The missing value premium- a 10 year global lookback

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countmein
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The missing value premium- a 10 year global lookback

Post by countmein »

The long side of the value premium appears to have gone MIA in the last 10 years. Has it finally been grazed away?

US 10 year returns, growth of 10K
Vanguard TSM...........22.1 k
DFA large value.........21.6 k

DFA small.................23.4 k
DFA small value........21.6 k


Int Developed 10 year returns, growth of 10K
Vanguard Int Developed (VEA)....16.2 k
DFA International value.............15.9 k

DFA International small.............18.6 k
DFA International small value.....19.3 k


EM 10 year returns, growth of 10K
Vanguard EM......22.7 k
DFA EM value.....23.3 k
DFA EM small.....27.8 k

*note that DFA EM Value is a little smaller than VWO, thus I think its outperformance is fully accounted for by the size differential (EM size premuim was large).
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FrogPrince
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Re: The missing value premium- a 10 year global lookback

Post by FrogPrince »

Interesting data. Definitely MIA.
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Clearly_Irrational
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Re: The missing value premium- a 10 year global lookback

Post by Clearly_Irrational »

Outpeformance of growth or value tends to be cyclical and the cycle is pretty long. Overall value seems to come out ahead more often than growth but it can take a while for the effect to catch up with you. Over the last ten years growth was winning but starting four years ago value pulled ahead and is now leading.
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Re: The missing value premium- a 10 year global lookback

Post by Derek Tinnin »

The slope of HmL on inflation is about 1.1. Low inflation tends to = low value premium...

see Bernstein's online journal for reference:

http://www.efficientfrontier.com/ef/701/value.htm

and this while you're there:

http://www.efficientfrontier.com/ef/401/fisher.htm

The 10 year data doesn't mean no more value premium, it's just showing exactly what we would expect to see...
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Re: The missing value premium- a 10 year global lookback

Post by vencat »

See below for an article and quote from Paul Merriman

http://www.marketwatch.com/story/savvy- ... genumber=1
"In my book “Live It Up Without Outliving Your Money,” I show the results of an 82-year study of value stocks vs. growth stocks. In every single 20-year period during that time, value stocks outperformed growth stocks, with an average return premium of 5.4 percentage points.

Value beat growth in 89% of the 10-year periods (average premium: five percentage points of annual return), in 82% of the five-year periods (average premium: 4.9 percentage points), and in 65% of the one-year periods (average premium: 5.5 percentage points)."
See Rick Ferri's blog as well:http: http://www.rickferri.com/blog/markets/e ... rket-gain/
"The longest period of underperformance for small value stocks was 18 years, from February 1984 to June 2001"
Slicing and dicing is not for the faint of heart.
Value is dead...Long live value!!!
Last edited by vencat on Thu Jan 29, 2015 6:12 pm, edited 1 time in total.
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Re: The missing value premium- a 10 year global lookback

Post by Derek Tinnin »

1965-1975 annualized
CPI = 5.20
HmL= 5.01

1930-1939 annualized
CPI = -2.04
HmL = 0.03

Edited to add: 1984-2001

CPI = 3.16
HmL=3.15

One more edit:

1965 to 2004
CPI = 4.63
HmL = 4.72

2005-2014
CPI = 2.13
HmL = 0.28
Last edited by Derek Tinnin on Thu Jan 29, 2015 6:19 pm, edited 1 time in total.
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countmein
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

Clearly_Irrational wrote: Over the last ten years growth was winning but starting four years ago value pulled ahead and is now leading.
I'm not seeing it...

US 4 year returns, growth of 10K
Vanguard TSM...........17.0 k
DFA large value.........17.0 k

DFA small.................16.6 k
DFA small value.........15.9 k


Int Developed 4 year returns, growth of 10K
Vanguard Int Developed (VEA)....11.9 k
DFA International value.............10.7 k

DFA International small.............11.8 k
DFA International small value.....12.3 k


EM 4 year returns, growth of 10K
Vanguard EM......9.8 k
DFA EM value.....8.5 k
DFA EM small.....10.5 k
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Re: The missing value premium- a 10 year global lookback

Post by Derek Tinnin »

countmein wrote:
Clearly_Irrational wrote: Over the last ten years growth was winning but starting four years ago value pulled ahead and is now leading.
I'm not seeing it...

US 4 year returns, growth of 10K
Vanguard TSM...........17.0 k
DFA large value.........17.0 k

DFA small.................16.6 k
DFA small value.........15.9 k


Int Developed 4 year returns, growth of 10K
Vanguard Int Developed (VEA)....11.9 k
DFA International value.............10.7 k

DFA International small.............11.8 k
DFA International small value.....12.3 k


EM 4 year returns, growth of 10K
Vanguard EM......9.8 k
DFA EM value.....8.5 k
DFA EM small.....10.5 k
Edited to correct myself: HmL 2005-2014 = 0.28

Technically, value is ahead for 10 years, but not the past 4 years...HmL =-0.84, but yes on the past 3 years, HmL = 1.07, no on the past 2 years, HmL = -1.64, and definitely no in 2014, HmL = -3.52
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Re: The missing value premium- a 10 year global lookback

Post by nisiprius »

With regard to Merriman's " I show the results of an 82-year study of value stocks vs. growth stocks..."

