Will the Small-Value premium persist over 40 years?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.

Will the Small-Value premium persist over 40 years?

Postby boggler » Mon Jul 01, 2013 1:29 pm

I'm young, and investing for a very long time. With the pace of innovation in this world, I have no idea what the world will look like in 40 years, yet I'm trying to make a decision today whether to invest in TSM or a small-value tilted approach. There are various explanations for the small-value premium. In an age of increasing globalization, technological development, and market efficiency, which of these reasons do we expect to remain valid?
boggler
 
Posts: 593
Joined: Thu Feb 07, 2013 2:29 am

Re: Will the Small-Value premium persist over 40 years?

Postby Blues » Mon Jul 01, 2013 1:33 pm

Image

A portent of things to come? Maybe the "I Ching" would provide a more accurate forecast given the growth of China's role in the world marketplace.
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson
User avatar
Blues
 
Posts: 1235
Joined: Wed Dec 10, 2008 11:58 am

Re: Will the Small-Value premium persist over 40 years?

Postby Simplegift » Mon Jul 01, 2013 1:45 pm

Boggler, if you don't have a strong conviction in the small/value premium (gained from your own research and study), then you shouldn't invest in it. Making a commitment to a tilt in one's portfolio can mean going whole decades at times without seeing any measurable benefit and having one's portfolio lag far behind the market portfolio (see 1983-2001 below).

The essential question is not "Will the small/value premium persist?" (no one knows the answer to this question), but rather, "Will you persist with the small/value premium?"

Image
Source: Vanguard
Last edited by Simplegift on Mon Jul 01, 2013 1:56 pm, edited 1 time in total.
Cordially, Todd
User avatar
Simplegift
 
Posts: 1420
Joined: Tue Feb 08, 2011 3:45 pm
Location: Central Oregon

Re: Will the Small-Value premium persist over 40 years?

Postby boggler » Mon Jul 01, 2013 1:56 pm

Simplegift wrote:Boggler, if you don't have a strong conviction in the small/value premium (gained from your own research and study), then you shouldn't invest in it. Making a commitment to a tilt in one's portfolio can mean going whole decades at times without seeing any measurable benefit and having one's portfolio lag far behind the market portfolio (see 1983-2001).

The essential question is not "Will the small/value premium persist?" (no one knows the answer to this question), but rather, "Will you persist with the small/value premium?"


Well put. That's actually the point of this thread. I try to think very long term, and thus I'm trying to understand the reasons for the SV premium that actually make sense over a long period of time.
boggler
 
Posts: 593
Joined: Thu Feb 07, 2013 2:29 am

Re: Will the Small-Value premium persist over 40 years?

Postby rkhusky » Mon Jul 01, 2013 2:06 pm

Plus if you gradually reduce equity exposure as you get closer to retirement, you will not be affected as much by a 5 year swoon in SV.
rkhusky
 
Posts: 1797
Joined: Thu Aug 18, 2011 8:09 pm

Re: Will the Small-Value premium persist over 40 years?

Postby M1garand30064 » Mon Jul 01, 2013 2:06 pm

As long as that asset class has risk that cant be diversified away I'd think it will persist.
M1garand30064
 
Posts: 77
Joined: Tue Sep 04, 2012 8:49 pm

Re: Will the Small-Value premium persist over 40 years?

Postby Random Walker » Mon Jul 01, 2013 2:53 pm

I think the simple intuitive cost of capital story is a strong reason to believe in the SV premium persisting over such a long time period. I also like the idea of diversifying across risk factors to improve portfolio efficiency.

Dave
Random Walker
 
Posts: 832
Joined: Fri Feb 23, 2007 8:21 pm

Re: Will the Small-Value premium persist over 40 years?

Postby boggler » Mon Jul 01, 2013 3:04 pm

Random Walker wrote:I think the simple intuitive cost of capital story is a strong reason to believe in the SV premium persisting over such a long time period. I also like the idea of diversifying across risk factors to improve portfolio efficiency.

Dave


What is the cost of capital story?
boggler
 
Posts: 593
Joined: Thu Feb 07, 2013 2:29 am

Re: Will the Small-Value premium persist over 40 years?

Postby Random Walker » Mon Jul 01, 2013 3:28 pm

Well, imagine you are a bank. Microsoft and Joe Nobody both come to you for a loan. Who is more likely to pay you back? Which is a riskier loan for you? Who will you charge the higher interest rate to? Someone (either Robert Merton or Merton Miller-I confuse this Merton stuff) got a Nobel Prize for showing that the expected return for an investment is the same as the company's cost of capital. This result intuitively makes great sense to me. And to stick with an investment plan through thick and thin, I think one really needs to have a plausible story behind the tilt in addition to historical data. Larry outlines this nicely in one or more of his books. I'm pretty sure it's in Wise Investing Made Simple.

Dave
Random Walker
 
Posts: 832
Joined: Fri Feb 23, 2007 8:21 pm

Re: Will the Small-Value premium persist over 40 years?

Postby IlliniDave » Mon Jul 01, 2013 3:59 pm

boggler wrote:I'm young, and investing for a very long time. With the pace of innovation in this world, I have no idea what the world will look like in 40 years, yet I'm trying to make a decision today whether to invest in TSM or a small-value tilted approach. There are various explanations for the small-value premium. In an age of increasing globalization, technological development, and market efficiency, which of these reasons do we expect to remain valid?


It's really not possible to know. Since the late 60s value stocks have outperformed growth stocks (Fama et. al.). Going back to the mid-late 30s, growth-oriented funds generally outperformed value funds up until the late 60s (Bogle/Malkiel) and you wind up with a draw. Apparently value stocks outperformed growth stocks in the handful of years prior to that, giving value stocks the edge going back to '29 (Fama et. al). Also, the definition of "value" has changed over time and probably isn't permanently defined.

I doubt it's a function of innovation. The theories I've heard are: 1) value stocks are riskier hence the reward is higher, or 2) value stocks generally are not the glamor stocks that get all the press/popularity (that results in higher price-to-name-your-parameter multiples) making them available at lower prices and therefore better buys. Reason 2) is at odds with some interpretations of the EMT.

If you go TSM you get both value and growth. A small tilt towards small/value may or may not give you a slight boost through the years. It's a bit of a gamble.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1383
Joined: Fri May 17, 2013 7:09 am

Re: Will the Small-Value premium persist over 40 years?

