Value versus Growth

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Dusn
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Re: Value versus Growth

Post by Dusn »

Fama and French used this retrospective data to come up with their small cap value hypothesis. Retrospective data is biased because of multiplicity (they could have analyzed the data 100 different ways until they found an association by chance) and the analysis was performed with the hope of finding a desired outcome. retrospective data can only be hypothesis generating, it cannot prove future causation.

So the question is has the hypothesis held up? I think for value it has not but I don’t know about small cap?

The other question is, did they use foreign data to come up with their hypothesis and if not, has it held up when looking at foreign data? In this case I think it has, which is good.

So maybe in the long run it’ll hold up. I’m sure my concerns were taken into account if they won the noble prize for this, so there’s probably more to it. But at least in the medical research world that I’m familiar with, a retrospective analysis should not be considered proof and is inherently biased.
Last edited by Dusn on Fri Jan 14, 2022 11:39 am, edited 3 times in total.
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burritoLover
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Re: Value versus Growth

Post by burritoLover »

fixi reinhart wrote: Fri Jan 14, 2022 11:24 am
burritoLover wrote: Fri Jan 14, 2022 11:21 am It is more proof that large caps dominate the returns of a market cap weight fund. They excluded Tesla when it first met their positive earnings screen - they didn't give an explanation but the narrative at the time was that Tesla was overvalued or that Tesla's earnings weren't "real" because they included selling carbon credits. If it was truly a passive vehicle, it should just be the top 500 companies by market cap rebalanced on a specific arbitrary schedule with the only consideration being liquidity/cost concerns. SCV funds, like Avantis, are just using a different set of mechanical metrics to screen and are no more active than the S&P 500 - just because you don't agree with those metrics, doesn't make it more active.
The S&P 500 is, for all practical purposes, passive BECAUSE it tracks the passive index that is the Total American Stock market so well.

A strategy that buys and sells stocks because the screens tell them that they are undervalued or overvalued is an active value investing strategy.
I guess an equal-weight S&P 500 fund is active investing strategy then since it doesn't follow the total market as well? An index can be actively managed - you realize that right?
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fixi reinhart
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Re: Value versus Growth

Post by fixi reinhart »

burritoLover wrote: Fri Jan 14, 2022 11:31 am I guess an equal-weight S&P 500 fund is active investing strategy then since it doesn't follow the total market as well?
Yes, it constantly buys and sells its holdings.

Passive means passive. Minimal trading.
alex_686
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Re: Value versus Growth

Post by alex_686 »

fixi reinhart wrote: Fri Jan 14, 2022 11:32 am
burritoLover wrote: Fri Jan 14, 2022 11:31 am I guess an equal-weight S&P 500 fund is active investing strategy then since it doesn't follow the total market as well?
Yes, it constantly buys and sells its holdings.

Passive means passive. Minimal trading.
No, it is passive. To be passive you have to follow a index. Preferably a rules based index but it does not have to be. See the DJIA index.

Now we can debate what a qualities a index should have. If held in a taxable account I would guess a high turnover would be a negative. But realize that trading cost are basically zero now no it is not a major negative. My big beef with equally weighted is that there is no real theory or logic behind it. De facto it is a back door to a mid sized cap index so why not buy a mid sized cap index?
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fixi reinhart
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Re: Value versus Growth

Post by fixi reinhart »

alex_686 wrote: Fri Jan 14, 2022 11:37 am
No, it is passive. To be passive you have to follow a index. Preferably a rules based index but it does not have to be. See the DJIA index.

Now we can debate what a qualities a index should have. If held in a taxable account I would guess a high turnover would be a negative. But realize that trading cost are basically zero now no it is not a major negative. My big beef with equally weighted is that there is no real theory or logic behind it. De facto it is a back door to a mid sized cap index so why not buy a mid sized cap index?
Well, I don't know who uses what definitions, but if "following an index" means passive, the word passive becomes meaningless.

Any active investment strategy can be converted into an "index" that a "passive vehicle" will track. Congratulations.
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vanbogle59
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Re: Value versus Growth

Post by vanbogle59 »

fixi reinhart wrote: Fri Jan 14, 2022 11:38 am
alex_686 wrote: Fri Jan 14, 2022 11:37 am
No, it is passive. To be passive you have to follow a index. Preferably a rules based index but it does not have to be. See the DJIA index.

Now we can debate what a qualities a index should have. If held in a taxable account I would guess a high turnover would be a negative. But realize that trading cost are basically zero now no it is not a major negative. My big beef with equally weighted is that there is no real theory or logic behind it. De facto it is a back door to a mid sized cap index so why not buy a mid sized cap index?
Well, I don't know who uses what definitions, but if "following an index" means passive, the word passive becomes meaningless.

Any active investment strategy can be converted into an "index" that a "passive vehicle" will track. Congratulations.
Isn't the much more important difference between S&P500 and SCV that one is EMH, nobody knows nothin', and the other is "hey, I found a $20 bill laying on the ground"?
The other differences seem trite to me.
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Re: Value versus Growth

Post by Da5id »

fixi reinhart wrote: Fri Jan 14, 2022 11:38 am
alex_686 wrote: Fri Jan 14, 2022 11:37 am
No, it is passive. To be passive you have to follow a index. Preferably a rules based index but it does not have to be. See the DJIA index.