At the risk of stating the obvious, the value premium was only "discovered" in 1992, less than 25 years ago. The data that was used to discover it--data that was the result of the behavior of investors who did not know about the value premium--cannot be included as part of a test of it. It was there in the data before 1992 or it would not have been discovered in 1992. What's not clear is whether it was there by chance or whether it is a persistent property of the stock market. The way we find that out is by looking at what happens since 1992.

I no longer remember the arguments but the slice-and-dicers claimed that there were reasons why the value premium couldn't be arbitraged away, why it was impossible that people would bid up the prices of value stocks now everyone knows how they improve portfolios. It's very confusing because there were some people--Arnott talking about RAFI indexes--who said that the premium depended on persistent behavioral errors that investors were helpless ever to correct, while others said it was a "risk story" and did not depend on any assumption of behavioral errors.
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Re: The missing value premium- a 10 year global lookback

Post by Derek Tinnin »

nisiprius wrote:With regard to Merriman's " I show the results of an 82-year study of value stocks vs. growth stocks..."

At the risk of stating the obvious, the value premium was only "discovered" in 1992, less than 25 years ago. The data that was used to discover it--data that was the result of the behavior of investors who did not know about the value premium--cannot be included as part of a test of it. It was there in the data before 1992 or it would not have been discovered in 1992. What's not clear is whether it was there by chance or whether it is a persistent property of the stock market. The way we find that out is by looking at what happens since 1992.

I no longer remember the arguments but the slice-and-dicers claimed that there were reasons why the value premium couldn't be arbitraged away, why it was impossible that people would bid up the prices of value stocks now everyone knows how they improve portfolios. It's very confusing because there were some people--Arnott talking about RAFI indexes--who said that the premium depended on persistent behavioral errors that investors were helpless ever to correct, while others said it was a "risk story" and did not depend on any assumption of behavioral errors.
Whether we use the "company's cost of capital = investor's expected return" line, or the "value = mine, growth = forest" line, or any other number of reasons, the leap in logic to assume the market is now consistently mispricing obvious differences in credit risk, interest rate or inflation sensitivity, etc. bears the burden of proof. In reality, since 1992, HmL is 3.38, but flat over the past 10 years. What's a more likely explanation, the fact that inflation has been declining (2.13 past 10 years, 1.69 past 5 years, 1.33 past 3 years, 0.76 past year, -1.48 past 6 months...) or the market finally arbed HmL away?
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

Derek Tinnin wrote:What's a more likely explanation, the fact that inflation has been declining (2.13 past 10 years, 1.69 past 5 years, 1.33 past 3 years, 0.76 past year, -1.48 past 6 months...) or the market finally arbed HmL away?
Derek- if this were true, why do growth stocks and value stocks have identical correlations to LT treasuries (on all time scales, near as I can tell)?
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Re: The missing value premium- a 10 year global lookback

Post by garlandwhizzer »

Derek Tinnan wrote:
What's a more likely explanation, the fact that inflation has been declining (2.13 past 10 years, 1.69 past 5 years, 1.33 past 3 years, 0.76 past year, -1.48 past 6 months...) or the market finally arbed HmL away?
I submit that no one knows the answer to this question with a high and reliable degree of certainty. Value returns have varied inversely with inflation over time, true, not so much because inflation helps value but because it hurts growth more. The factor zoo however is no longer the pristine place it used to be now that everyone knows the animals inside. There is evidence to suggest that factor outperformance declines after the factor is discovered and described. This is what one would expect if the market has any efficiency at all, with or without inflation. Tilting portfolios to value may in fact outperform over the investor's time horizon, but what is certain in my opinion is that the expected outperformance is more in the realm of hope than guarantee.

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Re: The missing value premium- a 10 year global lookback

Post by Derek Tinnin »

garlandwhizzer wrote:Derek Tinnan wrote:
What's a more likely explanation, the fact that inflation has been declining (2.13 past 10 years, 1.69 past 5 years, 1.33 past 3 years, 0.76 past year, -1.48 past 6 months...) or the market finally arbed HmL away?
I submit that no one knows the answer to this question with a high and reliable degree of certainty. Value returns have varied inversely with inflation over time, true, not so much because inflation helps value but because it hurts growth more. The factor zoo however is no longer the pristine place it used to be now that everyone knows the animals inside. There is evidence to suggest that factor outperformance declines after the factor is discovered and described. This is what one would expect if the market has any efficiency at all, with or without inflation. Tilting portfolios to value may in fact outperform over the investor's time horizon, but what is certain in my opinion is that the expected outperformance is more in the realm of hope than guarantee.