Postby nisiprius » Mon Jul 01, 2013 4:01 pm

Maybe the small value premium will persist, but, so what? It's not enough for there just to be a premium. You can always amp up risk and reward without changing asset classes, just by increasing the percentage allocation to the risky asset (and using leverage if necessary).

The question is: will it buy you anything more than amping up your risk simply by increasing your stock allocation? That's the big question.

1) Will small value have more risk-adjusted reward than the total market? DId it ever?

2) If not, is its correlation with the total market low enough to help much? If it used to be, will it stay that low, or will it increase like that of other diversifiers, as suggested by William J. Bernstein's Skating Where The Puck Was? According to Morningstar's 2010 SBBI yearbook the correlation between large growth and small value, as far apart one could get, is still 0.74. I'm procrastinating on doing some math but I don't think 0.74 is a low correlation, and that any help it gives is likely lost in the noise.

Boggler, keep in mind that even though the small value tilt/multifactor investing/Fama-French informed strategy/DFA thing is fairly rational and has some research behind it, it is not so cut-and-dried as all that. It belongs in the grey area of "might be something to it" and "a lot of people more knowledgeable than me seem to think there's something to it," but there are sane skeptics, one of them named John C. Bogle.

And, rather amazingly, there is this video on the DFA website itself--DFA being probably the company most identified with factor-based investing--in which Eugene Fama himself has this exchange with an interviewer:
Q: Some people cite your research showing that value and small firms have higher average returns over time and they assume that you would recommend most investors have a big helping of small and value stocks in their portfolios. Is that a fair representation of your views?

A: Um, no. (Laughter). Basically this a risk story the way we tell it, so there is no optimal portfolio. The way I like to talk about it when I give presentations for DFA or other people is, in every asset pricing model, the market portfolio is always an efficient portfolio. It's always a relevant portfolio for an investor to hold. And investors can decide to tilt away from that based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either. So there's a whole multi-dimensional continuum here of efficient portfolios that anybody can decide to buy that I can't quarrel with. And I have no recommendations about because I think it's totally a matter of taste. If you eat oranges and I eat apples I can't really quarrel very much with that."
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nisiprius
Advisory Board
 
Posts: 26060
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Will the Small-Value premium persist over 40 years?

Postby scone » Mon Jul 01, 2013 4:52 pm

Even if you don't get a big premium, the diversification benefit is worthwhile. If small caps "zig" while large caps "zag," the overall ride should be a little less volatile. It's even more noticeable with small cap value (IJS) and international small cap (VSS). They don't move in lockstep, on a day-to-day basis, and that does help the return. Personally, I can't see the point of avoiding a diversification benefit, however small. Why would you do that?

The other thing I like about small caps: a little goes a long way. I can get a decent expected return and still have a fairly modest stock allocation overall. That helps my peace of mind. I also like to think that by owning small caps, I'm providing capital to small businesses worldwide, and that's where a lot of job creation happens. Which is part of the social utility of capitalism-- one thing that Jack Bogle and Warren Buffett agree on!

So the premium, when and if it comes, is gravy-- there are benefits in the "here and now" that make small caps worthwhile to me.
"Sometimes you're the windshield, sometimes you're the bug." -- Mary Chapin Carpenter
scone
 
Posts: 906
Joined: Wed Jul 11, 2012 4:46 pm

Re: Will the Small-Value premium persist over 40 years?

Postby Chris M » Mon Jul 01, 2013 4:54 pm

boggler wrote:I'm young, and investing for a very long time. With the pace of innovation in this world, I have no idea what the world will look like in 40 years, yet I'm trying to make a decision today whether to invest in TSM or a small-value tilted approach. There are various explanations for the small-value premium. In an age of increasing globalization, technological development, and market efficiency, which of these reasons do we expect to remain valid?


Well, technological development and market efficiency have been around a long time, and even the current trend towards increasing globalization goes back to the early 1990s and the fall of the USSR. So I don't see major developments that would call the continued existence of the premium into question.

That said, in general the explanations of the premium we might expect to remain valid are those that are rooted in characteristics that should persist over time. IlliniDave notes that one of the explanations is that value stocks aren't the glamor stocks that get all the press and popularity. This particular explanation is ultimately based on certain human biases identifed by psychologists, such availability bias (the human tendency to overemphasize events--such as a big move in a stock's price--that receives heavy media attention) and recency bias. I would expect these biases, rooted as they are in human nature, to persist over time regardless of technology, market efficiency, etc. Now, whether this explanation of the premium is true is a different question from whether, assuming it is true, it will persist. To the extent it is true, I would expect it to persist.
Chris M
 
Posts: 88
Joined: Tue May 28, 2013 6:25 pm

Re: Will the Small-Value premium persist over 40 years?

Postby SVariance1 » Mon Jul 01, 2013 4:55 pm

Buy low and sell high versus buy high and sell higher. Which do you think will have a premium going forward?
Mike
User avatar
SVariance1
 
Posts: 1048
Joined: Mon Jun 20, 2011 11:27 am
Location: Philadelphia Area

Re: Will the Small-Value premium persist over 40 years?

Postby learning_head » Mon Jul 01, 2013 9:22 pm

I suppose it's also possible that small premium will persist while value will not and vice versa... In other words, I am not sure that both have to persist or not persist.
learning_head
 
Posts: 557
Joined: Sat Apr 10, 2010 6:02 pm

Re: Will the Small-Value premium persist over 40 years?

Postby stlutz » Mon Jul 01, 2013 9:57 pm

There are a whole host of anomalies out there--small, value, low. vol., momentum, asset growth etc. Why not tilt toward a bunch of them instead of just picking one or two?
stlutz
 
Posts: 1942
Joined: Fri Jan 02, 2009 1:08 am

Re: Will the Small-Value premium persist over 40 years?

Postby pascalwager » Mon Jul 01, 2013 10:25 pm

scone wrote:

The other thing I like about small caps: a little goes a long way. I can get a decent expected return and still have a fairly modest stock allocation overall. That helps my peace of mind. I also like to think that by owning small caps, I'm providing capital to small businesses worldwide, and that's where a lot of job creation happens. Which is part of the social utility of capitalism-- one thing that Jack Bogle and Warren Buffett agree on!


If most stock transactions are on the secondary market and money just passes from buyer to seller, I don't understand how we are "providing capital to small businesses worldwide" when we buy (domestic and foreign) small company stocks. According to W. Bernstein, there is no direct benefit to the companies from these transactions.
pascalwager
 
Posts: 436
Joined: Mon Oct 31, 2011 8:36 pm

Re: Will the Small-Value premium persist over 40 years?

