Search found 4437 matches

by SimpleGift
Wed Feb 14, 2024 7:03 pm
Forum: Investing - Theory, News & General
Topic: Ben Carlson : Is the stock market too concentrated?
Replies: 50
Views: 5278

Re: Ben Carlson : Is the stock market too concentrated?

Just for fun, spent a little internet time looking into corporate enterprise sizes, and why they tend to follow a power law, with such a heavily skewed distribution. In other words, is there a universal law that governs such things?

Some current theories involve the structure of very complex networks, and how a few nodes in a network (in this case, the global market economy) tend to build up a disproportionate share of relationships, creating a hub-and-spoke structure, eventually leading to market dominance of a few firms (idealized chart below).
  • Image
    Source: IE
Any other ideas or insights into the "why" of the heavily-skewed distribution of corporate enterprise sizes?
by SimpleGift
Wed Feb 14, 2024 4:32 pm
Forum: Investing - Theory, News & General
Topic: Ben Carlson : Is the stock market too concentrated?
Replies: 50
Views: 5278

Re: Ben Carlson : Is the stock market too concentrated?

the_wiki wrote: Wed Feb 14, 2024 4:17 pm
SimpleGift wrote: Wed Feb 14, 2024 3:28 pm It’s puzzling why the distribution of company market caps in the US stock market is ever even a concern — not to mention a persistent one that keeps coming up on the Forum.
Because the whole idea behind using broad index funds is for diversification. Concentration is the opposite of diversification.
Because of the underlying nature of corporate enterprise, where company sizes are governed by power laws (i.e., the big get bigger and the rich get richer) and are never normally or evenly distributed, broad market cap-weighted indexes will always be heavily skewed and concentrated. It’s just the nature of the beast that we need to accept in our portfolio designs.
by SimpleGift
Wed Feb 14, 2024 3:28 pm
Forum: Investing - Theory, News & General
Topic: Ben Carlson : Is the stock market too concentrated?
Replies: 50
Views: 5278

Re: Ben Carlson : Is the stock market too concentrated?

It’s puzzling why the distribution of company market caps in the US stock market is ever even a concern — not to mention a persistent one that keeps coming up on the Forum. https://i.imgur.com/jvZHdzw.jpeg Source: Statista , Market cap of largest S&P 500 companies, in billions, as of July 2023. As investors, my sense is we need to just accept that stock market capitalizations are, by their nature, not normally distributed. They have (and always will have) heavily skewed distributions. These are better described by a power law, which implies that a few of the outcomes are really large (or have large impact) and most observations are small. There are many of these power law-dominated phenomena in the world — for example, the size (geograp...
by SimpleGift
Sun Feb 11, 2024 4:19 pm
Forum: Investing - Theory, News & General
Topic: Ashwath Damodaran on the S&P 500
Replies: 15
Views: 3518

Re: Ashwath Damodaran on the S&P 500

Interesting to hear Damodaran’s take on some of the persistent and shared financial factors that have driven (and are driving) the remarkable earnings growth and profit margins of these 7 companies: 1. Pricing Power. Their ability to raise prices (except for Tesla), and at the same time increase growth. 2. Resilience of Product Demand. Their ability to reduce employees, and increase revenues/earnings. 3. Negative Net Debt Levels. Nearly all have more cash on hand than their debt levels. 4. Dominating Market Share. Ability to thrive in the post-industrial, "winner-take-all (or most)" economy. Of course, these beneficial factors can and will change eventually, as the global economy evolves. But at this point in time, it seems hard t...
by SimpleGift
Sat Feb 10, 2024 3:19 pm
Forum: Investing - Theory, News & General
Topic: Ashwath Damodaran on the S&P 500
Replies: 15
Views: 3518

Re: Ashwath Damodaran on the S&P 500

As a long-time S&P 500 index investor, it’s been hard to not to subconsciously feel that perhaps the 7 companies with the largest market cap today are crazily overvalued and heading for a correction. However, in this 30-minute video Damodaran shares some of his analytical work on the valuations of these companies, and he arrives at the conclusion that 5 of them (Alphabet, Amazon, Apple, Meta and Tesla) are only mildly overvalued (1% to 8%), all well within range of reasonable values. Due to the current hype surrounding AI and its future prospects, his analysis indicates Microsoft is perhaps more significantly overvalued (13%), with Nvidia being the only one that is crazily overvalued (55%) at current prices. But he allows that since no ...
by SimpleGift
Sat Feb 10, 2024 11:53 am
Forum: Investing - Theory, News & General
Topic: Regression toward the mean: SP500 P/E
Replies: 10
Views: 1042