Garland Whizzer
Just because a factor exists, doesn't mean you'll live long enough to see it. But to assume it doesn't exist is to assume market participants can consistently/persistently to turn the laws of capitalism on their head. Apply your same logic to the equity risk premium, what do you see?
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Re: The missing value premium- a 10 year global lookback

Post by Clearly_Irrational »

countmein wrote:I'm not seeing it...
You're using different funds and a different comparison. Try VBR vs. VBK for last four years. *shrug* It's a small effect, dates, fund selection, etc. will have a strong impact.
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Re: The missing value premium- a 10 year global lookback

Post by richard »

Derek Tinnin wrote:
garlandwhizzer wrote:Derek Tinnan wrote:
What's a more likely explanation, the fact that inflation has been declining (2.13 past 10 years, 1.69 past 5 years, 1.33 past 3 years, 0.76 past year, -1.48 past 6 months...) or the market finally arbed HmL away?
I submit that no one knows the answer to this question with a high and reliable degree of certainty. Value returns have varied inversely with inflation over time, true, not so much because inflation helps value but because it hurts growth more. The factor zoo however is no longer the pristine place it used to be now that everyone knows the animals inside. There is evidence to suggest that factor outperformance declines after the factor is discovered and described. This is what one would expect if the market has any efficiency at all, with or without inflation. Tilting portfolios to value may in fact outperform over the investor's time horizon, but what is certain in my opinion is that the expected outperformance is more in the realm of hope than guarantee.

Garland Whizzer
Just because a factor exists, doesn't mean you'll live long enough to see it. But to assume it doesn't exist is to assume market participants can consistently/persistently to turn the laws of capitalism on their head. Apply your same logic to the equity risk premium, what do you see?
Exactly what law of capitalism is being turned on its head?

Stocks as a risk story compared to bonds is much more compelling than value as a risk story compared to growth, if you believe in the relation between risk and hoped for returns.
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Re: The missing value premium- a 10 year global lookback

Post by Derek Tinnin »

countmein wrote:
Derek Tinnin wrote:What's a more likely explanation, the fact that inflation has been declining (2.13 past 10 years, 1.69 past 5 years, 1.33 past 3 years, 0.76 past year, -1.48 past 6 months...) or the market finally arbed HmL away?
Derek- if this were true, why do growth stocks and value stocks have identical correlations to LT treasuries (on all time scales, near as I can tell)?
In a nutshell, if looking at stock returns vs premiums, beta has to be accounted for. Beta has been has been 6.59 for 10 years, so if HmL is only 0.28, beta dominates the picture. HmL has a correlation of about .2ish with beta and about 0.02ish with LT bonds.
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Re: The missing value premium- a 10 year global lookback

Post by Derek Tinnin »

richard wrote:
Derek Tinnin wrote:
garlandwhizzer wrote:Derek Tinnan wrote:
What's a more likely explanation, the fact that inflation has been declining (2.13 past 10 years, 1.69 past 5 years, 1.33 past 3 years, 0.76 past year, -1.48 past 6 months...) or the market finally arbed HmL away?
I submit that no one knows the answer to this question with a high and reliable degree of certainty. Value returns have varied inversely with inflation over time, true, not so much because inflation helps value but because it hurts growth more. The factor zoo however is no longer the pristine place it used to be now that everyone knows the animals inside. There is evidence to suggest that factor outperformance declines after the factor is discovered and described. This is what one would expect if the market has any efficiency at all, with or without inflation. Tilting portfolios to value may in fact outperform over the investor's time horizon, but what is certain in my opinion is that the expected outperformance is more in the realm of hope than guarantee.

Garland Whizzer
Just because a factor exists, doesn't mean you'll live long enough to see it. But to assume it doesn't exist is to assume market participants can consistently/persistently to turn the laws of capitalism on their head. Apply your same logic to the equity risk premium, what do you see?
Exactly what law of capitalism is being turned on its head?

Stocks as a risk story compared to bonds is much more compelling than value as a risk story compared to growth, if you believe in the relation between risk and hoped for returns.
OK, explain why K-Mart (pre-bankruptcy) should have the same cost of capital as Wal-Mart? This is the equivalent of saying FICO scores don't matter with human borrowers...
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

Clearly_Irrational wrote:
countmein wrote:I'm not seeing it...
You're using different funds and a different comparison. Try VBR vs. VBK for last four years. *shrug* It's a small effect, dates, fund selection, etc. will have a strong impact.
Sorry, but not so. VBR and VBK are very nearly tied over the past four years, which is consistent with the OP premise (and Derek's follow up stat of -0.8 HML over past 4 years)-- no value premium for last ten years (or four).
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