Postby fulltilt » Tue Jul 02, 2013 11:00 am

nisiprius wrote:Maybe the small value premium will persist, but, so what? It's not enough for there just to be a premium. You can always amp up risk and reward without changing asset classes, just by increasing the percentage allocation to the risky asset (and using leverage if necessary).


You've stated this often, and i am wondering if you would care to elaborate on this. I don't understand why you think this. The way i understand the quote from Fama in your post is that he is essentially saying that small and value are different dimensions of risk than beta and that it is personal taste whether you choose to partake in them or not. You can choose to dabble in those dimensions or not. There is no "right" answer. I think we are on the same page here, right?

What i don't understand is why you think that increasing the depth of your exposure to one factor (beta) is the same thing as spreading your exposure across risk factors. What is the downside to diversifying across risk factors rather than doubling down on one risk factor?
fulltilt
 
Posts: 82
Joined: Thu Dec 01, 2011 2:23 pm

Re: Will the Small-Value premium persist over 40 years?

Postby Random Walker » Tue Jul 02, 2013 11:51 am

Pascal Wager,
Yes, you can create same increased expected return for a given portfolio by increasing beta exposure or tilting. As said above, adding more beta just increases exposure to one factor. Increasing expected return by diversifying across risk factors results in a more efficient portfolio because of the weak/no correlation between beta, small, value risk factors.
Tilted portfolio may cost more and be less tax efficient, but those costs have to be weighed against improved portfolio efficiency. Larry's short article Effective Diversification in 3 Factor World is very worthwhile reading.

Dave
Random Walker
 
Posts: 832
Joined: Fri Feb 23, 2007 8:21 pm

Re: Will the Small-Value premium persist over 40 years?

Postby IlliniDave » Tue Jul 02, 2013 12:20 pm

pascalwager wrote:
If most stock transactions are on the secondary market and money just passes from buyer to seller, I don't understand how we are "providing capital to small businesses worldwide" when we buy (domestic and foreign) small company stocks. According to W. Bernstein, there is no direct benefit to the companies from these transactions.


This is my way of thinking about secondary markets. Shares would be hard to sell if they could never be sold, right?. Who'd want to be locked into a risky investment for life. An obvious solution would be to arrange it so investors can redeem shares on demand directly from the company. But that could be extremely problematic for the company. Aside from the sticky issue of establishing fair prices for redemption, the company would have to keep a lot of cash on-hand to accommodate investors looking to dump shares during tough times (when possibly their cash is desperately needed to stay in business). So by having the secondary market the capitalized business is supported through not having to expend resources buying back shares (that they'd presumably be looking to immediately try and resell) when the resources could be put to use in ways that better benefit the business.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1383
Joined: Fri May 17, 2013 7:09 am

Re: Will the Small-Value premium persist over 40 years?

Postby pascalwager » Wed Jul 03, 2013 1:00 am

Pascal Wager,
Yes, you can create same increased expected return for a given portfolio by increasing beta exposure or tilting. As said above, adding more beta just increases exposure to one factor. Increasing expected return by diversifying across risk factors results in a more efficient portfolio because of the weak/no correlation between beta, small, value risk factors.
Tilted portfolio may cost more and be less tax efficient, but those costs have to be weighed against improved portfolio efficiency. Larry's short article Effective Diversification in 3 Factor World is very worthwhile reading.

Dave


I think you are responding to the post by fulltilt.
pascalwager
 
Posts: 436
Joined: Mon Oct 31, 2011 8:36 pm

Re: Will the Small-Value premium persist over 40 years?

Postby nisiprius » Wed Jul 03, 2013 6:07 am

fulltilt wrote:
nisiprius wrote:Maybe the small value premium will persist, but, so what? It's not enough for there just to be a premium. You can always amp up risk and reward without changing asset classes, just by increasing the percentage allocation to the risky asset (and using leverage if necessary).


You've stated this often, and i am wondering if you would care to elaborate on this. I don't understand why you think this. The way i understand the quote from Fama in your post is that he is essentially saying that small and value are different dimensions of risk than beta and that it is personal taste whether you choose to partake in them or not. You can choose to dabble in those dimensions or not. There is no "right" answer. I think we are on the same page here, right?

What i don't understand is why you think that increasing the depth of your exposure to one factor (beta) is the same thing as spreading your exposure across risk factors. What is the downside to diversifying across risk factors rather than doubling down on one risk factor?
What I am saying is that the burden of proof is on those who say it isn't, and they need to do it by presenting portfolio comparisons in which the risk is equalized. And that if someone wants to sell me a risky asset class to add to my portfolio, the right question to ask is "If I'm willing to boost the risk in my portfolio, why should I do it this way rather than by just adjusting my stock/bond allocation in my existing portfolio?"

There is an astonishing amount of nonsense written that focusses on returns alone; for example, a lot of people look at those 1926-to-date semilog charts of the the SBBI data series and see the "small company" line beating the "large-company" line and saying "well, I guess I should invest in small caps because it is going to make me more money."

And there is an astonishing amount of slightly less naïve writing that makes elaborate comparisons between portfolios that are not adjusted to have the same risk; for example, noting that some "diversified" portfolio showed lower risk, rather than making the appropriate comparison, which is to equalize risk and state the benefits of the "diversified" portfolio as greater return so that you can judge "how much is that in dollars."

The vast majority of writing on portfolio tweaks, e.g. adding low-grade high-yield bond funds, involves comparisons, sometimes very elaborate, between portfolios that have not been matched to have the same standard deviation. You make a change, all sorts of things change in response, and the writer selectively points out something and presents a subjective judgement that the change was an improvement.

What I am saying is that if someone advocates adding a riskier asset to a portfolio, the burden is on them to show what happens if you match that with a plain portfolio that's been adjusted to the same risk by adjusting stock allocation. And I am also saying that when this is done, the claimed advantage usually turns out to be subtle, weak, and dubious. Measured in basis points; existing only when data is averaged over many, many decades; including decade-long periods of underperformance as well as outperformance; and far too dependent on choice of endpoints.

The vaunted low correlations are not that low, not stable, and William J. Bernstein suggests that they have a strong tendency to increase as a result of increasing investor interest in them.

