Why is Tilting and Slice&Dice so popular in this forum?

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stlutz
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by stlutz »

We were having this same argument 10 or 15 years ago. Guess what? The S&Ders are ahead since we began having the argument.
Just looked and.... aw, darn. Small Value is having a good year. Now, since inception in 1998 the VG Small Value fund is actually beating out the "Black Hole of Investing Index Fund" (Smallcap Growth) by 0.1% per year. :twisted:
KyleAAA
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by KyleAAA »

afan wrote: Kyle- but no one is seriously talking about increasing expected returns simply by increasing risk. This would be a foolish thing to do. It would make far more sense to increase allocation to the asset mix with the highest risk adjusted return. One could then get a higher return with the same risk as a mix that simply has higher risk, but lower risk adjusted return. If high return, regardless of risk, is the goal, then borrow some money and leverage up on longinvest's three fund portfolio.
What do you mean? Most people are seriously talking about exactly that thing: tilting to small/value to increase returns at the expense of taking on greater risk. To the best of my knowledge, that's what pretty much everybody is talking about. I don't think many who tilt are under the impression that their overall portfolio isn't riskier as a result.

If one could know in advance what asset mix comes with the highest risk-adjusted return, one would do that. But one doesn't know, so one sticks to a few factors in the hopes of increasing returns.
stlutz
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by stlutz »

What do you mean? Most people are seriously talking about exactly that thing: tilting to small/value to increase returns at the expense of taking on greater risk. To the best of my knowledge, that's what pretty much everybody is talking about. I don't think many who tilt are under the impression that their overall portfolio isn't riskier as a result.
What do you believe your chances are of underperforming the market over a long time period--say 15 years?
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by KyleAAA »

stlutz wrote:
What do you mean? Most people are seriously talking about exactly that thing: tilting to small/value to increase returns at the expense of taking on greater risk. To the best of my knowledge, that's what pretty much everybody is talking about. I don't think many who tilt are under the impression that their overall portfolio isn't riskier as a result.
What do you believe your chances are of underperforming the market over a long time period--say 15 years?
Who knows. Probably pretty high.
Longtimelurker
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by Longtimelurker »

cowboysFan wrote:
Longtimelurker wrote:
cowboysFan wrote:I'll just leave it that Eugene Fama would disagree with you on 1 + 3. I think I'll trust the guy with the Nobel prize who basically invented the factor model over you. As for 2, if SCV only offers higher returns and not higher risk adjusted returns, then I can get the same effect by holding more stocks and fewer bonds.
Awesome. Just link proof of this - a paper, and interview, something - and I will declare total defeat in this debate.

Good luck.
Unfortunately, the original link for this interview is dead, but here's a Fama quote: Fama: Um, no. (Laughs) Basically this a risk story the way we tell it, so there is no optimal portfolio. The way I like to talk about it when I give presentations for DFA or other people is, in every asset pricing model, the market portfolio is always an efficient portfolio. It's always a relevant portfolio for an investor to hold. And investors can decide to tilt away from that based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either. So there's a whole multi-dimensional continuum here of efficient portfolios that anybody can decide to buy that I can't quarrel with. And I have no recommendations about because I think it's totally a matter of taste. If you eat oranges and I eat apples I can't really quarrel very much with that.

In a different interview, http://www.minneapolisfed.org/publicati ... fm?id=1134, he's not as a explicit about the total market being optimal, but argues the small and value premiums are risk premiums, not behavioral inefficiencies that can be exploited.
Lets be clear. You said Fama disagreed with the following three points:

1: At least the 3 factors (still haven't found time to read up on 4&5) have proven to have risk adjusted returns superior to that of Market Cap weighted portfolios in every stock market researched.
2: These premiums have persisted after being widely advertised
3: There are rational behavioral and structural reasons for the persistence of these premiums

In the quote you attached, none of these points were addressed. Are you a) changing your argument or b) hoping I ignore that you aren't supporting your argument?
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
cowboysFan
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by cowboysFan »

Longtimelurker wrote:
cowboysFan wrote:
Longtimelurker wrote:
cowboysFan wrote:I'll just leave it that Eugene Fama would disagree with you on 1 + 3. I think I'll trust the guy with the Nobel prize who basically invented the factor model over you. As for 2, if SCV only offers higher returns and not higher risk adjusted returns, then I can get the same effect by holding more stocks and fewer bonds.
Awesome. Just link proof of this - a paper, and interview, something - and I will declare total defeat in this debate.

Good luck.
Unfortunately, the original link for this interview is dead, but here's a Fama quote: Fama: Um, no. (Laughs) Basically this a risk story the way we tell it, so there is no optimal portfolio. The way I like to talk about it when I give presentations for DFA or other people is, in every asset pricing model, the market portfolio is always an efficient portfolio. It's always a relevant portfolio for an investor to hold. And investors can decide to tilt away from that based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either. So there's a whole multi-dimensional continuum here of efficient portfolios that anybody can decide to buy that I can't quarrel with. And I have no recommendations about because I think it's totally a matter of taste. If you eat oranges and I eat apples I can't really quarrel very much with that.