Derek Tinnin wrote:
countmein wrote:
Derek Tinnin wrote:What's a more likely explanation, the fact that inflation has been declining (2.13 past 10 years, 1.69 past 5 years, 1.33 past 3 years, 0.76 past year, -1.48 past 6 months...) or the market finally arbed HmL away?
Derek- if this were true, why do growth stocks and value stocks have identical correlations to LT treasuries (on all time scales, near as I can tell)?
In a nutshell, if looking at stock returns vs premiums, beta has to be accounted for. Beta has been has been 6.59 for 10 years, so if HmL is only 0.28, beta dominates the picture. HmL has a correlation of about .2ish with beta and about 0.02ish with LT bonds.
Has HML historically had lower correlation to LTTs than beta? It would have to to bear out the HML/inflation theory, right? But I thought beta had somewhat negative correlation to LTT.
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Re: The missing value premium- a 10 year global lookback

Post by Derek Tinnin »

countmein wrote:
Derek Tinnin wrote:
countmein wrote:
Derek Tinnin wrote:What's a more likely explanation, the fact that inflation has been declining (2.13 past 10 years, 1.69 past 5 years, 1.33 past 3 years, 0.76 past year, -1.48 past 6 months...) or the market finally arbed HmL away?
Derek- if this were true, why do growth stocks and value stocks have identical correlations to LT treasuries (on all time scales, near as I can tell)?
In a nutshell, if looking at stock returns vs premiums, beta has to be accounted for. Beta has been has been 6.59 for 10 years, so if HmL is only 0.28, beta dominates the picture. HmL has a correlation of about .2ish with beta and about 0.02ish with LT bonds.
Has HML historically had lower correlation to LTTs than beta? It would have to to bear out the HML/inflation theory, right? But I thought beta had somewhat negative correlation to LTT.
Beta to LTT is about 0.09ish, so non-correlated more than positive/negative, but slightly positive.

and yes, HmL to LTT is 0.02ish, HmL to beta is 0.2ish, so lower correlation to LTT.
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Re: The missing value premium- a 10 year global lookback

Post by Clearly_Irrational »

countmein wrote:Sorry, but not so. VBR and VBK are very nearly tied over the past four years
4 yrs +0.7% ahead
3 yrs +5.4% ahead
2yrs +3.1% ahead
1yr +5.2% ahead

So yeah, what I said was that small value pulled ahead of growth about four years ago. Look, all of this is quibbling, you're not going to be able to tell whether it's random or not on anything with this short a time scale.
Last edited by Clearly_Irrational on Fri Jan 30, 2015 11:05 am, edited 1 time in total.
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Re: The missing value premium- a 10 year global lookback

Post by grap0013 »

countmein wrote:The long side of the value premium appears to have gone MIA in the last 10 years. Has it finally been grazed away?

US 10 year returns, growth of 10K
Vanguard TSM...........22.1 k
DFA large value.........21.6 k
As long as we are cherry picking time frames I want to play too!

15 year returns
S&P 500 +4.54% annualized
DFA SCV +11.34% annualized
There are no guarantees, only probabilities.
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Re: The missing value premium- a 10 year global lookback

Post by randomguy »

countmein wrote:The long side of the value premium appears to have gone MIA in the last 10 years. Has it finally been grazed away?
Has it been grazed away or is it about to go on a bit run? Between 1985 and 1999 when large cap growth destroyed small value (something like 20% to 12%) was that a result of the small value premiums being grazed away? The next 15 years tell a different story. Maybe the value premium has been grazed away. It is possible. But it is also possible the value is about to go on a 5 year streak where you earn that extra 1% year premium for the next 20 years. Who the heck knows. Personally I am willing to gamble the slight ER increase that value will work out.
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Re: The missing value premium- a 10 year global lookback

Post by grap0013 »

The OP's 10 year backtest is informative. Is this the worst case scenario for value/small tilting? Very little to no premium? Looks like a risk worth taking. Downside is I do the same and upside is that I outperform by several percent annualized.

Same thing goes for bonds. A poster will opine and find a very specific 30 period where bonds outperformed stocks by 0.2% and then state that all investors even 25 years old need bonds just in case bonds beat stocks again over 30 years. Once again, downside?! 0.2%?! Really?! It's worth taking the risk at an extra 5% annualized at holding more stocks when you are younger. This stuff is just some basic math and logic. However, I cannot quantify the emotional piece of investing. I just put my money where I statistically have the best odds for success.
There are no guarantees, only probabilities.
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Re: The missing value premium- a 10 year global lookback

Post by stlutz »

I of course always like to look at real funds I could have invested in:

VG Small Cap Value since inception (1998): 8.79%. Small Cap Growth: 8.85% (I haven't looked at this comparison in a while--value has pulled ahead!)
VG Large Cap Value since inception (1992): 9.63% Large Cap Growth: 9.35%.