Now we can debate what a qualities a index should have. If held in a taxable account I would guess a high turnover would be a negative. But realize that trading cost are basically zero now no it is not a major negative. My big beef with equally weighted is that there is no real theory or logic behind it. De facto it is a back door to a mid sized cap index so why not buy a mid sized cap index?
Well, I don't know who uses what definitions, but if "following an index" means passive, the word passive becomes meaningless.

Any active investment strategy can be converted into an "index" that a "passive vehicle" will track. Congratulations.
I'm with Alex. It is a passive fund if it follows an index. But your strategy may not be passive if you buy an index fund. For example if you buy a cap weighted sector fund, presumably you'd agree the fund is passive. But your strategy, betting on the sector for whatever reason, is active compared to market weight.
fixi reinhart
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Re: Value versus Growth

Post by fixi reinhart »

vanbogle59 wrote: Fri Jan 14, 2022 11:41 am
Isn't the much more important difference between S&P500 and SCV that one is EMH, nobody knows nothin', and the other is "hey, I found a $20 bill laying on the ground"?
The other differences seem trite to me.
Yes, using certain stock characteristics to try to find segments of the market that will do better than the market requires a lot more confidence than simply accepting the average of all stock market investors.
fixi reinhart
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Re: Value versus Growth

Post by fixi reinhart »

Da5id wrote: Fri Jan 14, 2022 11:43 am I'm with Alex. It is a passive fund if it follows an index. But your strategy may not be passive if you buy an index fund. For example if you buy a cap weighted sector fund, presumably you'd agree the fund is passive. But your strategy, betting on the sector for whatever reason, is active compared to market weight.
I would say it is still passive. It may not be diversified properly, but still passive. (minimal trading)

Buying VTI is also passive, even though it excludes the other countries.
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Re: Value versus Growth

Post by alex_686 »

fixi reinhart wrote: Fri Jan 14, 2022 11:38 am Any active investment strategy can be converted into an "index" that a "passive vehicle" will track. Congratulations.
How? Why?

In order for this to work you would need a independent committee make decisions. The committee has to declare the change of the index prior to the fund trading on that change. So there is the issue of front running. Everybody could see what was going on so you can't use a secret sauce.

There are a variety of purposes for a index beyond portfolio creation. Such a risk and performance metric. And then there is the quality dimension. Having people pick a unpredictable basket of stocks is seen as a negative. I mean, almost nobody uses the DJIA index. Heck, S&P Dow Jones Indices has more or less admitted that it is a worthless index.
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fixi reinhart
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Re: Value versus Growth

Post by fixi reinhart »

alex_686 wrote: Fri Jan 14, 2022 11:51 am How? Why?

In order for this to work you would need a independent committee make decisions. The committee has to declare the change of the index prior to the fund trading on that change. So there is the issue of front running. Everybody could see what was going on so you can't use a secret sauce.

There are a variety of purposes for a index beyond portfolio creation. Such a risk and performance metric. And then there is the quality dimension. Having people pick a unpredictable basket of stocks is seen as a negative. I mean, almost nobody uses the DJIA index. Heck, S&P Dow Jones Indices has more or less admitted that it is a worthless index.
Would you say any rules-based strategy is passive?
alex_686
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Re: Value versus Growth

Post by alex_686 »

fixi reinhart wrote: Fri Jan 14, 2022 11:54 am Would you say any rules-based strategy is passive?
I sure there is a edge case that I am missing, but in general yes.

There once was a index where the stocks were picked by throwing darts at the WSJ. Note, this is not a high-quality index. The point of the index is that random picks often outperform stock analysist. But it meets all of the technical requirements of being a index.

As a counter, do you think that the Dow Jones Industrial Average Index, a index where a committee makes active decisions, a index? Do you think that the index funds that follow the DJIA index are actively or passively managed?
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fixi reinhart
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Re: Value versus Growth

Post by fixi reinhart »

alex_686 wrote: Fri Jan 14, 2022 12:00 pm I sure there is a edge case that I am missing, but in general yes.

There once was a index where the stocks were picked by throwing darts at the WSJ. Note, this is not a high-quality index. The point of the index is that random picks often outperform stock analysist. But it meets all of the technical requirements of being a index.

As a counter, do you think that the Dow Jones Industrial Average Index, a index where a committee makes active decisions, a index? Do you think that the index funds that follow the DJIA index are actively or passively managed?
I think it's the general idea that matters. Not the details.

Warren Buffett said this in his letter to shareholders:
The tens of millions of other investors and speculators in the United States and elsewhere have a wide variety
of equity choices to fit their tastes. They will find CEOs and market gurus with enticing ideas. If they want price
targets, managed earnings and “stories,” they will not lack suitors. “Technicians” will confidently instruct them as to
what some wiggles on a chart portend for a stock’s next move. The calls for action will never stop.

