I want to make a difference.”