Bogleheads.org

technovelist Just to set the record straight I went back to check the data on the REAL RETURN to one month tbills--if it's negative that clearly indicates easy monetary policy, if more than say 3% that would indicate tighter policy It was NEGATIVE every single year from 73-80. Gold collapsed when th...

scone
Well that depends on your equity allocation. For most I agree
But a paper that Kevin Grogan and I co-authored in the Journal of Investing showed that for high equity allocations longer bonds make for more efficient portfolios
So at say 80% stocks should consider owning longer bonds
Larry

scone The steepest part of the curve is typically at the short end, out to about 2 years you get the highest Sharpe Ratio Also note that the steeper the curve the higher the premium has been. So it's a balance between the shortest, say one-month bills and the term premium. Also note for munis the cu...

technovelist Real rates were falling and low from about 73-9 until Volker became Chairman and began to tighten He then squeezed harder and harder and eventually broke back of inflation High real rates raise the opportunity costs of owning gold. Also I see that your crystal ball is perfectly clear. P...

Jeb Well also is it the high vol strategies that are really bad, and low and medium about the same (another lottery type effect at work). That's what it seems like Shah found. AQR doesn't address this, at least as far as my read went. And all one seems to need to do was screen out high vol, neg mom ...

gerry GNMAs are strange bird and I'm sure that very few who invest in them understand/could explain the risks. Here is the problem. They trade based on, at time of issuance, over the yield on Treasury bonds which also have no credit risk. So the pricing reflects the same yield curve. However, the pr...

technovist
Tightening doesn't mean rise in rates, you can do that and have very easy monetary policy. Tightening means a rise in REAL rates and it was not until Volker came along and really put the brakes on that monetary policy tightened.
Best wishes
Larry

some more thoughts Remember that the highest vol stocks are only about 2% of the entire market, and screening for neg momentum and small growth stocks cut most of the premium from low vol. In other words a big chunk of the anomaly is explained by other anomalies--like the Black hole of small growth....

http://www.cbsnews.com/8301-505123_162-57585904/how-bernankes-testimony-affects-investors/

It's amazing how many investors don't understand the implications of the yield curve in terms of expected future rates
Hope you find it helpful

Larry

First, thanks for posting the paper I did a quick read and here are some comments, again based on quick read A) doesn't really say Shah's findings were really wrong--if you just do a straight BAB you do find that certain industries way heavily and you get a value titl-and their analysis doesn't incl...

rmelvey
What I can say is that some very smart people have looked at this and they (many independently) concluded that you need multiple screens--Larry

rmelvey IMO without question should come from the stock side. Reason is simple Why do you want to even consider commodities? Answer, hedge against certain risks, portfolio insurance if you will. Idea is to dampen volatility, cut tail risks That gives you the answer. If you take from stock side you a...

It helps to see things in the whole as this post points out.


http://www.cbsnews.com/8301-505123_162-57585316/how-commodities-can-help-a-portfolio/Hope you find it helpful

Larry

rmelvey
and gold coins have liquidity/trading costs issues
(:-))
Larry

rmelvey
What I can tell you is that if you screen for value first and then GROSS profitability you get signficantly higher returns than if you just screen for p/E,
If it was just p/e we would not be talking about a profitability factor.
Larry

hexdump
I agree. The key was to move UP the income statement to gross profitability--not using earnings.
Larry

rmelvey

Holding P/E constant, a lower P/B implies a lower ROE.

Don't think this is true.
Book value is historical long-term while p/e is current. It MIGHT be true over the long term but untrue today.

Larry

rmelvey
DFA funds are also available in lots of retirement plans and in 529 plans.
And there are reasonably priced ETFS
For example, for those interested IAU (gold trust by iShares) is 25bp, GLD is 40bp
And they have four producer equity funds for 39bp

Larry

rmelvey
Suggest you read Quantitative Value, which looks closely at Greenblatt's formula


Larry

Blue Yes and there are several papers on it, here's four posts I wrote on subject http://www.cbsnews.com/8301-505123_162-57499325/can-you-capture-the-liquidity-premium/ http://www.cbsnews.com/8301-505123_162-37842535/how-the-liquidity-premium-varies-in-good-times-and-bad-times/ http://www.cbsnews.co...

http://www.indexuniverse.com/sections/features/18765-swedroe-private-equity-inferior-to-small-caps.html Hope you find this of interest Right in line with my post on CBS about keeping it simple, avoiding complexity [url]http://www.cbsnews.com/8301-505123_162-57585331/in-complex-world-investing-shoul...

http://www.cbsnews.com/8301-505123_162-57585331/in-complex-world-investing-should-be-simple/

thought this would be appreciated by the Bogleheads

Larry

Brad No I would not draw that conclusion If anything it would be price to CASH FLOW, not earnings. You want to move up the income statement avoiding things like accruals. Also what works on paper may not work in practice if you have high turnover as result. FF chose BtM because it is more stable, re...