A point that I'm more and more struck by, incidentally, is that if you start with a portfolio consisting only of the S&P 500 for stocks, and the Barclay's/Lehman Aggregate Index for bonds, the alternatives that are suggested for addition are always always always riskier. Something is going on here, and I believe it is a marketing-driven push toward colonizing fresh investment territory, by constantly rehabilitating the reputation of asset classes the average investor would formerly have thought were too exotic or risky to consider.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
nisiprius
Advisory Board
 
Posts: 26060
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Will the Small-Value premium persist over 40 years?

Postby topos » Wed Jul 03, 2013 6:23 am

Chris M wrote:That said, in general the explanations of the premium we might expect to remain valid are those that are rooted in characteristics that should persist over time. IlliniDave notes that one of the explanations is that value stocks aren't the glamor stocks that get all the press and popularity. This particular explanation is ultimately based on certain human biases identifed by psychologists, such availability bias (the human tendency to overemphasize events--such as a big move in a stock's price--that receives heavy media attention) and recency bias. I would expect these biases, rooted as they are in human nature, to persist over time regardless of technology, market efficiency, etc. Now, whether this explanation of the premium is true is a different question from whether, assuming it is true, it will persist. To the extent it is true, I would expect it to persist.


My problem with that explanation is that most of the trading is suppose to be done by the highly skilled professionals or even computers. One might expect those traders to make analysis well beyond the "glamor stocks that get all the press". It is hard for me to believe such well known common investors' bias will not be arbitrage away by most sophisticated investors.
topos
 
Posts: 138
Joined: Wed Jan 28, 2009 9:47 pm

Re: Will the Small-Value premium persist over 40 years?

Postby Call_Me_Op » Wed Jul 03, 2013 7:05 am

boggler wrote:I'm young, and investing for a very long time. With the pace of innovation in this world, I have no idea what the world will look like in 40 years, yet I'm trying to make a decision today whether to invest in TSM or a small-value tilted approach. There are various explanations for the small-value premium. In an age of increasing globalization, technological development, and market efficiency, which of these reasons do we expect to remain valid?


Don't count on it. Make sure you hold some of everything - US, International, small, large, growth, & value.

When we talk about "tilting", we are not saying put all of your eggs in a particular basket. You're tilting with respect to beta (the market). For example, for US equities, I hold 50/50 large-cap/small-cap. This is tilted - but balanced. :wink:
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein
Call_Me_Op
 
Posts: 4911
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Will the Small-Value premium persist over 40 years?

Postby zaboomafoozarg » Wed Jul 03, 2013 7:46 am

I will bump this post on July 1, 2053 and let you know. Adding reminder to Google Calendar now!

Darn, would only let me go to July 1, 2050 :( Close enough :)
User avatar
zaboomafoozarg
 
Posts: 1128
Joined: Sun Jun 12, 2011 12:34 pm

Re: Will the Small-Value premium persist over 40 years?

Postby Stonebr » Wed Jul 03, 2013 8:12 am

One point that needs mentioning is that neither you nor anyone else NEEDs a portfolio that earns a premium over the market. What you need is a portfolio plan that achieves your financial goals: retirement at an acceptable age and standard of living, putting kids through college, etc. I don't know of any goal, short of being "filthy rich," that requires anything more than a high savings rate, reasonable returns, low cost, and low turnover -- basic Boglehead principles.

Attempts to beat the market using value, small cap, emerging markets premiums are simply not necessary for anything other than ego gratification. These are just another trap like timing, following gurus, and active management. While there may be "studies" that support a strategy's past effectiveness, there's no guarantee, and no need to out-perform the market. You can get to your goal with just TSM. Heck, millions of people have gotten to their goals with high-cost active management -- just takes a little longer on average. Again, it's savings, steady reasonable returns, low cost and low turnover that give you the sure-thing advantage over others -- not a select set of asset classes that out-perform.
"have more than thou showest, | speak less than thou knowest" -- The Fool in King Lear
Stonebr
 
Posts: 995
Joined: Wed Jan 21, 2009 11:19 am
Location: Maine

Re: Will the Small-Value premium persist over 40 years?

Postby IlliniDave » Wed Jul 03, 2013 8:16 am

topos wrote:
Chris M wrote:That said, in general the explanations of the premium we might expect to remain valid are those that are rooted in characteristics that should persist over time. IlliniDave notes that one of the explanations is that value stocks aren't the glamor stocks that get all the press and popularity. This particular explanation is ultimately based on certain human biases identifed by psychologists, such availability bias (the human tendency to overemphasize events--such as a big move in a stock's price--that receives heavy media attention) and recency bias. I would expect these biases, rooted as they are in human nature, to persist over time regardless of technology, market efficiency, etc. Now, whether this explanation of the premium is true is a different question from whether, assuming it is true, it will persist. To the extent it is true, I would expect it to persist.


My problem with that explanation is that most of the trading is suppose to be done by the highly skilled professionals or even computers. One might expect those traders to make analysis well beyond the "glamor stocks that get all the press". It is hard for me to believe such well known common investors' bias will not be arbitrage away by most sophisticated investors.


It depends on what all those computers and highly skilled professionals decide is desirable. Generally they are gunning for short/medium-term price inflation, I believe (which draws AUM which in turn is where they make their money, not from long-term investment returns). So in many corners there's a strong preference for high projected earnings growth above all else (often accompanied by a preference for no or scant dividends, which tend to be viewed as a drag on growth). Those stocks wind up with high price multiples. Persistent high price multiples and "popular" are close to being synonymous.

Value are opposite: low price multiples, lower earnings growth, and as a group pay higher dividends. In general they are the stocks the majority find relatively undesirable. Some of them will be struggling companies that have a certain risk. But my belief is there is a strong core of solid companies among them that will grow roughly with the per-capita GDP and maintain strong earnings/profit margins over time. Slow and steady, not unlike the outlook of a long-term investor.

History has shown "value" stocks in the aggregate work well for dedicated long-term investors over the course of decades, but probably not so much for the professional fund managers that constitute the majority of the market. For them gaudy recent returns are the bait. I think the market efficiently manifests the opinion/beliefs of the predominant market participants. I'm not sure the market is always priced efficiently from the perspective of the minority who desire to buy stocks and hold them for decades. As the value premium gains wider acceptance it could fade, but I'm not sure the market as a whole is patient enough for that to happen. Maybe it's actually a "patience premium" that side of the market universe offers.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1383
Joined: Fri May 17, 2013 7:09 am

Re: Will the Small-Value premium persist over 40 years?