Actually, this is about my prediction going foreward--value tilting is a way to pick up a few tenths of a percentage point in returns, not about getting 5% per year vs. 10%.
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Re: The missing value premium- a 10 year global lookback

Post by stlutz »

At the risk of stating the obvious, the value premium was only "discovered" in 1992, less than 25 years ago. The data that was used to discover it--data that was the result of the behavior of investors who did not know about the value premium--cannot be included as part of a test of it. It was there in the data before 1992 or it would not have been discovered in 1992. What's not clear is whether it was there by chance or whether it is a persistent property of the stock market. The way we find that out is by looking at what happens since 1992.
I actually never thought this was a fair point. It was pretty commonly accepted before 1992 that value investing was a very legitimate way to "beat the market"--the whole Graham and Dodd thing.
I no longer remember the arguments but the slice-and-dicers claimed that there were reasons why the value premium couldn't be arbitraged away, why it was impossible that people would bid up the prices of value stocks now everyone knows how they improve portfolios. It's very confusing because there were some people--Arnott talking about RAFI indexes--who said that the premium depended on persistent behavioral errors that investors were helpless ever to correct, while others said it was a "risk story" and did not depend on any assumption of behavioral errors.
Yes. The EMH types and the behavioralists have very different views on economic policy, but when it comes to promoting investing ideas, they will both insist that the future is destined to be just like the past.
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

grap0013 wrote:The OP's 10 year backtest is informative. Is this the worst case scenario for value/small tilting? Very little to no premium? Looks like a risk worth taking. Downside is I do the same and upside is that I outperform by several percent annualized.

Same thing goes for bonds. A poster will opine and find a very specific 30 period where bonds outperformed stocks by 0.2% and then state that all investors even 25 years old need bonds just in case bonds beat stocks again over 30 years. Once again, downside?! 0.2%?! Really?! It's worth taking the risk at an extra 5% annualized at holding more stocks when you are younger. This stuff is just some basic math and logic. However, I cannot quantify the emotional piece of investing. I just put my money where I statistically have the best odds for success.
The problem is that you expect the future to look like the past. Why should it? I don't expect stocks to return more than 0% for the next 100 years. That would require faith, not logic.
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Re: The missing value premium- a 10 year global lookback

Post by grap0013 »

stlutz wrote:I of course always like to look at real funds I could have invested in:

VG Small Cap Value since inception (1998): 8.79%. Small Cap Growth: 8.85% (I haven't looked at this comparison in a while--value has pulled ahead!)
VG Large Cap Value since inception (1992): 9.63% Large Cap Growth: 9.35%.

Actually, this is about my prediction going foreward--value tilting is a way to pick up a few tenths of a percentage point in returns, not about getting 5% per year vs. 10%.
I was using 5% to just pick a number. Here are some real funds that I'm actually invested in: https://www.portfoliovisualizer.com/bac ... tion3_1=25

I think the value premium will be more than a few tenths of a percent but we can agree to disagree. :-)
Last edited by grap0013 on Thu Jan 29, 2015 10:22 pm, edited 2 times in total.
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Re: The missing value premium- a 10 year global lookback

Post by grap0013 »

countmein wrote:
The problem is that you expect the future to look like the past. Why should it? I don't expect stocks to return more than 0% for the next 100 years. That would require faith, not logic.
The future will look similar to the past if there are some reasons for the past. Reward and risk have been inextricably linked for decades/centuries. Is it more likely for that to change or to stay the same? This time is different has historically not worked out well for investors.

If you really believe the above then what do you invest in? Faith implies you think it is all a gamble or is rigged. Every investor bases their asset allocation on some aspect of the past whether they like to admit it or not.
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Re: The missing value premium- a 10 year global lookback

Post by ERMD »

grap0013 wrote:Faith implies you think it is all a gamble or is rigged.
i don't think this is accurate. faith is a belief in something without requiring (or being able to) objectively prove it so. hardcore bogleheads have faith in the continued relative prosperity of the US economy over the next (25/50/100?) years. you're buying the entire market and putting your "faith" in 'murica.

i think calling it a gamble is a bit of a stretch. a gamble is putting all your money in gold bars and then sitting in your bomb shelter in the brace position for the next few decades.
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

grap0013 wrote:
If you really believe the above then what do you invest in? Faith implies you think it is all a gamble or is rigged. Every investor bases their asset allocation on some aspect of the past whether they like to admit it or not.
Though it sounds radical in these particular fora, I do mostly really believe the above, which is basically saying that my investor DNA is more Permanent Portfolio than it is Cult of Equities. But I have to invest in some equities to meet reasonable inflation hedging requirements (because gold is just too weird). Inflation/deflation risk parity is somewhere around 25/75 stock/5YT, near as I can tell. I like the idea of 25/25/50 value-tilted equity / real estate / intermediate treasuries as a way to tilt a little more towards growth-in-America without relying on a single asset class. I have never understood how anybody is comfortable with > 50% equity at any age; it just seems too possible that we had a nice/lucky century but why does it have to last? I could see betting on all the prosperity continuing with a significant chunk of your money, but all of it? No comprende.
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Re: The missing value premium- a 10 year global lookback

Post by nedsaid »

nisiprius wrote:With regard to Merriman's " I show the results of an 82-year study of value stocks vs. growth stocks..."

At the risk of stating the obvious, the value premium was only "discovered" in 1992, less than 25 years ago. The data that was used to discover it--data that was the result of the behavior of investors who did not know about the value premium--cannot be included as part of a test of it. It was there in the data before 1992 or it would not have been discovered in 1992. What's not clear is whether it was there by chance or whether it is a persistent property of the stock market. The way we find that out is by looking at what happens since 1992.