Re: Regression toward the mean: SP500 P/E

Hi all, does the statistical concept of "regression toward the mean" apply to the SP500 P/E? Often in investing we treat historical data series as stationary — i.e., in statistical terms, as if their means and variances are constant over time. In reality, nearly all of the historical data sets we encounter as investors are non-stationary — their means and their variances in one time period do not apply in another. For example, to your question about S&P 500 P/E ratios: https://i.imgur.com/JOu6mas.jpg Note: The time period is divided into four 35-year periods, with their means in red. Source: Shiller Data It appears there is no preordained mean value at which stocks are destined to trade. The amount that investors are willing ...
by SimpleGift
Fri Sep 29, 2023 3:09 pm
Forum: Investing - Theory, News & General
Topic: Global equity market cap question
Replies: 2
Views: 466

Re: Global equity market cap question

Am I missing something? As mentioned, what you are seeing is the difference in global stocks that are listed (U.S. share at 42%) versus global stocks that are actually investable via the major indexes (U.S. share at 61%). Beyond the U.S., the world has quite a lot of listed stock that is not actually investable via indexes — in other words, their free-float ratios (investable stocks to listed stocks) are lower than the U.S., sometimes by quite a large margin. These are some numbers from 2016: https://i.imgur.com/2QPpxd5.jpg Source: Bekaert & Harvey , as of 5/31/16. In short, in international markets a larger percentage of shares are owned by private family groups, by government entities, or cross-owned by other corporations, and thus a...
by SimpleGift
Tue Sep 26, 2023 5:33 pm
Forum: Investing - Theory, News & General
Topic: What did work in the late 60's?
Replies: 82
Views: 13809

Re: What did work in the late 60's?

gavinsiu wrote: Mon Sep 25, 2023 10:55 pm Secondly, what did work during that period?
This Forum thread from last year has real return data for various asset classes during the high inflation, stagnant growth period of the 1970s and early 1980s. Discussion of returns for the less prominent asset classes (small cap value, REITs, commodities, gold, etc.) is found further down the thread page from the OP.

T'was the Worst of Times — Case Study of 1973-1985
by SimpleGift
Tue Sep 26, 2023 12:59 pm
Forum: Investing - Theory, News & General
Topic: Retirement dreams and reality
Replies: 107
Views: 24560

Re: Retirement dreams and reality

And I agree with everything mentioned already about returning to what one loved doing as a child or teenager. You knew who you were then, and you knew what you liked. This has been my experience in retirement as well. Grew up in the West on a family-owned, cow-calf ranch, so spent nearly all of my childhood and youth outside in Nature, developing a wonder and appreciation for the diversity, complexity and beauty of the natural world. In retirement now, we’ve been fortunate to retire to an area with abundant public lands, both Forest Service and BLM, with lots of recreational opportunities and open access to these lands and the natural world. So in this way, after a working life, retirement has been a return to the roots of childhood and yo...
by SimpleGift
Mon Sep 25, 2023 9:16 am
Forum: Investing - Theory, News & General
Topic: Who holds individual TIPS in taxable accounts?
Replies: 30
Views: 4569

Re: Who holds individual TIPS in taxable accounts?

RedJunglefowl wrote: Sun Sep 24, 2023 9:39 pm I'm wondering about holding individual TIPS in taxable.
In retirement, we hold TIPS funds in our all-taxable 50/50 portfolio, but do limit them to about 35% of our bond portfolio. These TIPS funds are not for liability matching, but simply a portfolio diversifier. Our concern with increasing our allocation to TIPS funds much further is that, even though the inflation adjustment on principal is paid out each year, it can be quite substantial during periods of high inflation, propelling us into much higher tax brackets. On the plus side, all of the TIPS funds' payouts are non-taxable at the State level.

The tax implications of any allocation to TIPS in taxable will, of course, depend on one's individual circumstances.
by SimpleGift
Sun Sep 17, 2023 10:07 am
Forum: Investing - Theory, News & General
Topic: Concentration Risk if Overweighting EM Equity
Replies: 18
Views: 1898

Re: Concentration Risk if Overweighting EM Equity

When we invest in international stocks, whether in Europe or the Pacific or globally, we have the expectation that we are investing in capitalist enterprises operating in relatively free and open market systems. However, this is no longer the case in China, at least since the government "reforms" and crackdowns on corporate enterprise since November 2020: A major effect of the crackdown has been a fundamental change in corporate governance. Platform tech companies have been forced into appointing state-nominated directors and issuing ‘golden shares’ in subsidiary companies to state-owned enterprises under joint venture partnerships. Such golden shares amount typically to only about 1 per cent of a subsidiary’s equity. But they bes...
by SimpleGift
Sun Aug 20, 2023 11:55 am
Forum: Investing - Theory, News & General
Topic: Stocks vs bonds- do valuations matter?
Replies: 42
Views: 5288

Re: Stocks vs bonds- do valuations matter?