Postby Default User BR » Wed Jul 03, 2013 9:59 am

I can't predict the next 40 days. How could I predict 40 years?

If you don't want to tilt, don't. This sounds like a search for reasons not to.


Brian
Default User BR
 
Posts: 7501
Joined: Mon Dec 17, 2007 7:32 pm

Re: Will the Small-Value premium persist over 40 years?

Postby LH » Wed Jul 03, 2013 10:19 am

Unless you hold a near religious ability to stay the course if you decide to scv tilt, do not do it.

Outcome is unknown....

This is easy to say, but there is a lot behind it, once you go down the rabbit hole...

Look forward 40 years.

Say 40 year outcome is bad for scv, well then
1)the strategy was bad ex ante. Simply flawed.
2)the scv strategy was good, but the risk showed up, and things didn't work out

Sooooooo, even 40 years later, was your strategy wrong/flawed just because outcome bad? Does the fact that a lifetime lottery player hits the jackpot twenty years of playing lottery make his strategy good? (bad/good luck does not validate strategy)


Anyway, on and on and on.....

What IS guaranteed, is that scv tilt WILL fall out of favor. Maybe even FF repudiate it in next twenty years.....

Scv will, likely at same time, be a relative looser......

Classic Buy high, sell low ensues.

So, unless you can stay the course even if ff say its wrong, don't play SCV.
User avatar
LH
 
Posts: 5488
Joined: Wed Mar 14, 2007 2:54 am

Re: Will the Small-Value premium persist over 40 years?

Postby Chris M » Wed Jul 03, 2013 5:03 pm

IlliniDave wrote:
topos wrote:
Chris M wrote:That said, in general the explanations of the premium we might expect to remain valid are those that are rooted in characteristics that should persist over time. IlliniDave notes that one of the explanations is that value stocks aren't the glamor stocks that get all the press and popularity. This particular explanation is ultimately based on certain human biases identifed by psychologists, such availability bias (the human tendency to overemphasize events--such as a big move in a stock's price--that receives heavy media attention) and recency bias. I would expect these biases, rooted as they are in human nature, to persist over time regardless of technology, market efficiency, etc. Now, whether this explanation of the premium is true is a different question from whether, assuming it is true, it will persist. To the extent it is true, I would expect it to persist.


My problem with that explanation is that most of the trading is suppose to be done by the highly skilled professionals or even computers. One might expect those traders to make analysis well beyond the "glamor stocks that get all the press". It is hard for me to believe such well known common investors' bias will not be arbitrage away by most sophisticated investors.


It depends on what all those computers and highly skilled professionals decide is desirable. Generally they are gunning for short/medium-term price inflation, I believe (which draws AUM which in turn is where they make their money, not from long-term investment returns). So in many corners there's a strong preference for high projected earnings growth above all else (often accompanied by a preference for no or scant dividends, which tend to be viewed as a drag on growth). Those stocks wind up with high price multiples. Persistent high price multiples and "popular" are close to being synonymous.

Value are opposite: low price multiples, lower earnings growth, and as a group pay higher dividends. In general they are the stocks the majority find relatively undesirable. Some of them will be struggling companies that have a certain risk. But my belief is there is a strong core of solid companies among them that will grow roughly with the per-capita GDP and maintain strong earnings/profit margins over time. Slow and steady, not unlike the outlook of a long-term investor.

History has shown "value" stocks in the aggregate work well for dedicated long-term investors over the course of decades, but probably not so much for the professional fund managers that constitute the majority of the market. For them gaudy recent returns are the bait. I think the market efficiently manifests the opinion/beliefs of the predominant market participants. I'm not sure the market is always priced efficiently from the perspective of the minority who desire to buy stocks and hold them for decades. As the value premium gains wider acceptance it could fade, but I'm not sure the market as a whole is patient enough for that to happen. Maybe it's actually a "patience premium" that side of the market universe offers.


Excellent points. And you can find some empirical evidence supporting the short-term perspective of professional fund managers if you have a premium membership to Morningstar. Using their premium mutual fund screener you can develop a distribution of the universe of actively-managed equity funds by turnover ratio. When I did this a few weeks ago I found about 20 percent of funds had turnover ratios less than 25%, and about half had turnover of 50% or more. Remember, these guys are in business to gather assets into their funds. The quickest way to do that is to jump on the latest hot growth stocks, rack up impressive 1-year (or even shorter) returns, and get written up in the financial press.

I'll also add that the highly skilled are not necessarily immune from availability, recency, and other human biases.

Chris

P.S. I especially like the idea of the "patience premium."
Chris M
 
Posts: 88
Joined: Tue May 28, 2013 6:25 pm

Re: Will the Small-Value premium persist over 40 years?

Postby stlutz » Wed Jul 03, 2013 5:22 pm

For people who are confused about where Nisiprius has been going, this thread from a couple of years back on smallcap tilting is helpful:

viewtopic.php?t=83364

I'm young, and investing for a very long time. With the pace of innovation in this world, I have no idea what the world will look like in 40 years, yet I'm trying to make a decision today whether to invest in TSM or a small-value tilted approach


This is the risk in any strategy, not just small/value tilting. It even applies to total market investing as those changes you talk about may or may not be good for those companies/industries that currently dominate the market. Some here will argue that their particular approach to tiling is all but guaranteed to beat the market over 40 years (often with "risk" being the reason for the virtual guarantee). I've always been skeptical of such claims.

However, I would worry less about that and more on the risks you can control--namely your own behavior. Small/value may or may not help; switching in an out of small/value, changing to another "hot" factor tilt in a couple of years etc. is where problems arise. If you adopt a moderate tilt to small/value and then just rebalance periodically, you'll be fine and far ahead of 95% of the folks out there.

Personally I still tilt because that is what I started doing back in the 90s. I've been happy with the results, but I'm also not sure I would make the same decision if starting from scratch today.
stlutz
 
Posts: 1942
Joined: Fri Jan 02, 2009 1:08 am

Re: Will the Small-Value premium persist over 40 years?

Postby zaboomafoozarg » Wed Jul 03, 2013 6:34 pm

stlutz wrote:Personally I still tilt because that is what I started doing back in the 90s. I've been happy with the results, but I'm also not sure I would make the same decision if starting from scratch today.


Care to share why you would consider dropping the tilt if you were redoing it?