Many of those investors, I should add, will do quite well. After all, ownership of stocks is very much a
“positive-sum” game. Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at
a board listing all of the S&P 500, will – over time – enjoy dividends and capital gains, just as long as it never gets
tempted to make changes in its original “selections.”
12

Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most
owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample
diversification and a minimization of transactions and fees. Still, investors must never forget that their expenses are
Wall Street’s income. And, unlike my monkey, Wall Streeters do not work for peanuts
Owning productive assets will be rewarded over time. Make sure its diversified and you minimize taxes and fees and you're good to go. To me that is the spirit of passive.

Trading stocks back and forth because you think it's undervalued this time and overvalued that time is active in my book.
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Re: Value versus Growth

Post by Nathan Drake »

vanbogle59 wrote: Fri Jan 14, 2022 11:41 am
fixi reinhart wrote: Fri Jan 14, 2022 11:38 am
alex_686 wrote: Fri Jan 14, 2022 11:37 am
No, it is passive. To be passive you have to follow a index. Preferably a rules based index but it does not have to be. See the DJIA index.

Now we can debate what a qualities a index should have. If held in a taxable account I would guess a high turnover would be a negative. But realize that trading cost are basically zero now no it is not a major negative. My big beef with equally weighted is that there is no real theory or logic behind it. De facto it is a back door to a mid sized cap index so why not buy a mid sized cap index?
Well, I don't know who uses what definitions, but if "following an index" means passive, the word passive becomes meaningless.

Any active investment strategy can be converted into an "index" that a "passive vehicle" will track. Congratulations.
Isn't the much more important difference between S&P500 and SCV that one is EMH, nobody knows nothin', and the other is "hey, I found a $20 bill laying on the ground"?
The other differences seem trite to me.
No.

Investing in SCV is believing that the markets are pricing in risks of all companies efficiently, and that SCV is efficiently priced relative to the increased risks these sticks exhibit as investors are requiring higher expected returns in exchange for the additional risk
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vanbogle59
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Re: Value versus Growth

Post by vanbogle59 »

Nathan Drake wrote: Fri Jan 14, 2022 12:46 pm
vanbogle59 wrote: Fri Jan 14, 2022 11:41 am
fixi reinhart wrote: Fri Jan 14, 2022 11:38 am
alex_686 wrote: Fri Jan 14, 2022 11:37 am
No, it is passive. To be passive you have to follow a index. Preferably a rules based index but it does not have to be. See the DJIA index.

Now we can debate what a qualities a index should have. If held in a taxable account I would guess a high turnover would be a negative. But realize that trading cost are basically zero now no it is not a major negative. My big beef with equally weighted is that there is no real theory or logic behind it. De facto it is a back door to a mid sized cap index so why not buy a mid sized cap index?
Well, I don't know who uses what definitions, but if "following an index" means passive, the word passive becomes meaningless.

Any active investment strategy can be converted into an "index" that a "passive vehicle" will track. Congratulations.
Isn't the much more important difference between S&P500 and SCV that one is EMH, nobody knows nothin', and the other is "hey, I found a $20 bill laying on the ground"?
The other differences seem trite to me.
No.

Investing in SCV is believing that the markets are pricing in risks of all companies efficiently, and that SCV is efficiently priced relative to the increased risks these sticks exhibit as investors are requiring higher expected returns in exchange for the additional risk
OK. I'm fine with that logic.
But even if one arrives at SCV via a risk-premium story, it still seems to me that distinction between active and passive is trivial (assuming fees are kept low).
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nisiprius
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Re: Value versus Growth

Post by nisiprius »

Apathizer wrote: Thu Jan 13, 2022 10:56 pm I started a thread a few weeks ago discussing a rational reminder podcast about the value premium. I won't rehash it too much but the guest analyzed FF research and found that there were a couple seemingly innocuous decisions they made about when to calculate the value premium that affected it.

He found that if you calculated it at a different time which is just as reasonable an assumption it's about I think 25% less than they calculated originally.

This is only one study and even though it seems sound it's not necessarily definitive. And even if it's true the value premium is still statistically significant though not as large as originally thought.

Either way it's another good argument for the simplicity of index investing.
For me, the big take-home is not "Fama-French exaggerated" or "Fama-French cheated" or "Fama-French were extremely lucky in a set of trivial decisions they made."

The point is not that "the value premium is smaller than we thought."

The point is that numbers on measurements and calculations like "the size of the value premium" should be treated as having an error range of like ±25%.

What's shocking is not that Mathias Hasler found that Fama and French had made a set of arbitrary, "innocuous" choices that accidentally resulted in a number that might be 33% high. The shocking part is that numbers that thousands of advisors, strategists, and investors are relying on are that sensitive to such tiny, unimportant calculation details.
Last edited by nisiprius on Fri Jan 14, 2022 1:26 pm, edited 1 time in total.
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alex_686
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Re: Value versus Growth

Post by alex_686 »

fixi reinhart wrote: Fri Jan 14, 2022 12:08 pm Owning productive assets will be rewarded over time. Make sure its diversified and you minimize taxes and fees and you're good to go. To me that is the spirit of passive.