I no longer remember the arguments but the slice-and-dicers claimed that there were reasons why the value premium couldn't be arbitraged away, why it was impossible that people would bid up the prices of value stocks now everyone knows how they improve portfolios. It's very confusing because there were some people--Arnott talking about RAFI indexes--who said that the premium depended on persistent behavioral errors that investors were helpless ever to correct, while others said it was a "risk story" and did not depend on any assumption of behavioral errors.
There was a very obscure value investor who went way back. Trying to remember is name...oh that's right, Benjamin Graham. Didn't he write a book or two? Then there was another guy who ran a few eeny, weeny, tiny funds by the name of...let me think...ahhh...oh that's right, John Templeton. Then some guy who bought a little textile company and did some investing or something. Hmmm. Buffett, oh yah, Warren Buffett. Probably hardly anyone here has ever heard of him. Hmmm, the Davis family. Shelby the dad and a couple of sons who succeeded him, Chris Davis. Probably no one around these parts have heard of the Davis family. Then a very obscure fund company, Wellington or Wellesley. Well anywho, the founder hired some guy named Bogle who happened to ruin their flagship fund. Ahhh, Wellington, that's right. But I heard before that Bogle guy came around that Wellington knew something about Value investing. As for that Bogle guy, he wasn't a value guy but he started some obscure fund company, something about a ship. By the way, did that Bogle guy ever amount to anything?
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JoMoney
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Re: The missing value premium- a 10 year global lookback

Post by JoMoney »

nedsaid wrote:...
There was a very obscure value investor who went way back. Trying to remember is name...oh that's right, Benjamin Graham. Didn't he write a book or two? Then there was another guy who ran a few eeny, weeny, tiny funds by the name of...let me think...ahhh...oh that's right, John Templeton. Then some guy who bought a little textile company and did some investing or something. Hmmm. Buffett, oh yah, Warren Buffett. Probably hardly anyone here has ever heard of him. Hmmm, the Davis family. Shelby the dad and a couple of sons who succeeded him, Chris Davis. Probably no one around these parts have heard of the Davis family. Then a very obscure fund company, Wellington or Wellesley. Well anywho, the founder hired some guy named Bogle who happened to ruin their flagship fund. Ahhh, Wellington, that's right. But I heard before that Bogle guy came around that Wellington knew something about Value investing. As for that Bogle guy, he wasn't a value guy but he started some obscure fund company, something about a ship. By the way, did that Bogle guy ever amount to anything?
I doubt any of them define "value investing" the way Fama defined HmL as some sort of Efficient Market "Risk Factor". Given the performance of mutual funds that practiced "value" and "growth" style investing over time, the results of Mr.Bogle's studies certainly don't show the results that factor tilters claim were achieved for "value" and "growth" styles over the time period.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: The missing value premium- a 10 year global lookback

Post by tarheel »

I agree with the point I think grap0013 was trying to make above.....

So let's say the value premium has been gone for 10 years.....

Does that mean when bonds outperform stocks over 10 years (has happened a bunch) that market beta is now missing?

Over the long term the value premium has been as reliable as market beta (some people might say even more reliable).
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Re: The missing value premium- a 10 year global lookback

Post by BigJohn »

Is the value premium gone forever because it's been arbitraged away due to broad, low cost access or.... has it just gone underground in a not unprecedented period of under performance only to reappear in the future and vindicate all tilters? Ask me in 10 or 15 years, no one can know the answer today with any certainty. So like many investment choices, you'll just have to place your bet and then hold on until the wheel comes to a stop. :beer
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Re: The missing value premium- a 10 year global lookback

Post by grap0013 »

Some skepticism is good, but too much.....

"Forget heparin for anticoagulation, we've been using leeches for 2500 years and you only have one 80 year data point for heparin!! I'm not changing my mind about leeches!"

I work in healthcare and you must weigh patient care by risks vs. benefits with the best available information. Much like anything else, if the data is persistent, persuasive (does the drug's mechansim of action align with what we would think physiologically would happen?, ie value stocks have more variability in their earnings and much larger debt levels than growth stocks therefore they are riskier) and it is statistically significant globally across multiple geographies? We have 95% confidence the value premium is real across almost every country. The 5% odds of being wrong lined up with all those countries is miniscule. Now we have some pretty good funds PXSV that have a nice value load, at a reasonable expense ratio, and it tracks its index well. It has beaten TSM by over 2% annualized since I bought it in 2012 thus far....
There are no guarantees, only probabilities.
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Re: The missing value premium- a 10 year global lookback

Post by Clearly_Irrational »

countmein wrote:I don't expect stocks to return more than 0% for the next 100 years. That would require faith, not logic.
For stocks to return zero percent over the long term it would mean that there was a total lack of positive net present value projects. That would pretty much be the end of capitalism and it would cause extreme political chaos, to the point where modern civilization would either collapse or possibly revert to some earlier form like feudalism. The chances of that seem extraordinarily low.
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

