For Value Investing Geeks

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
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Rick Ferri
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For Value Investing Geeks

Post by Rick Ferri »

If Investment Strategy were a college degree, I would major in indexing and minor in value investing. The creation and management of "beta" seeking indexes is nearest and dearest to my heart and my money. However, my hobby is value investing. That's why the only stock I own is Berkshire Hathaway and why I'm a sucker for any new research that helps explain the value premium in the marketplace.

Here is an article that combines several pieces of research from Research Affiliates. I believe they are doing a good job trying to uncover the mystery of value investing.

Value Stocks and Dividends

Enjoy!

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
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Re: For Value Investing Geeks

Post by abuss368 »

Rick Ferri wrote:If Investment Strategy were a college degree, I would major in indexing and minor in value investing. The creation and management of "beta" seeking indexes is nearest and dearest to my heart and my money. However, my hobby is value investing. That's why the only stock I own is Berkshire Hathaway and why I'm a sucker for any new research that helps explain the value premium in the marketplace.

Here is an article that combines several pieces of research from Research Affiliates. I believe they are doing a good job trying to uncover the mystery of value investing.

Value Stocks and Dividends

Enjoy!

Rick Ferri
Thanks Rick. By the way Mr. Buffett was on CNBC this morning with another great interview.
John C. Bogle: “Simplicity is the master key to financial success."
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Re: For Value Investing Geeks

Post by BlueEars »

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Last edited by BlueEars on Tue Mar 05, 2013 2:42 pm, edited 1 time in total.
larryswedroe
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Re: For Value Investing Geeks

Post by larryswedroe »

Few thoughts here

Value stocks have higher dividend YIELDS because their stock prices are depressed (making them a value stock). That seems to be missed in the discussion by RAFI, Instead they say "This isn’t surprising because value stocks are typically viewed as mature companies and these companies tend to pay higher dividends."

And yes migration of a small number of companies (both value and small) account for the lion's share of the premium--Investors it seems underestimate, persistently, the power of RTM of abnormal (both high and low) earnings. That's the behavioral story at work


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Larry
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Re: For Value Investing Geeks

Post by Rick Ferri »

larryswedroe wrote:Few thoughts here

Value stocks have higher dividend YIELDS because their stock prices are depressed (making them a value stock). That seems to be missed in the discussion by RAFI, Instead they say "This isn’t surprising because value stocks are typically viewed as mature companies and these companies tend to pay higher dividends."

Best wishes
Larry
"This isn’t surprising because value stocks are typically viewed as mature companies and these companies tend to pay higher dividends." was my addition, not in RA's paper. I was speaking about how value companies are viewed in the marketplace, i.e. mature, dividend paying, etc. The research explains that this isn't quite true.

Sorry for the misunderstanding.

I agree that the value premium appears to be mainly a behavioral story, but will we ever know for sure?

Rick Ferri
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Re: For Value Investing Geeks

Post by rmelvey »

Value investing is a hobby of mine as well. I like to look for firms that are trading below their liquidation value, and if I can find them below net cash that is ideal! Not many are on my list today because the market has been so strong :(
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Re: For Value Investing Geeks

Post by Rick Ferri »

You're a true follower of Benjamin Graham. :wink:
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Re: For Value Investing Geeks

Post by rmelvey »

Rick Ferri wrote:You're a true follower of Benjamin Graham. :wink:
Yes I was inspired by security analysis :) I have my "permanent portfolio" (which funnily enough is the Harry Browne Permanent Portfolio), and my "enterprising portfolio" which is the liquidation based approach.

If you ever want to follow me on my hunt for liquidation securities than you can check out my blog at liquidationvalue.blogspot.com. It updates every day after the close (the downloading / number crunching takes an hour or so). There is nothing too exciting on the list right now because most of the firms trading below liquidation value deserve to be there because they are about to be delisted or management is truly god awful. But it is something to bookmark in case the market crashes... some okay firms with cash flow and dividends might end up on the list :happy
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Re: For Value Investing Geeks

Post by Stryker »

I've been following dividend growth investing for over thirty years now, and presently have thirty four individual Canadian equities in my taxable account. Having read Ben Graham's "The Intelligent Investor" numerous times, I think it would be a stretch of the imagination to call myself a value investor though. Sure I'll look at either Morningstar or Reuters to see the price ratios for the particular stock I may be interested in, but that's about the extent of my financial analysis. I learned something important as regards to diversification from the financial sector debacle down in the U.S. and over in Europe in 2008-09, and now I have seven sectors in the portfolio, equally divided. We were lucky here in Canada, where only one stock, and that was an insurance company I didn't own, cut it's dividend during that time period. The good thing I've found about diversifying by sector is that I put the figures in a spreadsheet and I can see at a glance which sectors have advanced and which have fallen behind. The laggard sectors are the one's that get the fresh investments, much like the asset classes in a diversified index portfolio. I find investing in individual dividend growth stocks no more time consuming or difficult than investing in index funds which make up 100% of my tax free and tax deferred accounts. I only look for three things in the dividend growth account. Which stocks have the higher yields in a sector, which have the highest dividend growth along with that yield, and finally what is the payout ratio for the stocks I'm interested in.

For American dividend growth investors there are a few good resources free on the internet.

Used to have to pay for Lowell Miller's "The Single Best Investment", but now the complete book is free as a pdf file from his own website at Miller/Howard Investments.