Trading stocks back and forth because you think it's undervalued this time and overvalued that time is active in my book.
I find the inclusion of tax odd. It is almost never included for 2 reasons. Tax situations tend to vary and thus very hard to included with any precision. This is the land of custom indexes. It is very hard to specify the index prior to tax events. This put it in the land of subjective judgements and thus active manage. And it is irrelevant for tax advantaged investors (most) or holders of ETFs.

In any event, ignoring taxes, by that definition all of the indexes we have been talking about would quality under this definition.
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fixi reinhart
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Re: Value versus Growth

Post by fixi reinhart »

alex_686 wrote: Fri Jan 14, 2022 1:26 pm I find the inclusion of tax odd. It is almost never included for 2 reasons. Tax situations tend to vary and thus very hard to included with any precision. This is the land of custom indexes. It is very hard to specify the index prior to tax events. This put it in the land of subjective judgements and thus active manage. And it is irrelevant for tax advantaged investors (most) or holders of ETFs.

In any event, ignoring taxes, by that definition all of the indexes we have been talking about would quality under this definition.
Not all investors have the luxury of ignoring taxes. (many countries don't have a variety of tax-advantaged accounts/ETFs to choose from)
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Re: Value versus Growth

Post by nisiprius »

Nathan Drake wrote: Fri Jan 14, 2022 12:46 pm...Investing in SCV is believing that the markets are pricing in risks of all companies efficiently, and that SCV is efficiently priced relative to the increased risks these sticks exhibit as investors are requiring higher expected returns in exchange for the additional risk...
No, because if that were true you could do just as well at lower cost simply by increasing your stock allocation.

To justify overweighting small-cap value stocks in a portfolio, it is not sufficient to believe they will have higher return.

If they are going to have higher risk-adjusted return, then fine, but under the efficient market hypothesis they shouldn't.

Since inception, the Dimensional US Small-Cap Value Portfolio, DFSVX has had a slightly lower risk-adjusted return than Total Stock.

If small-cap value stocks have are going to have lower risk-adjusted return than the market, the only way they can avoid dragging down the risk-adjusted return of the whole portfolio is to have low correlation. And it's not sufficient for it to be "anything lower than 1.00." It's a balancing act. Low Sharpe ratio drags down the Sharpe ratio of the whole portfolio, low correlation boosts it, and which one prevails isn't preordained, it depends on the actual numbers.

For DFSVX and VTSMX it's ρ = 0.85, and in any statistics class that would be called "high correlation." It's certainly not going to have the powerful effect of ρ = -0.22 between stocks and long-term Treasury bonds in recent years.

The small-cap value tilter needs to believe in much more than an efficient market for riskier stocks.
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fixi reinhart
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Re: Value versus Growth

Post by fixi reinhart »

nisiprius wrote: Fri Jan 14, 2022 1:41 pm
The small-cap value tilter needs to believe in much more than an efficient market for riskier stocks.
More importantly, the small cap value tilter needs to believe that the fund he invests in is good at identifying those stocks that are riskier AND likely to outperform going forward.

Given the constantly changing nature of financial markets and models, it's quite something to commit an investment for perhaps 30-50 years to something based on a model released 5 years ago, which hasn't proven itself out-of-sample.
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vanbogle59
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Re: Value versus Growth

Post by vanbogle59 »

nisiprius wrote: Fri Jan 14, 2022 1:41 pm
Nathan Drake wrote: Fri Jan 14, 2022 12:46 pm...Investing in SCV is believing that the markets are pricing in risks of all companies efficiently, and that SCV is efficiently priced relative to the increased risks these sticks exhibit as investors are requiring higher expected returns in exchange for the additional risk...
No, because if that were true you could do just as well at lower cost simply by increasing your stock allocation.
To be fair, I think Nathan is 100/0.
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Re: Value versus Growth

Post by Nathan Drake »

vanbogle59 wrote: Fri Jan 14, 2022 1:01 pm
Nathan Drake wrote: Fri Jan 14, 2022 12:46 pm
vanbogle59 wrote: Fri Jan 14, 2022 11:41 am
fixi reinhart wrote: Fri Jan 14, 2022 11:38 am
alex_686 wrote: Fri Jan 14, 2022 11:37 am
No, it is passive. To be passive you have to follow a index. Preferably a rules based index but it does not have to be. See the DJIA index.

Now we can debate what a qualities a index should have. If held in a taxable account I would guess a high turnover would be a negative. But realize that trading cost are basically zero now no it is not a major negative. My big beef with equally weighted is that there is no real theory or logic behind it. De facto it is a back door to a mid sized cap index so why not buy a mid sized cap index?
Well, I don't know who uses what definitions, but if "following an index" means passive, the word passive becomes meaningless.

Any active investment strategy can be converted into an "index" that a "passive vehicle" will track. Congratulations.
Isn't the much more important difference between S&P500 and SCV that one is EMH, nobody knows nothin', and the other is "hey, I found a $20 bill laying on the ground"?
The other differences seem trite to me.
No.