I've got a small tilt (20% of US & Int'l) to SCV and it's fine now, and I can stick with it, but the extra logistics involved is my biggest concern. I just think that in 30 years I might get sick of the whole thing, and want something simpler like a 3-fund.
User avatar
zaboomafoozarg
 
Posts: 1128
Joined: Sun Jun 12, 2011 12:34 pm

Re: Will the Small-Value premium persist over 40 years?

Postby nedsaid » Wed Jul 03, 2013 8:36 pm

The small stock premium works in part because they are less followed by Wall Street. The Value premium works because value stocks are unpopular and unloved. Since Wall Street is largely an expectations game, it is easier for small companies and for value companies to beat the expectations of the market. It makes sense to buy what is unpopular, unloved, and underfollowed.

People are drawn to exciting and cool and popular like moths to a flame. Value strategies are boring and require patience. People crave excitement and over time lose interest in Value strategies. This is why you don't have to worry about "everyone" buying small cap value. The premium would disappear for a while but as people got disappointed with the returns and bored with waiting would then rush to the Growth stocks.

These premiums work over long periods of time. Large can outperform Small and Growth can outperform Value for periods of a decade. In the 1990's, large cap growth stocks were quite popular and outperformed small stocks. In the 2000's, small and value outperformed. The academic research shows these premiums in almost all stock markets in the world. The trouble is that sometimes you have to be very patient.

So if you overweight your portfolio to small and value, don't overdo it. Small Cap Value can be very volatile.
A fool and his money are good for business.
User avatar
nedsaid
 
Posts: 2684
Joined: Fri Nov 23, 2012 12:33 pm

Re: Will the Small-Value premium persist over 40 years?

Postby Random Walker » Wed Jul 03, 2013 9:53 pm

Nedsaid laid out excellent potential behavioral explanations of small and value premia. But I would personally consider those icing on the cake. I think the cake is the risk based explanations, which makes sense to me as a cost of capital story.

Dave
Random Walker
 
Posts: 832
Joined: Fri Feb 23, 2007 8:21 pm

Re: Will the Small-Value premium persist over 40 years?

Postby hq38sq43 » Wed Jul 03, 2013 9:57 pm

boggler wrote:
Simplegift wrote:Boggler, if you don't have a strong conviction in the small/value premium (gained from your own research and study), then you shouldn't invest in it. Making a commitment to a tilt in one's portfolio can mean going whole decades at times without seeing any measurable benefit and having one's portfolio lag far behind the market portfolio (see 1983-2001).

The essential question is not "Will the small/value premium persist?" (no one knows the answer to this question), but rather, "Will you persist with the small/value premium?"


Well put. That's actually the point of this thread. I try to think very long term, and thus I'm trying to understand the reasons for the SV premium that actually make sense over a long period of time.


Five hundred years from now, who'll know the difference?

Best regards,
Harry at Bradenton
hq38sq43
 
Posts: 351
Joined: Tue Sep 06, 2011 5:25 pm
Location: Bradenton FL

Re: Will the Small-Value premium persist over 40 years?

Postby boggler » Wed Jul 03, 2013 11:09 pm

LH wrote:Unless you hold a near religious ability to stay the course if you decide to scv tilt, do not do it.

Outcome is unknown....

This is easy to say, but there is a lot behind it, once you go down the rabbit hole...

Look forward 40 years.

Say 40 year outcome is bad for scv, well then
1)the strategy was bad ex ante. Simply flawed.
2)the scv strategy was good, but the risk showed up, and things didn't work out

Sooooooo, even 40 years later, was your strategy wrong/flawed just because outcome bad? Does the fact that a lifetime lottery player hits the jackpot twenty years of playing lottery make his strategy good? (bad/good luck does not validate strategy)


Anyway, on and on and on.....

What IS guaranteed, is that scv tilt WILL fall out of favor. Maybe even FF repudiate it in next twenty years.....

Scv will, likely at same time, be a relative looser......

Classic Buy high, sell low ensues.

So, unless you can stay the course even if ff say its wrong, don't play SCV.


Wise post. Thanks.
boggler
 
Posts: 593
Joined: Thu Feb 07, 2013 2:29 am

Re: Will the Small-Value premium persist over 40 years?

Postby pascalwager » Thu Jul 04, 2013 12:51 am

According to W. Bernstein, when a factor falls out of favor, that's when you should most want to own it, rather than being concerned that it might one day fall out of favor!

For a young person, he now recommends a portfolio comprised of DFA small value, int'l small value, emerging markets value, and VG short term bond index: 35/10/5/50. Using only Vanguard, he says you would need to go with small value, int'l small company, and emerging markets index.

The bond % can be adjusted for differing risk aversions.
pascalwager
 
Posts: 436
Joined: Mon Oct 31, 2011 8:36 pm

Re: Will the Small-Value premium persist over 40 years?

Postby stevewolfe » Thu Jul 04, 2013 6:27 am

pascalwager wrote:According to W. Bernstein, when a factor falls out of favor, that's when you should most want to own it, rather than being concerned that it might one day fall out of favor!

For a young person, he now recommends a portfolio comprised of DFA small value, int'l small value, emerging markets value, and VG short term bond index: 35/10/5/50. Using only Vanguard, he says you would need to go with small value, int'l small company, and emerging markets index.

The bond % can be adjusted for differing risk aversions.


Honestly, with all due respect to Dr. Berstein, this can't be his general recommendation for all young people. I can't imagine many young people would actually stick with this which means to recommend it doesn't make sense to me.
User avatar
stevewolfe
 
Posts: 1319
Joined: Fri Oct 10, 2008 7:07 pm

Jack Bogle on Value and Small-cap stocks.

Postby Taylor Larimore » Thu Jul 04, 2013 6:59 am

boggler wrote:I'm young, and investing for a very long time. With the pace of innovation in this world, I have no idea what the world will look like in 40 years, yet I'm trying to make a decision today whether to invest in TSM or a small-value tilted approach. There are various explanations for the small-value premium. In an age of increasing globalization, technological development, and market efficiency, which of these reasons do we expect to remain valid?


Boggler:

Jack Bogle discusses value and small-cap stock "premium" in this Morningstar keynote speech during the Bogleheads' third annual reunion in Chicago:

The Telltale Chart

Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
User avatar
Taylor Larimore
Advisory Board
 
Posts: 20228
Joined: Tue Feb 27, 2007 8:09 pm
Location: Miami FL

Re: Will the Small-Value premium persist over 40 years?