This was the Asian Contagion that spread throughout the markets and led to the failure of LTCM---Larry

Swaption The alpha definition has nothing to do with DFA or any firm. It's what left, the unexplained portion, from the regression. It might be skill for example, or it might be explained by another variable, not explained by the factors used in the regression. I already provided several explanation...

here's some more data 75-12 High profitability minus low profitability 4.9% with tstat of 3.5 when defining profitability as EBITDA over book value Take out interest expense and it's even higher at 5.3% with 3.6% tstat Net income to book it's 3.8% with tstat of 2.8 As you see the higher up the incom...

grap
No. Each 0.1 percent loading on size AND value gets you about 80bp in expected returns. So a core 1 type portfolio would have outperformed, be expected to outperform TSM by about 80bp. A profitability filter or ranking would add something onto that

Larry

crake The nice thing is that you don't need lots of assets to tilt -even to profitability, especially with core funds now available like AQRs which expose you to US, large and small and also value, MOM and profitability and so does their international fund And you certainly can tilt using other (non...

few things First for grap, you might want to read the Novy Marx paper which has the data or my summary here http://www.cbsnews.com/8301-505123_162-57542953/a-new-way-to-be-a-value-investor/ Second, for Dave and Crake, moving to profitability doesn't take you back to a TSM portfolio, at least not to ...

Dave So in the old VG versus DFA debate, does this new factor affect any individual investors thoughts? On the one hand it appears DFA will incorporate this new factor into its screens. On the other hand, this factor appears negatively correlated with value and might make some people more adamant TS...

After reading many of the posts I think the following will help clear up some issues on this idea of the FF model explaining say 94% of the DIFFERENCE in returns of diversified portfolio and thus what value could adding another factor (profitability) add First, when someone says that the model expla...

edge
There is much longer backtest with the data available in the US and it is highly robust
Larry

asinger MOM is not as tax inefficient as people think because there are lots of short term losses and more long term gains---And yes a core fund makes much more sense for a variety of reasons, not just saving internal trading costs and improving tax efficiency but cutting need to rebalance!!! Edge T...

Here's some monthly returns data thought you would find of interest on the profitability factor


High and Low Profitability Portfolios, US 1975-2012

High Low High-Low
Average 1.42 0.97 0.44
Std Dev 4.99 6.10 2.61
t-stat of difference 3.64

You can see why people have been impressed

Larry

learning head Any concentrated portfolio model won't work nearly as well because you have lots of idiosyncratic risks that a model cannot explain. The big difference is that the FF model, while explaining a very high percent of the difference in returns between diversified portfolios leaves us with ...

http://www.cbsnews.com/8301-505123_162-57583724/the-returns-of-stocks-with-less-risk/

since this is hot topic thought would be helpful
Best wishes
Larry

3CT_Paddler I would very much disagree with your characterization. It's not that one new factor is more important--it's that a factor was found that helped explain returns more than we knew before hand. It's not that one is more important than the other. For example, the MOM premium and the profitab...

I was asked about what anomalies the newer models explain that FF doesn't do good job at Here's a list of at least some of them, might be some I am missing Small cap growth MOM profitability earnings surprises Financial distress net investment net stock issuance Again, those interested should read t...

Scone
That's very good analysis--my own experiences tell me you're correct.

TC
You basically have that in a two fund approach
DFA US Core equity and DFA international core equity

Larry

tc Well we are still doing due diligence on fund providers but given what I have heard you don't have to do anything. If you are heavy with DFA SV that fund will begin to incorporate profitability some time in the not too distant future. And so will there other value funds. So don't think you really...

clearly irrational Of course Larry is talking his book Don't know why you said that. I don't have any "book" on this. I just presented the findings from Novy Marx' paper and from Zhang's etal paper and also from presentations I have seen so so far on the subject. I don't yet invest based o...

swaption You don't need a risk theory to explain any of this as I said. All you need is the cost of capital story. If you have two companies that have the same valuation and one is more profitable, and profitability persists, then you have higher expected returns. That's simple math, nothing more. A...

Paul Few thoughts for you Three factor model does a wonderful job, but it failed to explain the existence of many anomalies, including MOM. That is why MOM was added as a fourth explanatory factor Recently there has been a lot of research including papers I have written about that show that other mo...

http://www.cbsnews.com/8301-505123_162-57583697/jim-cramer-still-wont-make-you-rich/

While he might be entertaining...

Best wishes
Larry

Rod Completely agree, One should be skeptical that any evidence isn't result of data mining or data snooping That is why before acting one should be sure that the evidence is A) logical story behind the evidence B) persistent across the globe and asset classes C) is implementable in live portfolios-...

overthehill [Inflammatory comment removed by admin LadyGeek] [Response to inflammatory comment removed by admin LadyGeek] If anyone thinks that spending time on a board for DIYers is going to be a productive use of their time in terms of drumming up business they have no clue about what they are tal...

[Inflammatory comment removed by admin LadyGeek] 1) [Response to inflammatory comment removed by admin LadyGeek (also fixed quote)] 2)As to your other comment--it's Vanguard's choice to stick with simple index funds because they choose to do so---now that comes with a price to it's investors in tax...

beammeupscotty Vanguard certainly could, don't know if they will. They tend to stick with simple INDEXES as a retail oriented firm. Richard The explanation of why it works is simple math, in the equation I gave. Book value is net asset value, assets minus liabilities, not asset value. Now of course ...

momar
Might be surprising but it's true. Note however that there was whole school of Graham and Dodd and Buffett that invested this way, as did for example Greenblatt. This is we now know the source of their alpha (relative to the three factor model).
Larry

matjen As to Larry Portfolio, DFA will be incorporating the data and Bridgeway in some way as well (there methodology may already be doing this as they incorporate Cash flow to price and sales to price as value metrics (which are profitability type measures) and not just BTM, and momentum is a profi...