Investing in SCV is believing that the markets are pricing in risks of all companies efficiently, and that SCV is efficiently priced relative to the increased risks these sticks exhibit as investors are requiring higher expected returns in exchange for the additional risk
OK. I'm fine with that logic.
But even if one arrives at SCV via a risk-premium story, it still seems to me that distinction between active and passive is trivial (assuming fees are kept low).
The distinction between active and passive can be trivial. It depends on how the “active” fund is constructed.

DFA/Avantis fund = passively constructed, low turnover, with high diversification and low fees, not unlike an index fund

Ark Invest = highly concentrated, high fee, daily/weekly trading, which are at the whims of the manager (Cathie Wood)

The latter is problematic and not consistent with ethos of passive investing
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Re: Value versus Growth

Post by fixi reinhart »

Nathan Drake wrote: Fri Jan 14, 2022 2:38 pm
The distinction between active and passive can be trivial. It depends on how the “active” fund is constructed.

DFA/Avantis fund = passively constructed, low turnover, with high diversification and low fees, not unlike an index fund

Ark Invest = highly concentrated, high fee, daily/weekly trading, which are at the whims of the manager (Cathie Wood)

The latter is problematic and not consistent with ethos of passive investing
Great, now who defines "passively constructed" and "low turnover" and "low fees"?
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Re: Value versus Growth

Post by vanbogle59 »

Nathan Drake wrote: Fri Jan 14, 2022 2:38 pm
vanbogle59 wrote: Fri Jan 14, 2022 1:01 pm
Nathan Drake wrote: Fri Jan 14, 2022 12:46 pm
vanbogle59 wrote: Fri Jan 14, 2022 11:41 am
fixi reinhart wrote: Fri Jan 14, 2022 11:38 am

Well, I don't know who uses what definitions, but if "following an index" means passive, the word passive becomes meaningless.

Any active investment strategy can be converted into an "index" that a "passive vehicle" will track. Congratulations.
Isn't the much more important difference between S&P500 and SCV that one is EMH, nobody knows nothin', and the other is "hey, I found a $20 bill laying on the ground"?
The other differences seem trite to me.
No.

Investing in SCV is believing that the markets are pricing in risks of all companies efficiently, and that SCV is efficiently priced relative to the increased risks these sticks exhibit as investors are requiring higher expected returns in exchange for the additional risk
OK. I'm fine with that logic.
But even if one arrives at SCV via a risk-premium story, it still seems to me that distinction between active and passive is trivial (assuming fees are kept low).
The distinction between active and passive can be trivial. It depends on how the “active” fund is constructed.

DFA/Avantis fund = passively constructed, low turnover, with high diversification and low fees, not unlike an index fund

Ark Invest = highly concentrated, high fee, daily/weekly trading, which are at the whims of the manager (Cathie Wood)

The latter is problematic and not consistent with ethos of passive investing
Sure.
I was just commenting on the back and forth about the difference between S&P500 vs SCV.
I don't think the primary difference is that one is passive and the other is not.
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Re: Value versus Growth

Post by Nathan Drake »

nisiprius wrote: Fri Jan 14, 2022 1:41 pm
Nathan Drake wrote: Fri Jan 14, 2022 12:46 pm...Investing in SCV is believing that the markets are pricing in risks of all companies efficiently, and that SCV is efficiently priced relative to the increased risks these sticks exhibit as investors are requiring higher expected returns in exchange for the additional risk...
No, because if that were true you could do just as well at lower cost simply by increasing your stock allocation.

To justify overweighting small-cap value stocks in a portfolio, it is not sufficient to believe they will have higher return.

If they are going to have higher risk-adjusted return, then fine, but under the efficient market hypothesis they shouldn't.

Since inception, the Dimensional US Small-Cap Value Portfolio, DFSVX has had a slightly lower risk-adjusted return than Total Stock.

If small-cap value stocks have are going to have lower risk-adjusted return than the market, the only way they can avoid dragging down the risk-adjusted return of the whole portfolio is to have low correlation. And it's not sufficient for it to be "anything lower than 1.00." It's a balancing act. Low Sharpe ratio drags down the Sharpe ratio of the whole portfolio, low correlation boosts it, and which one prevails isn't preordained, it depends on the actual numbers.

For DFSVX and VTSMX it's ρ = 0.85, and in any statistics class that would be called "high correlation." It's certainly not going to have the powerful effect of ρ = -0.22 between stocks and long-term Treasury bonds in recent years.

The small-cap value tilter needs to believe in much more than an efficient market for riskier stocks.
I am not claiming a higher risk adjusted return. SCV offers high exposure to multiple risk factors that manifest during different time periods, so it is not at all the same as just increasing your allocation to the market factor. If that were true, then the returns would have 100% covariance. They do not.

Why is a higher risk adjusted return necessary in order to justify investment? Why is it necessary for SCV outperformance to be consistent with the EMH?

The risk adjusted return is highly sensitive to start/end dates. Compare the period 00-09 in terms of risk adjusted returns and it paints a completely different picture, that’s the diversification benefits at work.
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Re: Value versus Growth

Post by Massdriver »

nisiprius wrote: Fri Jan 14, 2022 1:41 pm
Nathan Drake wrote: Fri Jan 14, 2022 12:46 pm...Investing in SCV is believing that the markets are pricing in risks of all companies efficiently, and that SCV is efficiently priced relative to the increased risks these sticks exhibit as investors are requiring higher expected returns in exchange for the additional risk...
No, because if that were true you could do just as well at lower cost simply by increasing your stock allocation.