Thank you for your response and thank you for the linked article. I am not sure what to make of this conclusion in the article : Our more forward looking measures tell a consistent story. Bond yields have re-priced more than equities. US equity investors today are being rewarded with a smaller return premium for bearing equity risk than at any time in recent memory, at a time when macroeconomic risks are high and central banks are in less supportive mood. More risk, less reward. For the long-term, buy-and-hold investor, it’s not too complicated. All that’s required is to make some judgement about the expected equity risk premium over one’s remaining investing career, then design a portfolio allocation accordingly, one that's expected to me...
by SimpleGift
Sun Aug 20, 2023 10:04 am
Forum: Investing - Theory, News & General
Topic: Stocks vs bonds- do valuations matter?
Replies: 42
Views: 5288

Re: Stocks vs bonds- do valuations matter?

Is this actionable? Should we sell equities and buy bonds? Valuations don't matter (shrug shoulders and stay the course)? The equity risk premium at any particular point in time doesn’t have much informational value for the long-term, buy-and-hold investor. These portfolios are designed around the expected equity risk premium more on the scale of 50-year holding periods, encompassing their entire investing careers (in green below). https://i.imgur.com/58Zhjmo.jpg Source: Schroders , using Shiller data from January 1871 to March 2023. If anything, a low ERP today could indicate lower expected equity returns in the future, which might be useful for financial planning purposes — but not necessarily actionable for changing one’s portfolio allo...
by SimpleGift
Fri Aug 18, 2023 8:23 am
Forum: Investing - Theory, News & General
Topic: Is 1.5-2% real return for nominal bonds/treasuries a historic norm
Replies: 14
Views: 1907

Re: Is 1.5-2% real return for nominal bonds/treasuries a historic norm

toddthebod wrote: Fri Aug 18, 2023 7:40 am There's no normal.
Just to extend this point. We have several centuries of data on real interest rates, going back to the 1300s (chart below).
  • Image
    Note: Trend line in black is GDP-weighted among countries. Chart source: The Economist
While one can discern a long-term declining trend in real rates, falling about 1.6% per century, there is so much variation and instability in the short and medium term, there can be no predictable "normal" rate over the course of the average investor's lifetime.
by SimpleGift
Thu Aug 03, 2023 2:54 pm
Forum: Investing - Theory, News & General
Topic: How Can Quality Be a "Risk Premium"?
Replies: 68
Views: 5306

Re: How Can Quality Be a "Risk Premium"?

JSPECO9 wrote: Thu Aug 03, 2023 2:18 pm Why would a quality stocks (profitable and safer) warrant a higher expected return over a junkier one?
I’ve seen the argument that excess returns to quality are a consequence of a market regime defined by a prolonged decline in interest rates since the 1980s — leading to a sustained re-rating for stocks with "bond-like" qualities. Also, due to the uncertainty around what metrics actually define "quality," this suggest a potential data-mining problem — if you test enough "quality" metrics, in enough global markets, some are likely to prove significant.

In the end, the possibility is out there that quality might not actually be a genuine factor.
by SimpleGift
Thu Aug 03, 2023 1:18 pm
Forum: Investing - Theory, News & General
Topic: Are the Valuations of U.S. Stocks Justified?
Replies: 51
Views: 4648

Re: Are the Valuations of U.S. Stocks Justified?

Nathan Drake wrote: Thu Aug 03, 2023 9:23 am The trend doesn’t need to reverse for returns to be lower, however.
Sure, lower future returns are always a possibility, whether one is a broad-market index investor or a heavy value tilter. But here the wisdom of Forum contributor HomerJ applies best, which is roughly:
  • "Design your financial plans from the start around lower expected returns. If things turn out differently, you’ll just reach your financial goals sooner. If not, you’re already prepared for lower returns."
Personally, can’t think of better financial advice for any stage of one’s investing career.
by SimpleGift
Thu Aug 03, 2023 10:13 am
Forum: Investing - Theory, News & General
Topic: Are the Valuations of U.S. Stocks Justified?
Replies: 51
Views: 4648

Re: Are the Valuations of U.S. Stocks Justified?

asif408 wrote: Thu Aug 03, 2023 9:59 am Increased regulation of large corporations seems to be one of the few things both parties in the US government are in favor of, to some extent, without getting into the political details).
Good point, which was only touched on briefly upthread. Not only in the U.S., but in Europe, India and Brazil as well, it appears there are ongoing anti-trust investigations into Alphabet, Amazon, Apple, Meta and Microsoft.

New anti-trust litigation and legislation worldwide could impose limits on the future growth of these companies. In fact, this point seems important enough I will edit the thread summary post and add it.
by SimpleGift
Thu Aug 03, 2023 9:05 am
Forum: Investing - Theory, News & General
Topic: Are the Valuations of U.S. Stocks Justified?
Replies: 51
Views: 4648

Re: Are the Valuations of U.S. Stocks Justified?