Postby Levett » Thu Jul 04, 2013 7:10 am

"The essential question is not "Will the small/value premium persist?" (no one knows the answer to this question), but rather, "Will you persist with the small/value premium?"

Nicely said.

Lev
Levett
 
Posts: 3368
Joined: Fri Feb 23, 2007 2:10 pm

Re: Jack Bogle on Value and Small-cap stocks.

Postby louis c » Thu Jul 04, 2013 7:47 am

Taylor Larimore wrote:
boggler wrote:I'm young, and investing for a very long time. With the pace of innovation in this world, I have no idea what the world will look like in 40 years, yet I'm trying to make a decision today whether to invest in TSM or a small-value tilted approach. There are various explanations for the small-value premium. In an age of increasing globalization, technological development, and market efficiency, which of these reasons do we expect to remain valid?


Boggler:

Jack Bogle discusses value and small-cap stock "premium" in this Morningstar keynote speech during the Bogleheads' third annual reunion in Chicago:

The Telltale Chart

Best wishes
Taylor


Thanks Taylor. I had not read that until now, and found it a very informative argument for a simple total market portfolio.
There is no free lunch.
User avatar
louis c
 
Posts: 518
Joined: Fri Apr 01, 2011 11:07 pm

Re: Will the Small-Value premium persist over 40 years?

Postby richard » Thu Jul 04, 2013 7:55 am

One version of the small-value premium story is that it's a reward for taking additional risk. The notion that a riskier portfolio will reliably beat a less risky portfolio doesn't make sense, for any reasonable definition of risk.

Perhaps it's a behavioral story. If so, why it would persist is not entirely clear. Smart investors would pile on, raising prices and therefore limiting the premium.

Some say value is unloved. The last time I looked at it, institutional investors had somewhat of a value tilt. Unloved just seems another way to say behavioral.

Some say tilting creates more diversification or the advantages of low correlating asset classes. The famous Fama-French model says you can analyse a portfolio by its exposure to the small, value and market factors. Note that this equation only looks to factor exposure, not to how well correlated the parts are or whether you hold it all in the middle rather than a combination of extremes.

The answer to the subject question is "maybe."
richard
 
Posts: 7539
Joined: Tue Feb 20, 2007 3:38 pm

Re: Will the Small-Value premium persist over 40 years?

Postby stlutz » Thu Jul 04, 2013 12:53 pm

stlutz wrote: Personally I still tilt because that is what I started doing back in the 90s. I've been happy with the results, but I'm also not sure I would make the same decision if starting from scratch today.


Care to share why you would consider dropping the tilt if you were redoing it?


Basically, as I've learned more there there is simply a big gap between backtested theory and investing reality.

On the smallcap side, there never really was a premium in reality. The backtests started by saying, "Assume there are no bid/ask spreads and that large institutions do not impact the market when they trade." If you make that assumption, you end up with a good sized premium. After costs, not so much. The conclusion we should draw from the research on smallcap investing is that there is no reason to *exclude* smallcaps because of their higher trading costs--those will get made up for. As Nisiprius showed in the thread I linked to earlier, if you equalize risk between a smallcap and large cap holding in a balanced portfolio with bonds, you end up in about the same place--sometimes smallcap runs ahead, sometimes large cap does.

On the value side, there is also a gap. Taylor gets at this with his link to Bogle's "telltale chart." There are academic studies that show the same thing--value mutual funds do not outperform growth funds over the long haul. As such, perhaps we should think of it as a "low institutional ownership value stock" premium. To bring it more down to the real world, let's compare the results of the Vanguard Smallcap Value Index vs. their smallcap growth index fund (the so-called "black hole of investing). Since inception in 1998, value has *under*performed growth by about .2% per year. Yet, if I download the factor returns from Ken French's data library (the data source for the premium) and roll up the theoretical returns for that period, small value beats small growth by 6.5% per year. In implementation, that's a difference of 6.7% per year!!

We've discussed reasons for this gap in other threads, but the conclusion I would draw is that seemingly minor changes in how backtested strategies are executed can have a big impact on the resulting returns.

Tilting to under-represented portions of the market, whether that be small/value stocks or, say, adding a holding focused on the Materials sector can flatten out some portfolio volatility if the extra piece doesn't correlate closely with the overall market. That worked great with small/value in the tech bust (which is why I was happy about the tilt in my portfolio at the time). However, I don't see any reason to expect that one segment will consistently outperform the overall market in actual practice over the long term. As such, I'm neutral on the whole subject of tilting--done in moderation it can have some benefits, but I don't view it as being a key investing decision overall.
stlutz
 
Posts: 1942
Joined: Fri Jan 02, 2009 1:08 am

Re: Will the Small-Value premium persist over 40 years?

Postby pascalwager » Thu Jul 04, 2013 3:58 pm

Postby stevewolfe » Thu Jul 04, 2013 7:27 am

pascalwager wrote:According to W. Bernstein, when a factor falls out of favor, that's when you should most want to own it, rather than being concerned that it might one day fall out of favor!

For a young person, he now recommends a portfolio comprised of DFA small value, int'l small value, emerging markets value, and VG short term bond index: 35/10/5/50. Using only Vanguard, he says you would need to go with small value, int'l small company, and emerging markets index.

The bond % can be adjusted for differing risk aversions.

Honestly, with all due respect to Dr. Berstein, this can't be his general recommendation for all young people. I can't imagine many young people would actually stick with this which means to recommend it doesn't make sense to me.


Granted, and for young investors with less "moxie", Bernstein recommends using the DFA US and int'l Vector funds (half the factor loading compared to small value) and DFA EM Value or Core. (Page 20, The Ages of the Investor.)

And thus, from Bernstein's perspective, are young people forewarned about the likelihood of achieving adequate retirement income using periodic investing with mere market returns.
pascalwager
 
Posts: 436
Joined: Mon Oct 31, 2011 8:36 pm

Re: Will the Small-Value premium persist over 40 years?

Postby pascalwager » Thu Jul 04, 2013 4:03 pm

Rick Ferri's comment regarding The Telltale Chart was that the funds studied were not index funds, but rather actively managed funds, so he considered the study invalid.
pascalwager
 
Posts: 436
Joined: Mon Oct 31, 2011 8:36 pm

Re: Will the Small-Value premium persist over 40 years?

