The More Things Change, The More They Stay the Same...

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simba
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The More Things Change, The More They Stay the Same...

Post by simba »

Jeff Troutner has this post in their company blog titled - The More Things Change, The More They Stay the Same
Eric Nelson, one of our principals at Equius, who examined the “risk premiums” of stocks for two distinct periods going back to 1928. The first period ends in 1990--the ending year for the original Fama/French “Three-Factor” research (The Cross-Section of Expected Stock Returns, The Journal of Finance, June 1992)--and the second period looks at the data from 1991-2009. Here’s what he found:
Image
Two “bubbles,” the Internet, real estate, commodities, gold, hedge funds, the “endowment approach,” the re-rebirth of “tactical asset allocation,” Republicans, Democrats, tax cuts, tax increases, no deficits, high deficits, Goldman, Lehman Brothers, etc. all come and go.

Stocks beat bonds, small beats large, and value beats growth. Discipline. Patience. Things you can count on.
Will this hold up in the future? Time will tell.....

Best Regards,
Simba
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Post by GammaPoint »

Interesting, and I'm glad to see it :)
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nisiprius
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Post by nisiprius »

I'm skeptical. I don't think the two periods were intentionally cherry-picked to prove a point, and I think the choice of what might be called "Fama-French Day" as the dividing point is not arbitrary. It seems very reasonable to look at the endpoint of a block of famous data and ask "what's happened since then."

But I suspect Troutner only chose to blog about it because it happens to be 2010 and his attention was caught by the two columns happening to match so perfectly.

The devil in generalizations or sweeping statements about how stocks behave is that the slightest change in endpoint produces humongous differences.

I have a similar queasy feeling about a statement in Siegel's Stocks for the Long Run. The point he wishes to make is that stock market total returns have, in his view, shown extraordinary stability, and this is how he makes the point:
Note the extraordinary stability of the real return on stocks over all major subperiods: 7.0 percent per year from 1802 through 1870, 6.6 percent from 1871 through 1925, and 6.8 percent a year since 1926.
Would you have chosen to break a 205-year period into "subperiods" in the ratio 69:55:81?

Were the dividing points arbitrary? Probably not. But if he'd picked, say, the Civil War, World War I, and World War II as dividing points would it have been shown equally "remarkable" stability... and, if not, would he have chosen to point it out conspicuously and early in his book?
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Post by dumbmoney »

1982-2009

DFA micro cap fund: 11.34% [since 12/23/81]
Vanguard S&P 500 fund: 10.94%
S&P 500 index: 11.23%
Russell 2000 index: 9.78% [since 12/23/81]

(Sources: DFA, Simba spreadsheet. Can't vouch for accuracy.)
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.
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Post by fishndoc »

I guess its reassuring to see long term returns holding steady, but it means very little to me, and to most individual investors I suspect:

Although returns may "average out" over the long term, we unfortunately are investing for the short term, and our entry point and exit point are far more important than historical returns.

We just have to figure out a way to live longer to be guaranteed the average market return.
" Successful investing involves doing just a few things right, and avoiding serious mistakes." - J. Bogle
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Post by Wagnerjb »

nisiprius wrote:I'm skeptical. I don't think the two periods were intentionally cherry-picked to prove a point, and I think the choice of what might be called "Fama-French Day" as the dividing point is not arbitrary.
The choice makes sense to me. Before Fama-French publicized the small and value premiums, they were not well known. There was no such thing as the "Style Box" before that time. Since then, there is an awful lot of focus on small and value stocks.

Some folks (including me) believe the small and value premiums will disappear if the additional returns are not risk related. Jeff's data is one point in the evaluation of that issue. Time will tell; however if the premiums remain robust I would conclude that small and value stocks do indeed have higher risks - we just haven't figured out how to measure them yet.

Best wishes.
Andy
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simba
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Post by simba »

nisiprius - Jerry may have cherry picked the dates to prove his point.

But in this case, I agree with Andy that the dates were specifically chosen to coincide with the paper's publication. No cherry picking to prove their point.

So why not blog about this is 2009 or 2008? I don't know but time will tell if these premiums will continue to persist.

Best Regards,
Simba
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Post by Rodc »

simba wrote:nisiprius - Jerry may have cherry picked the dates to prove his point.

But in this case, I agree with Andy that the dates were specifically chosen to coincide with the paper's publication. No cherry picking to prove their point.

So why not blog about this is 2009 or 2008? I don't know but time will tell if these premiums will continue to persist.

Best Regards,
Simba
FWIW: SmallHi made similar points over the recent past, so I'm not sure there is a lot of end point bias over the last few years.

However, we know these numbers move around a lot, so I don't think looking at one point in time is very meaningful. Interesting curiosity, but not much more.

http://home.comcast.net/~rodec/finance/ ... _error.pdf
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Post by jeffyscott »

Wagnerjb wrote:I would conclude that small and value stocks do indeed have higher risks - we just haven't figured out how to measure them yet.
Do larger declines = risk?

From the high (10/9/07) to the low (3/9/09) the S&P 500 and VTSMX lost 55%. During that same interval, DFLVX, DFSCX, DFSTX, and DFSVX each lost 60-63%.
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