Just to summarize a few of the points made in this thread. Mean reversion in stock valuations is not an inevitability, since there is no fixed mean value that global investors are willing to pay for a dollar of earnings. However, in order for U.S. stock valuations to "mean revert," one or more of these future events will need to happen: • The secular trend toward lower interest rates will need to reverse, increasing corporate financing costs, and increasing the discount rate on future corporate earnings. • The U.S. will need to lose its global preeminence in technology and the commercialization of innovation, leading to a general decline in corporate profitability. • The level of U.S. corporate taxation will need to increase signi...
by SimpleGift
Wed Aug 02, 2023 11:54 pm
Forum: Investing - Theory, News & General
Topic: Are the Valuations of U.S. Stocks Justified?
Replies: 51
Views: 4648

Re: Are the Valuations of U.S. Stocks Justified?

I wouldn’t know where to find the data, but the current concentration and profitability of the largest companies seems similar to the early 1900s and the big trusts (standard oil, US Steel, etc.). I wonder how it compares quantitatively. This February 2023 paper may have some of the qualitative comparisons you are interested in: 100 Years of Rising Corporate Concentration We collect data on the size distribution of all U.S. corporations for 100 years. We document that corporate concentration (e.g., asset share or sales share of top businesses) has increased persistently over the past century. Rising concentration was stronger in manufacturing and mining before the 1970s, and stronger in services, retail, and wholesale after the 1970s. Furt...
by SimpleGift
Wed Aug 02, 2023 3:37 pm
Forum: Investing - Theory, News & General
Topic: Are the Valuations of U.S. Stocks Justified?
Replies: 51
Views: 4648

Re: Are the Valuations of U.S. Stocks Justified?

An oversimplification is that the world is experiencing another Industrial revolution -- this one centered around semi-conductors and software -- and the US has a big jump on everyone else. Much like Britain got the jump on everyone else for the Industrial revolution that kicked off around 1760. Very much appreciate this perspective, as I don’t know much about the global tech industry today. Looking to the future, do you have any thoughts about the sustainability of the U.S. advantages in this global tech competition? I tend toward techno-optimism, believing that any productivity gains due to the innovations of these large tech companies will eventually filter through to other industry sectors and to the larger society. At the same time, o...
by SimpleGift
Wed Aug 02, 2023 3:10 pm
Forum: Investing - Theory, News & General
Topic: Are the Valuations of U.S. Stocks Justified?
Replies: 51
Views: 4648

Re: Are the Valutions of U.S. Stocks Justified?

...which leads me to wonder, has the high EPS growth of US companies since the early 1990s been similarly driven by the growing purchasing power of foreign consumers (i.e. the great growth of the middle class in developing countries)? And at the end of the 20th century, were US companies just best positioned to seize that opportunity and profit? Certainly, the proportion of U.S. stocks owned by foreign entities has increased steadily in recent decades, doubling from 20% in 1990 to 40% today (in red, chart below). I’ve not seen any data on the makeup of these foreign entities, whether individuals, pension funds, sovereign wealth funds, etc. https://i.imgur.com/FXddzLR.jpg Source: TPC However, with the earnings growth rates of U.S. stocks su...
by SimpleGift
Wed Aug 02, 2023 2:17 pm
Forum: Investing - Theory, News & General
Topic: Are the Valuations of U.S. Stocks Justified?
Replies: 51
Views: 4648

Re: Are the Valutions of U.S. Stocks Justified?

lazyday wrote: Wed Aug 02, 2023 1:43 pm Some might be from share buybacks. Was dilution worse in the decades before '93?
Yes, a good insight. Bernstein and Arnott found share dilution of over 2% per year between 1900 and 2000. However since 2000, large-company buybacks have generally predominated over new share issuance, with a steady concentrating effect upon earnings-per-share from these net share buybacks.

Buybacks appear to be a trend that has not slowed in recent decades, so should continue to support EPS growth.
by SimpleGift
Wed Aug 02, 2023 12:44 pm
Forum: Investing - Theory, News & General
Topic: Are the Valuations of U.S. Stocks Justified?
Replies: 51
Views: 4648

Re: Are the Valutions of U.S. Stocks Justified?

Nathan Drake wrote: Wed Aug 02, 2023 12:37 pm Certainly plenty of large, old, companies internationally that haven’t been the recipient of valuation expansion.
Of course, but the large-cap companies internationally haven't had nearly the profitablity and earnings growth rates over the last 30 years of the large U.S. companies. The U.S. companies appear fundamentally different today than large-cap companies in Europe, Japan and the major emerging markets.

But, please, let's focus on U.S. companies and not turn this thread into another "U.S. vs international" thread!
by SimpleGift
Wed Aug 02, 2023 12:30 pm
Forum: Investing - Theory, News & General
Topic: Are the Valuations of U.S. Stocks Justified?
Replies: 51
Views: 4648

Re: Are the Valutions of U.S. Stocks Justified?