Postby Blues » Thu Jul 04, 2013 4:32 pm

pascalwager wrote:Granted, and for young investors with less "moxie", Bernstein recommends using the DFA US and int'l Vector funds (half the factor loading compared to small value) and DFA EM Value or Core. (Page 20, The Ages of the Investor.)

And thus, from Bernstein's perspective, are young people forewarned about the likelihood of achieving adequate retirement income using periodic investing with mere market returns.


FWIW, Bernstein also states in "Skating Where The Puck Was":

"If you're unwilling to change professions and move to Orlando, then the best course is likely to float on the tide of liquid assets as successfully as you can, and these days that may just mean an old-fashioned balanced portfolio, which large institutional investors are fleeing in droves."


http://www.amazon.com/Skating-Where-Puc ... B00AKJ7WZM

Offered simply as food for thought and in furtherance of Taylor's "many roads to Dublin" philosophy.
“Tactics without strategy is the noise before defeat.” - Sun Tzu | "Everybody has a plan until they get punched in the mouth." - Mike Tyson
User avatar
Blues
 
Posts: 1235
Joined: Wed Dec 10, 2008 11:58 am

Re: Will the Small-Value premium persist over 40 years?

Postby SVariance1 » Thu Jul 04, 2013 5:03 pm

pascalwager wrote:Rick Ferri's comment regarding The Telltale Chart was that the funds studied were not index funds, but rather actively managed funds, so he considered the study invalid.

Rick makes a good point. I would also say there seems to be other flaws as well. For example, how did they categorize the funds? Categorization based on style did not become popular until early 1990s. The small versus large comparison is an odd one in that if you eliminate a period, the small cap advantage goes away.
Mike
User avatar
SVariance1
 
Posts: 1048
Joined: Mon Jun 20, 2011 11:27 am
Location: Philadelphia Area

Re: Will the Small-Value premium persist over 40 years?

Postby IlliniDave » Thu Jul 04, 2013 5:54 pm

SVariance1 wrote:
pascalwager wrote:Rick Ferri's comment regarding The Telltale Chart was that the funds studied were not index funds, but rather actively managed funds, so he considered the study invalid.

Rick makes a good point. I would also say there seems to be other flaws as well. For example, how did they categorize the funds? Categorization based on style did not become popular until early 1990s. The small versus large comparison is an odd one in that if you eliminate a period, the small cap advantage goes away.


Edit: Below I'm referring to the data Bogle presents in Common Sense on Mutual Funds in the section on reversion to the mean for growth versus value funds Not the "Telltale Chart" paper, which I never read before today, but is presumably based on some of the same research.

It is somewhat apples to oranges. The idea of value versus growth stocks (or funds) has been around a long time. Bogle studied real funds that real investors had access to over time. I believe Malkiel cites either similar (or the same) research in Random Walk. That's why their published data goes back to only to ~1936 (versus 1986 in the paper) rather than 1929. Their data actually suggests an approximate 70-year periodicity to value/growth relative returns, so it is a slow thing.

FF mined historical data for stocks and came up with theoretical past performance, and expanded/modified the definition for "value". To their credit that performance seems to have continued into the future. Originally/historically I believe the definition of "value" was essentially high dividend yield (or low P/div). Now dividend yield is only one of several factors measured.

I'm not convinced that the privately managed indexes at DFA are fundamentally different than a carefully managed "active" historical value fund like those that would have been part of Bogle/Malkiel's data. Especially from the 30s to the early 60s those funds were probably doing things extremely similar to DFA, just with a different set of value criteria. Bogle wrested Wellington from the high turnover active management it fell prey to in the mid-60s and set it back to passive style management. Granted it's a blended fund, but it's 65% stocks are value stocks managed with low turnover and it has flourished the last few decades relative to it's peers.

I think the questions Bogle and Malkiel raise are legitimate, is it just a multi-decade cycle between growth and value, or have Fama and company extracted a better, persistent definition of "value"? Time will tell, but I think the Plain Jane Only-for-the-patient nature of value stocks definitely work in the favor of long-term investors. The patience premium. :happy
Last edited by IlliniDave on Thu Jul 04, 2013 7:23 pm, edited 2 times in total.
Don't do something. Just stand there!
IlliniDave
 
Posts: 1383
Joined: Fri May 17, 2013 7:09 am

Re: Will the Small-Value premium persist over 40 years?

Postby stlutz » Thu Jul 04, 2013 6:23 pm

Rick makes a good point. I would also say there seems to be other flaws as well. For example, how did they categorize the funds?


Here is the main academic paper on this subject ("Do Investors Capture the Value Premium?"): http://papers.ssrn.com/sol3/papers.cfm? ... _id=879291
stlutz
 
Posts: 1942
Joined: Fri Jan 02, 2009 1:08 am

Re: Will the Small-Value premium persist over 40 years?

Postby pascalwager » Thu Jul 04, 2013 10:23 pm

Postby Blues » Thu Jul 04, 2013 5:32 pm



pascalwager wrote:Granted, and for young investors with less "moxie", Bernstein recommends using the DFA US and int'l Vector funds (half the factor loading compared to small value) and DFA EM Value or Core. (Page 20, The Ages of the Investor.)

And thus, from Bernstein's perspective, are young people forewarned about the likelihood of achieving adequate retirement income using periodic investing with mere market returns.


FWIW, Bernstein also states in "Skating Where The Puck Was":



"If you're unwilling to change professions and move to Orlando, then the best course is likely to float on the tide of liquid assets as successfully as you can, and these days that may just mean an old-fashioned balanced portfolio, which large institutional investors are fleeing in droves."


http://www.amazon.com/Skating-Where-Puc ... B00AKJ7WZM

Offered simply as food for thought and in furtherance of Taylor's "many roads to Dublin" philosophy.


Yes, I've read "Puck" several times. Bernstein seems to be suggesting that a portfolio comprised of simply S&P 500 index plus bonds is adequate in an age of ever increasing correlations; and if you still want to diversify into small/value, REIT, EM, etc., then you should be prepared to stay the course for a very long time, until and long after popular asset classes become repugnant. But he seems to no longer be promoting the diversified portfolios used in his earlier books. He's describing a new investing reality in the two e-books.
pascalwager
 
Posts: 436
Joined: Mon Oct 31, 2011 8:36 pm

Next

Return to Investing - Theory, News & General

Who is online

Users browsing this forum: asif408, Grt2bOutdoors, JLJL, larryswedroe, newtonc, NOVACPA, packet, ProdigalSon, Riprap, rixer, sschullo, v013477 and 50 guests