To justify overweighting small-cap value stocks in a portfolio, it is not sufficient to believe they will have higher return.

If they are going to have higher risk-adjusted return, then fine, but under the efficient market hypothesis they shouldn't.

Since inception, the Dimensional US Small-Cap Value Portfolio, DFSVX has had a slightly lower risk-adjusted return than Total Stock.

If small-cap value stocks have are going to have lower risk-adjusted return than the market, the only way they can avoid dragging down the risk-adjusted return of the whole portfolio is to have low correlation. And it's not sufficient for it to be "anything lower than 1.00." It's a balancing act. Low Sharpe ratio drags down the Sharpe ratio of the whole portfolio, low correlation boosts it, and which one prevails isn't preordained, it depends on the actual numbers.

For DFSVX and VTSMX it's ρ = 0.85, and in any statistics class that would be called "high correlation." It's certainly not going to have the powerful effect of ρ = -0.22 between stocks and long-term Treasury bonds in recent years.

The small-cap value tilter needs to believe in much more than an efficient market for riskier stocks.
I don't believe that SCV/factors will just give me a higher return. I also believe they will diversify my portfolio since it will be exposed to more factors, increasing the chance of smoother returns over long periods of time which should improve the chances that I will have fewer periods of 0% real returns over 10 year stretches thus improving the chances of higher SWRs down the road.

1) Over the last several decades, SCV has not had any decades of 0% real returns to my knowledge in contrast to market cap weighted total stock market investments.

2) While this information may be extrapolated from academic indexes, there is no good reason to think factors cannot be captured with funds from companies such as Avantis since even long only returns for factors show diversification benefits and fewer losing streaks than regular TSM MCW funds. Other small cap value funds also seem to be doing an adequate job of capturing factor diversification despite differences in methodology, which only gives investors more options. Since such funds are relatively cheap and accessible now days and the evidence indicates that they capture factors, it's not unreasonable to tilt if one wishes to diversify their portfolio and understands the risks.

3) I prefer to look at additional risk characteristics of an asset class aside from max drawdowns and sharp ratios such as how it does over 10 year stretches of time.

4) If you only go off of real world fund performance, an honest look at the data shows that small cap value has underperformed vs growth in recent years. But the fact the funds are underperforming correlates with academic factors showing the same thing on the long only side. So the funds seem to be working fine, we are just going through a period where growth beat value.

5) Historically when growth/value spreads were this absurd, value outperformed over the following few years. Will this happen again? No guarantees, but one day it will, and if it does happen soon, even your risk adjusted return portfolio visualizer chart may look a lot different. While waiting for it to look different, one might miss the benefits of being diversified across factors. Why not not just tilt some? :beer

P.S. I was primarily referring to U.S. funds in the discussion above. Small cap value international has beat international total stock market market cap weighted indexes for a while the last I checked.
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Re: Value versus Growth

Post by AustinC27 »

alex_686 wrote: Fri Jan 14, 2022 8:56 am
AustinC27 wrote: Thu Jan 13, 2022 9:47 pm As an individual investor I get very frustrated by how etf's define "Value". Buffet himself has stated that growth is part of the value equation and vice versa. True value investing is mostly opportunity cost based. I just get very frustrated with how it's defined mostly by etf's as "a cluster of cheap stocks". Just my 2 cents...
The Farma/French definition of value is the industry yardstick. What would you suggest instead?

I have knocked around the industry for a fair bit of time. I have never heard a portfolio manager who did not seek value. If the definition is "opportunity cost based" this would including everything from Buffet to high frequency traders to hedge funds. It is totally a subjective based viewpoint. Even if we could agree that it should be based on fundamental investing and Benjamin Graham we still have a very wide subjective definition.

Indexes generally don't work like that. That would require a investment committee making active decisions. At that point you might as well higher a active manager. Indexes tend to work with a objective set of rules. i.e., some variation of Farma and French.
I believe you actually are correct in that regard. Swing traders by some people's definition would be defined as value "traders" they are scouting out fundamentals and stocks selling below intrisnic value and speculating that they will be able to make a lucrative return in the short term. If you look at Buffet's essay "Superinvestors of Graham and Doddsville" he goes over how many other value investors vary widely in their application of the concept. The two most dominant traits being an emphasis on price paid, and the "Mr Market" mindset. That's why snapshots of value portfolios frusturate me because they aren't able to capture the full essence of what the branch of investment philosophy is. Many investors follow the "value" framework but year after year suffer subpar market returns, but for some reason feel entitled to better than market returns. And yes I do believe that indexing suits 99.9% of investors better than value investing, because high performance value investing takes more than just an understanding of what it is in essence; it takes other far more important traits like asset allocation, psychology, decision making under uncertainty, scrupulous accounting, economic generalist and industry specific knowledge.
Last edited by AustinC27 on Fri Jan 14, 2022 8:44 pm, edited 1 time in total.
rockstar
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Re: Value versus Growth