It has more to do with sentiment and narratives than fundamentals. Not sure that sentiment alone can account for the increased valuation levels. U.S. public firms are quite different today compared to 1975 or even 1990. They are fewer and larger and their profits, assets and payouts are more concentrated in a smaller group of companies. From the table below: • In 1975, 50 percent of the total earnings of public firms were earned by the 109 top-earning firms; by 2015, the top 30 firms earn 50 percent of the total earnings of the US public firms. • Between 1975 and 2015, the percentage of earnings accounted for by the top 100 firms almost doubles, from 48.5% in 1975 to 84.2% in 2015. https://i.imgur.com/i6B8fIt.jpg Note: Statistics are for a...
by SimpleGift
Wed Aug 02, 2023 11:16 am
Forum: Investing - Theory, News & General
Topic: Are the Valuations of U.S. Stocks Justified?
Replies: 51
Views: 4648

Are the Valuations of U.S. Stocks Justified?

An undercurrent in investor consciousness these days seems to be that U.S. large-cap stocks are overvalued. It's widely known that, over the last century, CAPE values averaged about 15 — but for the last 30 years CAPE values have averaged over 25 (in blue, chart below). This post is not to suggest that "this time is different," but something is clearly different, and I’m interested to hear the Forum’s thoughts on what is going on. For starters, the rate of real earnings growth over the last 30 years has been more than three times its century-long average — 1.5% for the 1881-1992 period, but 4.9% from 1993 to 2023 (in green, chart below). https://i.imgur.com/Pn1SDt5.jpg NOTE: Log scale. 12-month earnings-per-share, inflation-adjust...
by SimpleGift
Sun Jul 30, 2023 11:54 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

Viewed more broadly and looking at the long term data, it may seem as though a 100% SCV allocation is extreme; however, we have long only fund data for many decades that suggests it does perform similar to the market, with higher risk characteristics, and where the risk profile shows up at different times with a higher premium. It features higher drawdowns and volatility, but also less start date sensitivity relative to the market. I do not see any evidence that a 100% SCV allocation is extremely dangerous unless one has the inability to stay the course and is prone to wild changes between risk assets as a result. One needs to be careful (in the bold underlined parts above) to use the past tense when talking about long-term historical data...
by SimpleGift
Sun Jul 30, 2023 4:50 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

Hold that thought nedsaid. And consider how we would decide on it versus this alternative: that size is really a value factor in disguise. And if size and value aren't separate, additive contributions to return ... It would seem that Fama-French answered this question in their 2005 paper, Migration . In it, they break down the sources of excess returns for both the small and value factors, averaged over the 1926-2005 period (table below). But first, it will help to familiarize with the matrix used in their analysis of the excess return sources: • Minus. Stocks that moved to a lower P/B portfolio in the same size bin, or no longer met the listing requirements, or had negative book equity. • Same. Firms that stayed in the same bin. • Plus. S...
by SimpleGift
Sun Jul 30, 2023 2:41 pm
Forum: Investing - Theory, News & General
Topic: Valuations are Completely Useless and Meaningless
Replies: 260
Views: 14524

Re: Valuations are Completely Useless and Meaningless

Actionable item: ignore valuations in making investment decisions. No? For broad-market index investors, beyond extreme highs and lows, the idea of "normal" stock valuations is probably not a very useful metric. There is no preordained average value at which stocks are destined to trade. The amount that investors are willing to pay for a dollar of earnings is fluid and non-stationary, different in different time periods and in different interest rate regimes (chart below). https://i.imgur.com/JOu6mas.jpg Note: The full data series is divided into four 35-year periods, with their means in red. Source: Shiller Data In short, beyond the extreme highs and lows of valuation, the inevitability of mean reversion and the concept of an &q...
by SimpleGift
Sun Jul 30, 2023 2:01 pm
Forum: US Chapters
Topic: What was your first Boglehead post?
Replies: 61
Views: 9478

Re: What was your first Boglehead post?

What was your first Boglehead post? A bit embarrassing to look back at that first post from 12 years ago. We had just read Jim Otar’s book, Unveiling the Retirement Myth , in which he recommends various allocations between TIPS and nominal bonds, corresponding with various portfolio withdrawal rates: Withdrawal Rate 0-3%.........100% nominal bonds 4%.............75% nominal/25% TIPS 5%.............25% nominal/75% TIPS 6%.............100% TIPS Well, this was totally confusing to us, since we’d never heard anything like this discussed before in several years of lurking on the Forum. Turned out, while most Bogleheads respected Jim Otar’s work and his book, the consensus was this relationship didn't make much sense, so we never incorporated it...
by SimpleGift
Sat Jul 29, 2023 4:55 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