Back in the early 90s' there was a series of three articles in Fortune Magazine written by Edmund Faltermayer.

"Lessons From A Lazy Amateur"

"Big Returns My Way"

"Stocks A Retiree Can Stick With

I just love this guy, but unfortunately Edmund passed away in 2003 at the age of 75 due to complications brought on by ALS (Lou Gehrig's disease).

Thanks for the article Rick. I'll be passing it on to a friend of mine who has been doing Canadian dividend growth investing since the mid-80's. His strong point is that he's more focused than I am, and it's served him well over all these years.
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Re: For Value Investing Geeks

Post by larryswedroe »

Rick
In small cap we know that value premium is much larger. And it's small growth that the behavioral story really plays out. So while I believe there is an element of risk story to the value premium there clearly is a behavioral story as well.
Best
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Re: For Value Investing Geeks

Post by grok87 »

larryswedroe wrote:Rick
And it's small growth that the behavioral story really plays out.
this would be the "lottery ticket" idea- investors overpay for positive skewness?
cheers,
RIP Mr. Bogle.
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Re: For Value Investing Geeks

Post by hafius500 »

Rick Ferri wrote:...
Here is an article that combines several pieces of research from Research Affiliates. I believe they are doing a good job trying to uncover the mystery of value investing.

Value Stocks and Dividends

Enjoy!

Rick Ferri
Yes, but:

on the implementation costs of fundamental Emerging Markets funds:
Indexuniverse - The Added Value Of Fundamental Indexing, By Cris Heaton, March 04, 2013
In this column, the actual returns of fundamental emerging market ETFs are compared with the indices they're tracking.

Since inception, the NAVs of these funds have typically underperformed their benchmarks by between one and two percentage points per year. It's clear that implementation costs for non-cap-weighted index trackers can easily wipe out any claimed performance advantage...
The author adds the historic outperformance of the RAFI EM Index could have been exaggerated because the index which was not float-adjusted might have profited from overweighting some very large and very profitable (*) stocks that had a "small float of tradable stocks" vs. the float-adjusted cap-weighted index.

(*) RAFI (mistakingly) claimed that cap-weighted indexes always overweight overvalued securities.
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Re: For Value Investing Geeks

Post by Rick Ferri »

It appears that your assuming that the articles are a discussion of the RAFI methodology. That is part of the RA discussion, but not the focus. Neither the article nor the links address RAFI methodology specifically. Many different methodologies and ideas are considered.

Rick Ferri
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Re: For Value Investing Geeks

Post by grap0013 »

hafius500 wrote:Yes, but:

on the implementation costs of fundamental Emerging Markets funds:
Indexuniverse - The Added Value Of Fundamental Indexing, By Cris Heaton, March 04, 2013
In this column, the actual returns of fundamental emerging market ETFs are compared with the indices they're tracking.

Since inception, the NAVs of these funds have typically underperformed their benchmarks by between one and two percentage points per year. It's clear that implementation costs for non-cap-weighted index trackers can easily wipe out any claimed performance advantage...
The author adds the historic outperformance of the RAFI EM Index could have been exaggerated because the index which was not float-adjusted might have profited from overweighting some very large and very profitable (*) stocks that had a "small float of tradable stocks" vs. the float-adjusted cap-weighted index.

(*) RAFI (mistakingly) claimed that cap-weighted indexes always overweight overvalued securities.
Thanks for the link interesting read. Here's what I've noticed about RAFI funds. US tracks indexes pretty well minus ER. Developed international you lose about 25-50 basis points due to "friction" minus ER, and EM you lose 200-300 basis points. RAFI is not good in this space. If they did a emerging market small cap value it would probably lose 6% compared to the index.

On the contrary, I think DGS does a pretty good job. When you factor in ER, you are only losing 50 basis points to trading costs. Finally here's 10K growth chart of DGS (EM small cap dividend) vs. VEIEX (EM large blend) since inception of DGS 11/2/07:

DGS: $12,090
VEIEX: $8807

That's a large difference IMO.

Lesson: Look under the hood before you buy and extra ER may be worth it for more horsepower.
There are no guarantees, only probabilities.
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Re: For Value Investing Geeks

Post by Stryker »

Doing a quick scan through the research paper Rick kindly linked, I get the feeling that dividend growth is much more important than investors were led to believe in the past.

Rebalancing and the Value Effect

"It is, therefore, the act of rebalancing and reconstituting the growth and value portfolios that increases the growth rate for dividend income in value strategies, and rather sharply reduces it in the case of growth strategies.

While this is analogous to the findings of Fama and French in their Migration paper, our results more specifically attribute much of the advantage of value strategies to the acts of reconstituting and rebalancing and their side effects on dividends. In so doing, we shed some light on the faster dividend growth of value portfolios."

--------------------------------------------------------

Quite different from the hardly positive contribution of dividend growth given a decade ago by one of the same authors who co-authored the above paper.

Dividends and the Three Dwarfs Robert D. Arnott

"It is startling to realize that dividend growth has averaged less than 1 percent above inflation during the past 200-year period."

The above was certainly a downer to investors who had been following the dividend growth strategy, but the dedicated ones just carried on with what they'd already been doing in the past, in some cases for many years.
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Re: For Value Investing Geeks

Post by dharrythomas »

Rick,

I appreciate the analysis. Your posts are always helpful.

Harry
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