Clearly_Irrational wrote:
countmein wrote:I don't expect stocks to return more than 0% for the next 100 years. That would require faith, not logic.
For stocks to return zero percent over the long term it would mean that there was a total lack of positive net present value projects. That would pretty much be the end of capitalism and it would cause extreme political chaos, to the point where modern civilization would either collapse or possibly revert to some earlier form like feudalism. The chances of that seem extraordinarily low.
A total lack of positive net present value projects doesn't have to mean the end of capitalism at all. It is very easy to stagnate/deflate, in fact we've witnessed it in Japan and seem to be witnessing it again globally. Capitalism can truck along just fine breaking even, chaos free, for generations.
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

grap0013 wrote:Some skepticism is good, but too much.....

"Forget heparin for anticoagulation, we've been using leeches for 2500 years and you only have one 80 year data point for heparin!! I'm not changing my mind about leeches!"
grap, you are my favorite poster, but that has to be the worst analogy of all time. There are laws of nature that dictate the result of a heparin/blood reaction. There is no such law for the persistence of stock returns or economic progress. That stocks will more or less track inflation-- yes there are some mechanisms we can rely on there. But that there will be any inflation at all-- far less certain.
Last edited by countmein on Fri Jan 30, 2015 1:11 pm, edited 1 time in total.
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Re: The missing value premium- a 10 year global lookback

Post by richard »

Derek Tinnin wrote:
richard wrote:
Derek Tinnin wrote:<snip>
Just because a factor exists, doesn't mean you'll live long enough to see it. But to assume it doesn't exist is to assume market participants can consistently/persistently to turn the laws of capitalism on their head. Apply your same logic to the equity risk premium, what do you see?
Exactly what law of capitalism is being turned on its head?

Stocks as a risk story compared to bonds is much more compelling than value as a risk story compared to growth, if you believe in the relation between risk and hoped for returns.
OK, explain why K-Mart (pre-bankruptcy) should have the same cost of capital as Wal-Mart? This is the equivalent of saying FICO scores don't matter with human borrowers...
You haven't listed the law of capitalism being turned on its head and you answered a general question about stocks v. bonds compared to value v. growth with a question about two specific companies. Even taking the latter as a statement that K-Mart is riskier than Walmart and therefore one may hope for a higher return as compensation for risk, it does not answer the question.
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Re: The missing value premium- a 10 year global lookback

Post by Clearly_Irrational »

countmein wrote:A total lack of positive net present value projects doesn't have to mean the end of capitalism at all. It is very easy to stagnate/deflate, in fact we've witnessed it in Japan and seem to be witnessing it again globally.
You're confusing a stagnant local economy with a lack of +NPV projects. They're not the same. I can guarantee you that the corporations in Japan are still investing in things that generate a net improvement over time. They had a massive bubble, they refused to let it deflate properly so it's dragged on, but eventually it will clear and they'll be on the way up again.
countmein wrote:Capitalism can truck along just fine breaking even, chaos free, for generations.
Yes, local markets can indeed go down or even sideways for a while, for a hundred years globally without breaking things though, no way. Capitalism is inherently based on a growth model, no growth and it falls over sideways. Do all socio-economic structures require growth? No, but ours does and we wouldn't like most of the ones that don't.
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

Clearly_Irrational wrote:
countmein wrote:A total lack of positive net present value projects doesn't have to mean the end of capitalism at all. It is very easy to stagnate/deflate, in fact we've witnessed it in Japan and seem to be witnessing it again globally.
You're confusing a stagnant local economy with a lack of +NPV projects. They're not the same. I can guarantee you that the corporations in Japan are still investing in things that generate a net improvement over time. They had a massive bubble, they refused to let it deflate properly so it's dragged on, but eventually it will clear and they'll be on the way up again.
countmein wrote:Capitalism can truck along just fine breaking even, chaos free, for generations.
Yes, local markets can indeed go down or even sideways for a while, for a hundred years globally without breaking things though, no way. Capitalism is inherently based on a growth model, no growth and it falls over sideways. Do all socio-economic structures require growth? No, but ours does and we wouldn't like most of the ones that don't.
Not at all true. Our population can decline and we can receed until the cows come home. Same for the rest of the world, in aggregate. 50 year stagnation periods are pretty common when you look at history, so it just doesn't make sense to say that it can't happen.
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Re: The missing value premium- a 10 year global lookback

Post by Clearly_Irrational »

countmein wrote:Not at all true. Our population can decline and we can receed until the cows come home. Same for the rest of the world, in aggregate. 50 year stagnation periods are pretty common when you look at history, so it just doesn't make sense to say that it can't happen.
Name one period where that happened globally while we were using capitalism. (I freely admit that can and has happened under other systems like feudalism) FYI, I didn't say anything about population, capitalism can handle a declining population just fine as long as economic growth is continuing. The great depression lasted all of about 12 years and that nearly brought down capitalism right there, extend that for decades and it would get ugly in a hurry.
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