So their interpretation is actually that more of the value premium is accounted for by growth stocks with negative migration than from value stocks with positive migration. Interesting. It’s perhaps not too surprising that, historically, the high (maybe overpriced) expectations of small growth stocks have more often disappointed investors than the low (maybe underpriced) expectations of small value stocks have rewarded them. The question for investors today is whether this same dynamic will still hold true in a techno-optimistic future of slowing growth, low inflation and aging populations, at least in the advanced countries. In all probability, it will be a very different world than the 20th-century one whose style premiums we are now ana...
by SimpleGift
Sat Jul 29, 2023 3:03 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

As a further contribution to the effort, these next charts demonstrate that small value stocks are *smaller* than ‘small’ not-value stocks; and that large not-value stocks are larger than ‘large’ value stocks...Thoughts? Just speculating on why non-value stocks, on average, have much larger market caps than their value stock cohorts. Since the implied earnings growth rates of growth and neutral stocks are, in general, higher than that of value stocks, their valuations and market capitalizations are higher in anticipation of these future earnings. In short, investors are expecting more from non-value stocks in the future than they are from value stocks, and this is reflected in their different average market capitalizations — even within th...
by SimpleGift
Sat Jul 29, 2023 11:55 am
Forum: Investing - Theory, News & General
Topic: Inflation Tends to Linger. Could It Last a Decade This Time? (Barron's)
Replies: 47
Views: 7079

Re: Inflation Tends to Linger. Could It Last a Decade This Time? (Barron's)

nisiprius wrote: Sat Jul 29, 2023 10:08 am Betteridge's Law of Headlines says that "Any headline that ends in a question mark can be answered by the word 'no.'"
Which of course, just for fun, suggests an article with the headline, "Is Betteridge's Law True?"
by SimpleGift
Fri Jul 28, 2023 8:36 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

Persistence rate of 60-70% in small for t+1 doesn’t seem that high. Over 5-10 years I would imagine a small-value portfolio would be look very different. If you looked in aggregate at the securities in small value and small growth over 10 years I wonder how many companies might have been classified as both at different times? Some might even go back and forth. Yes, with an annual persistence rate of only 60%-70% for companies in the small growth and small value bins, it would make sense that the composition of these portfolios would be markedly different after 5-10 years. However, looking at the Fama-French data on migration from small growth to small value, and conversely from small value to small growth, less than 2% of market cap makes ...
by SimpleGift
Fri Jul 28, 2023 11:28 am
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

If the CRSP FF portfolios "reset" once a year to reclassify securities, how much fluidity is there in the database? How frequently do stocks go from growth to value? What I mean is how durable is the classification of a given security to a given style box? Was curious about this question also. It turns out that in 2005 Fama-French wrote a paper titled Migration , which looked at the transition frequencies between their style bins. These were calculated as the changes between each year (t) and the next year (t+1) — and what they published were tables showing the average annual changes over the 1926-2005 period. Below is their table showing the average annual percentage of market cap that stayed in the same style bin between year t...
by SimpleGift
Thu Jul 27, 2023 11:43 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

McQ wrote: Thu Jul 27, 2023 2:04 pm The performance of small “junk,” as charted in the previous post, is a case in point.
Just to clarify, I believe the rather nebulous term "junk" currently refers not to the entire class of small growth stocks, but rather has come to mean that subset of small growth stocks that are the opposite of quality — i.e, the opposite of profitable, growing, well-managed, with high payout ratios, good credit ratings, etc.

At least this is the definition used by Asness et al. to construct their Quality-minus-Junk (QMJ) data series.
by SimpleGift
Thu Jul 27, 2023 5:49 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

McQ wrote: Thu Jul 27, 2023 2:04 pm Are these two in an obverse relationship? I’m not seeing it.
The underlying forces that are driving these size and value premiums are, of course, not independent from the broader economy and financial landscape. Shifts in inflation levels, changes in the discount rate, the vagaries of investor sentiment, and even industry-specific reshufflings would not seem to have symmetrical impacts upon these two factor premiums, relative to the market.

Unless I’m missing something, not sure why one would expect a symmetrical, obverse relationship?
by SimpleGift
Thu Jul 27, 2023 1:41 pm
Forum: Investing - Theory, News & General
Topic: The "New" Zombie Companies
Replies: 16
Views: 2678

Re: The "New" Zombie Companies

WhenWillWeGetThere wrote: Thu Jul 27, 2023 12:05 pm History is a great teacher and I appreciate everyone's wisdom.
Just a suggestion, but the subject of "zombie companies" has received a lot of academic research and attention in recent years, so you might be best rewarded by searching, say, Google Scholar or just the general internet for specific answers to your question. There's quite a few papers on zombie companies out there, not only addressing the U.S. market, but other advanced countries as well.

