Greenblatt's model is very similar to the profitability model, though it is an "extreme portfolio" with small amount of holdings that no fund could run on and have a large amount of assets, it's not well diversified either. But the concept is the same. As to premiums--you appear to have misunderstood this. The fact that there is a premium doesn't rule out mispricing. The issue is a very different one--you can have a premium either because of a risk story or a mispricing (behavioral) or combination of both.
Few other thoughts
One snide comment was made about the discovery that profitability matters---it's not profitability, but profitability relative to market value---so firms with the same value metrics but having higher profitability (using gross profitability as the measure) have had higher returns. The question is is that an anomaly (market not pricing them right) or is it a risk story (as I mentioned, profitability predicts growth and thus more of the cash flows from high profitability are further into the future and thus more risky--discount them at higher rate--or you might argue that high profitability firms are more likely to attract competition and see their margins deteriorate--I"ve heard that story from a top finance professor).
I love comments like Overthehill's rubbish--some of the top financial economists in the world think this is the most important "discovery" in finance in long time, and overthehill knows better.
As to number of factors, first this is not a brand new issue. In fact I wrote about a new factor model that some are suggesting should replace the FF 3 factor model as it does a better job of explaining returns and addressing anomalies--which is a problem for the FF model. While the FF model does explain a high percentage of the differences in returns between diversified portfolios, there are many anomalies that go unexplained. Here's the paper
Kewei Hou, Chen Xue , Lu Zhang, “Digesting Anomalies: An Investment Approach,” September 2012 and here are the four factors
• The market excess return (MK T).
• The difference between the return on a portfolio of small-cap stocks and the return on a portfolio of large-cap stocks (rME). The size factor earns an average return of 0.31 percent per month and is statistically significant at the 5 percent level.
• The difference between the return on a portfolio of low-investment stocks and the return on a portfolio of high-investment stocks (R*A/A). The investment factor earns an average return of 0.44 percent per month and is statistically significant. It’s worth noting that the investment factor is highly correlated with the value premium (0.69), suggesting that this factor plays a similar role to that of the value factor.
• The difference between the return on a portfolio of high return on equity (ROE) stocks and the return on a portfolio of low return on equity stocks (rROE). The ROE factor earns an average return of 0.60 percent per month, and is statistically significant. Also of importance is that the rROE factor has very low correlation with the Fama-French factors. Thus, we can conclude that this factor provides important new information missing from the Fama-French model. In addition, it has a high correlation (0.50) with the momentum factor, meaning that rROE would play a similar role as the momentum factor in analyzing performance. They also found that the investment and return on equity factors are almost totally uncorrelated, meaning that they are independent, or unique, factors.
This model pretty much solves all the anomalies thus appears to be a better model than CAPM
What surprises me is the negative reactions. All models are by definition wrong. Researchers work to improve them. So we moved from the CAPM one factor beta world to a much better 3 factor model, clearly a superior model. Then a fourth factor MOM was added, improving on the FF model. And now basically academics appear to be in agreement that we can do better, adding profitability. Should we not try to learn more by examining data to learn how markets are pricing things. This factor for example now fully explains Buffett's alpha--it wasn't stock picking, but investing in this factor (plus the leverage from BRK).
What should matter is the following:
A) is the evidence logical
B) Is it persistent around the globe/across markets
c) can you access it (costs of implementation
I'll note that this is gotten some of the smartest people in the world of finance like Fama and French and Asness and Moskowitz very excited. And probably the most talked about new paper in finance is Novy-Marx's paper. The reason is that it meets all the criteria.
DFA's growth funds are not growth funds at all, that is misleading term and don't know why they chose it--well I do--at least IMO to give them a fund to market to institutions that want to fill in style boxes. But it's a profitability fund and adds momentum screens. I don't have the loadings and of course they will change over time anyway.
The market size is not an issue as it is there in the large space as well as small. And if it's risk story it cannot be arbed away (see my answer above) and if it's anomaly, doesn't matter you should buy the more profitable stocks anyway, as long as all else equal (p/e, or BtM) --that's simple math.
I hope this is helpful. Fine to be skeptical, but one should at least read the research and then make a judgment.