Post by rockstar »

How is value and growth defined? The reason why I avoid these is because I have no idea how this determination is being made.
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Re: Value versus Growth

Post by AustinC27 »

rockstar wrote: Fri Jan 14, 2022 8:12 pm How is value and growth defined? The reason why I avoid these is because I have no idea how this determination is being made.
Exactly my point stated above. You make a stellar point and are most likely saving yourself a financial headache
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Re: Value versus Growth

Post by jason2459 »

rockstar wrote: Fri Jan 14, 2022 8:12 pm How is value and growth defined? The reason why I avoid these is because I have no idea how this determination is being made.
Depends on who you ask. Like would you consider Apple a value or growth?
"In the short run, the stock market is a voting machine; in the long run, it is a weighing machine" ~Benjamin Graham
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Re: The Telltale Chart

Post by LilyFleur »

Taylor Larimore wrote: Fri Jan 14, 2022 10:44 am Bogleheads:

Twenty years ago in Chicago, I heard Mr. Bogle give a speech titled: The Telltale Chart. It is full of wisdom including his thoughts about value and growth stocks. This is the link:

http://johncbogle.com/speeches/JCB_Morningstar_6-02.pdf

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "One of the seemingly indestructible myths of investing is that stocks with small market capitalizations outpace stocks with large market capitalizations over time."
Absolutely full of wisdom. Thank you, Taylor.

Discussions like this one today, in my opinion, belong under a heading, "Discussions not supportive of Boglehead philosophy." I feel badly if new members are led astray by these types of discussions. The lack of simplicity and the long discussions of ideas opposed to those of Jack Bogle--is rather astounding. It seems to be worse than when I first joined the forum several years ago.

At the same time, I'm grateful to the moderators for the volunteer time they put in to ensure that this forum follows its own guidelines.
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Re: Value versus Growth

Post by rockstar »

jason2459 wrote: Fri Jan 14, 2022 9:16 pm
rockstar wrote: Fri Jan 14, 2022 8:12 pm How is value and growth defined? The reason why I avoid these is because I have no idea how this determination is being made.
Depends on who you ask. Like would you consider Apple a value or growth?
It matters if I buy a fund labeled growth or value. How would that fund define it and draw the line? Much easier to own just small cap or large cap, which is simply defined than tag on an additional label that isn't well defined.
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Re: Value versus Growth

Post by nedsaid »

Nathan Drake wrote: Fri Jan 14, 2022 2:29 am
nedsaid wrote: Thu Jan 13, 2022 11:15 pm
Apathizer wrote: Thu Jan 13, 2022 10:57 pm I started a thread a few weeks ago discussing a rational reminder podcast about the value premium. I won't rehash it too much but the guest analyzed FF research and found that there were a couple seemingly innocuous decisions they made about when to calculate the value premium that affected it.

He found that if you calculated it at a different time which is just as reasonable an assumption it's about I think 25% less than they calculated originally.

This is only one study and even though it seems sound it's not necessarily definitive. And even if it's true the value premium is still statistically significant though not as large as originally thought.

Either way it's another good argument for the simplicity of index investing.
Well shoot, Growth has outperformed Value from 2008-2019. I also remember a recent three year stretch when Small Value did particularly poorly vs. Large Growth. Value roared in the last half of 2020 and the first half of 2021, Growth then almost caught up to Value the second half of 2021. So with such a long run of Growth dominance, wouldn't it be surprising that after 13 years that some people would be questioning the Value premium? After 13 years, wouldn't it be surprising that the Value premium would seem to diminish? Isn't it surprising after making comparisons between Growth peaks and Value troughs? I am not surprised at all.

I am so old that I remember when even cash that paid 5% was trash and Warren Buffett and Value Investing were passe back in the late 1990's. I also remember back in 2007, when the Value premium, particularly the Small Value premium was so obvious that I couldn't believe I missed it.

So I don't know, it seems like the Academics, when saying the Value premium has been reduced by 25% are stating the obvious. I mean, what did they expect? Did they expect the Value premium to increase after 13 years of Growth dominance?
This period of underperformance is nothing unusual at all though. Just look at the tell tale chart from Paul Merriman

A premium wouldn’t exist if there weren’t stretches like these. It’s par for the course

The “market” premium has been known for a very long time, it still exists, and it’s still prone to these same long stretches. As I said, par for the course
Yep.
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Re: Value versus Growth

Post by nedsaid »

burritoLover wrote: Fri Jan 14, 2022 10:29 am
alex_686 wrote: Fri Jan 14, 2022 10:21 am
burritoLover wrote: Fri Jan 14, 2022 10:15 am
alex_686 wrote: Fri Jan 14, 2022 9:43 am
burritoLover wrote: Fri Jan 14, 2022 9:19 am So why wouldn't everyone just "run to stocks" and push up the price, "making performance drag" knowing that stocks outperform bonds?
Why do you think this has not been happening?