~0% (or worse) equity returns:


Japan 1900 - 1950........50 yrs
Europe 1900 - 1950.......50 yrs
Austria 1900 - 2000.......100 yrs
Belgium 1900 - 1980......80 yrs
France 1929 - 1979.......50 yrs
Spain 1930 - 1980.........50 yrs
Norway 1915 - 1978.......60 yrs
Netherlands 1900 - 1950...50 yrs
Italy 1900 - 1978.............80 yrs
Italy 1960 - present.........50 yrs
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

in the US, S&P composite:
1881...6.58
1933...6.23
1942...7.84

... ie, stagnant
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Re: The missing value premium- a 10 year global lookback

Post by White Coat Investor »

countmein wrote:The long side of the value premium appears to have gone MIA in the last 10 years. Has it finally been grazed away?

US 10 year returns, growth of 10K
Vanguard TSM...........22.1 k
DFA large value.........21.6 k

DFA small.................23.4 k
DFA small value........21.6 k


Int Developed 10 year returns, growth of 10K
Vanguard Int Developed (VEA)....16.2 k
DFA International value.............15.9 k

DFA International small.............18.6 k
DFA International small value.....19.3 k


EM 10 year returns, growth of 10K
Vanguard EM......22.7 k
DFA EM value.....23.3 k
DFA EM small.....27.8 k

*note that DFA EM Value is a little smaller than VWO, thus I think its outperformance is fully accounted for by the size differential (EM size premuim was large).
Recency bias. Large Growth has done well the last few years. You'll see something similar if you look at international. Stick with your plan, whatever it may be.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course
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World stock market returns

Post by Taylor Larimore »

Annualized real (after-inflation) returns since 1900:

Australia 7.4%
Austria 0.7%
Belgium 2.6%
Canada 5.7%
China -3.8%
Denmark 5.2%
Finland 5.3%
France 3.2%
Germany 3.2%
Ireland 4.1%
Italy 1.9%
Japan 4.1%
Netherlands 4.9%
N. Zealand 6.0%
Norway 4.3%
Portugal 3.7%
Russia 5.8%
S. Africa 7.4%
Spain 3.6%
Sweden 5.8%
Switzerland 4.4%
U.K. 5.3%
U.S.A. 6.5%
World 5.2%

Source: Credit Suisse Global Investment Returns Yearbook 2014.

Best wishes.
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Re: The missing value premium- a 10 year global lookback

Post by JoMoney »

countmein wrote:in the US, S&P composite:
1881...6.58
1933...6.23
1942...7.84

... ie, stagnant
From the Shiller data, $1 invested at the beginning of 1881 would have been worth about $24.50 at the end of 1933.
Quoting stock returns without including dividends is silly and misleading. Do you calculate the return on bonds or other interest bearing investments without including the coupon yield?
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
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Re: The missing value premium- a 10 year global lookback

Post by Clearly_Irrational »

countmein wrote:~0% (or worse) equity returns:
I said globally. Obviously individual economies can stagnate, as you showed that's not even uncommon given the right circumstances. Capitalism can be thought of as a system of interconnected optimizers, if returns in one area stagnate the investments go elsewhere. Also, with the exception of Italy 1960-present, every example you gave was of a country that experienced devastation caused by WWII. Capitalism is of course vulnerable to strategic bombing. The Italy 1960-present example is more of an issue of a mixed market economy with too much socialism combined with excessive political corruption and more recently a currency union that doesn't favor net importers.

Investors want a better than even chance of getting positive return on their money or they won't invest. If there was any sort of reasonable expectation that the stock market wouldn't achieve that goal, the money would flow out so fast your head would spin. On top of that investors put their money where they believe they can get the best risk adjusted returns. Long before the stock market reached expectations of 0% returns investors would shift their money to other asset classes, real estate for example. This automatic balancing process serves to keep asset classes correctly priced relative to each other and to the risk that they contain. (over the long run, in the short run fairly serious imbalances can develop, see the tech & housing crashes for recent examples).
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Re: The missing value premium- a 10 year global lookback

Post by countmein »

Clearly_Irrational wrote: Also, with the exception of Italy 1960-present, every example you gave was of a country that experienced devastation caused by WWII. Capitalism is of course vulnerable to strategic bombing.
Indeed it is. Also vulnerable to environmental destruction, corruption, over-regulation, nuclear accidents, demographics, etc. Our lifespans just aren't long enough to be guaranteed a return. If it were a guarantee, there would be no risk, as has been said here a thousand times.

Also negative returns:

Phillipines........1954-1996......40 years
Pakistan..........1960-1996.......45 years
India..............1939-1996.......60 years
Columbia........1936-1996.......60 years
Peru..............1941-1996.......55 years
Venezuela......1937-1996.......60 years
South Africa....1947-1996......50 years
Portugal........1931-1996.......65 years
New Zealand.....1931-1996......65 years
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