This is not a subject I’ve looked into, so sorry not to be able to point you to specific research or studies.
by SimpleGift
Thu Jul 27, 2023 12:29 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

Others here have pointed out similar performance records of Vanguard Small Cap Value index fund and Vanguard Small Cap Growth Index funds since inception. I just checked, since inception of May 21, 1998 Vanguard Small Cap Growth Index has returned 8.52% annually and Vanguard Small Cap Value Index has returned 8.51%. My source is Morningstar. Eerie. I don't see any black hole here. The characterization of small growth as a "black hole" originated in the 1990s, I believe, when folks started focusing on the 70-year historical performance of the Fama-French factors. I first became aware of it in April, 1999 from a William Bernstein article on his old Efficient Frontier blog, where he posted the chart below. In the article, he didn’t ...
by SimpleGift
Thu Jul 27, 2023 9:48 am
Forum: Investing - Theory, News & General
Topic: treasury bonds returns higher than AAA corporate bonds [How to achieve returns w/little risk and 6-7% return?]
Replies: 70
Views: 5379

Re: treasury bonds returns higher than AAA corporate bonds

Econberkeley wrote: Wed Jul 26, 2023 3:33 pm I wanted to invest in corporate AAA bonds go get higher return, but shocked to see that treasury bonds have higher returns for the same maturity. How is this possible?
During times of rising interest rates and high inflation, even 3-month Treasury bills can temporarily have higher yields than longer-term corporate bonds. Though rare and definitely not normal, it has happened a few times before in the 1970s and early 1980s (chart below).
Eventually the relationship between risk and reward will come back into balance.
by SimpleGift
Thu Jul 27, 2023 8:25 am
Forum: Investing - Theory, News & General
Topic: Dividend yield irrelevance?
Replies: 24
Views: 3050

Re: Dividend yield irrelevance?

rkhusky wrote: Wed Jul 26, 2023 5:09 pm
SimpleGift wrote: Wed Jul 26, 2023 1:29 pm
Penn Wharton wrote:The Inflation Reduction Act of 2022 imposed a new 1 percent excise tax on buybacks. We estimate that buybacks are on average still tax-favored for domestic shareholders...We estimate that an excise tax of 4.6 percent would be enough to eliminate the tax preference on average.
This was just a shot across the bow. Once this is fully implemented, it will be easy for Congress to change the rates.
Right. We can’t discuss proposed legislation, but we can note that an increase in the excise tax on buybacks from 1% to 4% is included in the White House’s 2024 Budget. It just seems a matter of time before we have approximate tax equivalency between buybacks and dividends.
by SimpleGift
Wed Jul 26, 2023 1:29 pm
Forum: Investing - Theory, News & General
Topic: Dividend yield irrelevance?
Replies: 24
Views: 3050

Re: Dividend yield irrelevance?

rkhusky wrote: Wed Jul 26, 2023 1:22 pm
comeinvest wrote: Wed Jul 26, 2023 8:48 am In a sense it's probably good that corporations don't switch to share buybacks instead of dividends, or politicians would probably change tax laws to put the two ways of returning capital on the same footing.
Seems like they have already done that.
A recent Penn Wharton study suggests that the excise tax on buybacks would need to be in the 4%-5% range to create tax equivalency between buybacks and dividends.
Penn Wharton wrote:The Inflation Reduction Act of 2022 imposed a new 1 percent excise tax on buybacks. We estimate that buybacks are on average still tax-favored for domestic shareholders...We estimate that an excise tax of 4.6 percent would be enough to eliminate the tax preference on average.
by SimpleGift
Wed Jul 26, 2023 1:04 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

It's worth noting that a lot of the claims being made about the non-stationary nature of the market are controversial. If someone was reading this thread and many other factor threads, they may get the impression that there is some sort of consensus in favor of non-stationarity. I cannot find one. The implications of non-stationarity leads to a radical form of skepticism towards not just small and value, but the market factor. Thank you for pointing out that non-stationarity in financial data is a relative viewpoint (though hardly controversial, I would think). The point is that investors need to guard against taking a century's worth of financial data, calculating a long-term mean, and then formulating ideas about expected market behavior...
by SimpleGift
Wed Jul 26, 2023 9:32 am
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

I don’t believe in stationary premiums, persistently declining premiums, or “regime shifts” (if this is to mean “this time is permanently different”) Apologies. Perhaps I misunderstood. When you commented that "premia change with time and one reason could be that expected premia are higher," my sense was that you were referring to mean reversion. Like so many financial data series — including stock valuations, real interest rates, inflation — it can be dangerous to assume they are mean reverting over time. Just ask the folks who are expecting CAPE 10 values to return to their long-term average of 16, or those expecting real interest rates to return to 4%. In fact, the long-term averages of these data series are not fixed. They sh...
by SimpleGift
Wed Jul 26, 2023 12:45 am
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

Nathan Drake wrote: Wed Jul 26, 2023 12:28 am No, it doesn’t need to be stationary for my statements to be correct. I never claimed anything other than premia that change with time and that one reason could be that expected premia are higher (which may inevitably actualize).
Perhaps I’m misunderstanding where you’re coming from, but a persistent decline in realized premiums and a corresponding increase in expected premiums would seem to imply a fixed mean and variance. Why else would expected premiums increase unless a stationary mean premium is assumed?