The Equity Risk Premium, the spread between expected stock return and expected bond returns, have been steadily falling.
It isn't a fixed spread - never has been. There's a difference between saying it is reduced in some current period and saying it doesn't exist entirely.
I am not sure what you are trying to say. Let me try to clarify my point. Over the past 50 years ERP has been declining. Over the past 50 years the small cap value premium has been declining. I can make a solid case for both that people have figured out that this is where they should be putting their money, pouring into the market, pushing up the price, and causing these premiums to fall.
The person I was responding to was implying that the market had arbitraged SCV away completely. You can't arbitrage away a risk premium in a relatively efficient market. Too many here buy into the equity risk premium hook, line and sinker but when it comes to the SCV premium they think it some snake-oil concept invented by academia when really it is just riskier than the broad market.
I think it is a behavioral story too, not just a risk story. I was quite pleased that Cliff Asness made similar comments in his interview with Rick Ferri.
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Re: Value versus Growth

Post by burritoLover »

nedsaid wrote: Fri Jan 14, 2022 9:53 pm
burritoLover wrote: Fri Jan 14, 2022 10:29 am
alex_686 wrote: Fri Jan 14, 2022 10:21 am
burritoLover wrote: Fri Jan 14, 2022 10:15 am
alex_686 wrote: Fri Jan 14, 2022 9:43 am

Why do you think this has not been happening?

The Equity Risk Premium, the spread between expected stock return and expected bond returns, have been steadily falling.
It isn't a fixed spread - never has been. There's a difference between saying it is reduced in some current period and saying it doesn't exist entirely.
I am not sure what you are trying to say. Let me try to clarify my point. Over the past 50 years ERP has been declining. Over the past 50 years the small cap value premium has been declining. I can make a solid case for both that people have figured out that this is where they should be putting their money, pouring into the market, pushing up the price, and causing these premiums to fall.
The person I was responding to was implying that the market had arbitraged SCV away completely. You can't arbitrage away a risk premium in a relatively efficient market. Too many here buy into the equity risk premium hook, line and sinker but when it comes to the SCV premium they think it some snake-oil concept invented by academia when really it is just riskier than the broad market.
I think it is a behavioral story too, not just a risk story. I was quite pleased that Cliff Asness made similar comments in his interview with Rick Ferri.
Even if it were all behavioral, this doesn’t mean that it will be arbitraged away. Like anything in finance, it’s probably a bit of both that varies over time.
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Re: Value versus Growth

Post by retire2022 »

Op and all

Morningstar has an article with graphs on this, which the author is alluding there is widest gap ever.

https://www.morningstar.com/articles/10 ... -is-uneven
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Re: Value versus Growth

Post by Beensabu »

rockstar wrote: Fri Jan 14, 2022 8:12 pm How is value and growth defined? The reason why I avoid these is because I have no idea how this determination is being made.
I think it's most broadly "a good deal for something with consistently decent earnings" vs. "high earnings growth rate/potential".

It kind of seems like if you want:

large cap growth --> cap weighted index fund
large cap value --> sector fund (or an active fund that essentially identifies undervalued sectors for you)
small/micro cap anything --> active fund

That's my take, anyway. It makes sense why the most committed proponents of passive index investing tend to stick with large cap growth. You can't really do the other bits properly via indexing, even though options exist. Once you go active with those bits, it costs more and there's more turnover (which is not great for the folks with massive taxable accounts). The exception is BRK, which is like an active value fund in disguise.
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Re: Value versus Growth

Post by Apathizer »

Massdriver wrote: Fri Jan 14, 2022 3:18 pmI don't believe that SCV/factors will just give me a higher return. I also believe they will diversify my portfolio since it will be exposed to more factors, increasing the chance of smoother returns over long periods of time which should improve the chances that I will have fewer periods of 0% real returns over 10 year stretches thus improving the chances of higher SWRs down the road.
That's my thinking as well. Diversification should improve return consistency and reliability. Any factor, including market, can under-perform for short or long periods, but it's unlikely all of them will under-perform simultaneously for long-periods. That's why I diversify across all factors including market. Sure, when the market factor performs best, as has been the case most of the last decade, my portfolio will slightly under-perform, but only modestly.

Like most people I'd probably be fine with a simple broadly diverse fund like VSMGX, but I feel better have more factor diversification.
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nedsaid
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Re: Value versus Growth

Post by nedsaid »

fixi reinhart wrote: Fri Jan 14, 2022 2:42 pm
Nathan Drake wrote: Fri Jan 14, 2022 2:38 pm
The distinction between active and passive can be trivial. It depends on how the “active” fund is constructed.

DFA/Avantis fund = passively constructed, low turnover, with high diversification and low fees, not unlike an index fund

Ark Invest = highly concentrated, high fee, daily/weekly trading, which are at the whims of the manager (Cathie Wood)

The latter is problematic and not consistent with ethos of passive investing
Great, now who defines "passively constructed" and "low turnover" and "low fees"?
Well, actually I have posted on this topic many times. I call it the continuum. It is a matter of degree and "passive" and "active" are not precise definitions.
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Re: Value versus Growth

Post by tvubpwcisla »

Why not both?
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Re: Value versus Growth

Post by rockstar »

tvubpwcisla wrote: Sat Jan 15, 2022 1:51 pm Why not both?
Which is why I buy VOO.
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