Otherwise, a persistent decline in realized premiums could just mean a regime shift, along with declining expected premiums. This latter behavior is what one would expect to see in a non-stationary data series.
by SimpleGift
Wed Jul 26, 2023 12:10 am
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

It's not sufficient to simply look at the recent performance and conclude the Value premium is gone, when merely the expected Value premiums may have simply increased. This would only be true if the value premium was a stationary data series, i.e., its mean and variance are constant over time. However, we have ample evidence that factor premiums are non-stationary data series, i.e., their means and variances in one time period do not seem to apply in other time periods. In fact, most data series in investing are non-stationary, in that they experience breaks and regime changes over time, often dramatically shifting their means and distributions (e.g., see U.S. stock valuations and real interest rates since the 1980s). As investors, a certa...
by SimpleGift
Tue Jul 25, 2023 6:18 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

In the spirit of further evidence on the subject of "regime changes" and their impact on shifting factor premiums, a very comprehensive recent study is: Have Risk Premia Vanished? Using monthly returns data on a sample of more than 23,000 stocks from 1950 to 2018, we find strong evidence of four breaks in a four-factor model…The break dates are located at July 1972, October 1981, June 2001, and October 2008, thus coinciding with the oil price shocks of the early seventies, the change in the Fed’s monetary policy regime, the crash of the Tech bubble, and the Global Financial Crisis (GFC). https://i.imgur.com/8QV9UZ7.jpg We find that the equity risk premium, value premium, and size premium all vary significantly over time and have d...
by SimpleGift
Tue Jul 25, 2023 2:19 pm
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

Possibly it’s just a phase, and the long-term dominance of small value over the total market will shortly be restored. But that’s more hope than plan. Thank you for the nice chart. Hope you don't mind that I've appended notes to it below. Different folks will see different things in the historical record. However, the "burstiness" of the small value premium is widely recognized. Further, there have been three major bursts in the U.S. over the last century — which just happen to coincide with three major "regime changes" (chart below). https://i.imgur.com/P370evM.jpg In the past, whenever I've considered small value, I've had to ask myself: Are these types of regime changes likely to be repeated in the future? Most major...
by SimpleGift
Tue Jul 25, 2023 11:55 am
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

Researchers have found no correlation between value premiums and inflation. And inflation itself isn’t predictable, so it would not make sense to try and allocate to value on trying to forecast future inflation. In fairness, one can't make such an unequivocal statement, based on the full body of research. For example: Inflation and the Value Premium , by Larry Swedroe Or, Inflation and the Value premium: Simple Story or Tangled Tale? • High inflation alone was a driver of value outperformance in the past, but not exclusively. In fact, periods of medium inflation also show consistent performance of Value. • The most recent jump in inflation is potentially transient but longer term prospects for Value are still good if inflation stays at the...
by SimpleGift
Tue Jul 25, 2023 10:31 am
Forum: Investing - Theory, News & General
Topic: Interrogating the size and value factors
Replies: 647
Views: 53544

Re: Interrogating the size and value factors

If nothing else, markets are aware of odds from the past and adapt. As McQ wrote above "each time is a regime, and regimes are different", which may be easier to understand than "nonstationarity" (i.e., the odds are changing through time). Right. If one reads McQ’s various research papers, a primary overarching theme is regime changes. The factors driving market behavior one period of time (i.e., inflation levels, real interest rates, stock valuations, etc.) do not persist in other periods of time — and sometimes dramatically so. In the case of the value premium, prospective investors need to be looking to the future — especially the global secular trends of low inflation, slowing productivity growth and aging populatio...
by SimpleGift
Mon Jul 24, 2023 6:34 pm
Forum: Investing - Theory, News & General
Topic: Dividend yield irrelevance?
Replies: 24
Views: 3050

Re: Dividend yield irrelevance?

PowderSkier wrote: Mon Jul 24, 2023 6:03 pm If this is an important metric, are there any websites that display the S&P 500’s historical and/or current “Dividend and Buyback Yield?”
Both dividends and buybacks are means for corporations to return cash to shareholders. Not sure whether the combined dividend and buyback yield (aka, the shareholder yield) is of much importance in and of itself — but it does reassure investors that with the shrinking dividend yield, buybacks have more than compensated (chart below).
Yardeni Research (link above) is the only source I’m aware of that regularly publishes these combined yields.