In a different interview, http://www.minneapolisfed.org/publicati ... fm?id=1134, he's not as a explicit about the total market being optimal, but argues the small and value premiums are risk premiums, not behavioral inefficiencies that can be exploited.
Lets be clear. You said Fama disagreed with the following three points:

1: At least the 3 factors (still haven't found time to read up on 4&5) have proven to have risk adjusted returns superior to that of Market Cap weighted portfolios in every stock market researched.
2: These premiums have persisted after being widely advertised
3: There are rational behavioral and structural reasons for the persistence of these premiums

In the quote you attached, none of these points were addressed. Are you a) changing your argument or b) hoping I ignore that you aren't supporting your argument?
I think in the first quote, it's very obvious that Fama believes no portfolio can beat the total market on a risk adjusted basis. Perhaps, it's more clear if I add the question Fama was responding to: Interviewer: Some people cite your research showing that value and small firms have higher average returns over time and they assume that you would recommend most investors have a big helping of small and value stocks in their portfolios. Is that a fair representation of your views?

If the small and value premiums are really just risk premiums then points 2 and 3 are irrelevant. A risk premium will persist, but slicing and dicing offers no advantages over just increasing your allocation to stocks and decreasing your allocation to bonds.
Last edited by cowboysFan on Sun Jun 08, 2014 7:00 pm, edited 1 time in total.
Longtimelurker
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by Longtimelurker »

cowboysFan wrote: I think in the first quote, it's very obvious that Fama believes no portfolio can beat the total market on a risk adjusted basis.
LOL this is really what you are getting from that quote????? Cognitive Dissonance / Confirmation Bias is strong in you my friend. Good luck. Lets just hope you don't convince yourself you can breath under-water...

Edit:
1: when Fama says "there is no optimal portfolio" and you interpret that as "TSM is the optimal portfolio" - that is disingenuous at best.
2: still waiting for a quote where Fama states that the small and value premiums are NOT persistent across all studied markets, or that they do not produce risk adjusted returns superior to that of simple beta.

I know. I'll either be waiting forever, since you won't find anything. Or you will find another "there is no optimal portfolio" quote and interpret that as your "evidence"
Stay the course. If you can't resist greed, and fear is proven to be 2x as strong, you are doomed as an investor.
AdamP
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by AdamP »

longinvest wrote:First, you said the math was wrong. Now, you say that the same math proves my points wrong, and that my reasoning is not logical.
Longinvest, I'm sorry that you confuse math with religious/belief camps. (My god, St. Bogle, is right. No, my interpretation of this text is more accurate because I say so...) First, there is no mathematical PROOF in any of what you've written that you BELIEVE in. Now, a lot of math is used to analyze past performances and tease out risk and return values. And even more esoteric math is used to GUESS at future performance (Firecalc, for instance). However, there are no PROOFS. Of what is left, the math that is used to calculate returns/risk and estimate future performance, there is no right and wrong math. So please, stop abusing the term math in this way. YOUR math is neither right nor wrong (unless you add 2 and 2 and get 7.3), and THEIR (apparently your financial demons, that would temp you away from your perfect devotion) math is neither right nor wrong.

With that said, there is nothing wrong with agreeing with Bogle's findings (for the love of pete, can this forum stop deifying him?) that market-weighted indexing can be a very inexpensive way to invest in the entire market and get the average returns of the whole market. Yup, it's simple and easy.. But, as others have found (this goes with the deifying comment, just because they aren't Bogle, doesn't mean their research and evidence is somehow less valid) there have been increased returns for things like small cap value, which also came with increased costs (although those costs have dropped precipitously as indexing and computer trading has become more available). This applies all of the other factors that have been researched. Just because you don't want to believe their conclusions, doesn't make them invalid.

Science doesn't (shouldn't) work in belief camps. Science, and by extension any field that purports to use the scientific method, tests hypotheses and uses data to support or invalidate conclusions. There are gaping holes in our understanding of almost every field -including this one-, but ignoring (or worse, appealing to authority) the evidence of people that you disagree with is ignorant. There is a wealth of research on factors like SCV and yet, there are no proofs, there are only correlations and catalogs of historical data. However, as you should well know, past performance is no promise of future returns, and it is possible all factors could eventually be accounted for by the market.
steve_14
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by steve_14 »

cowboysFan wrote:I think in the first quote, it's very obvious that Fama believes no portfolio can beat the total market on a risk adjusted basis...
Yes, the point Mr. Fama is making is a very simple one: markets are efficient, and no one portfolio is any better or worse (on a risk adjusted basis) than any other. It doesn't get much blunter or clearer than:
...there is no optimal portfolio...the market portfolio is always an efficient portfolio. It's always a relevant portfolio for an investor to hold. And investors can decide to tilt away from that based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either.
Unfortunately, as I note above, once you've latched onto the hope of a free lunch, such comments can be hard to hear. DFA just launched a small growth fund, so I guess they're listening, anyway.
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longinvest
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by longinvest »

Matjen,
matjen wrote:Longinvest,

Serious question. You are obviously aware of Bill Sharpe's Arithmetic of Active Management, but have you ever actually read any of Larry Swedroe's articles or books or Bill Bernstein's books. All of these make the case for tilted portfolios if you are the type of investor who can stay the course.
Yes, I have read many articles by Larry Swedroe, as well as Bill Bernstein's The Four Pillars of Investing. I can't say that I have been convinced, so far, by Mr. Swedroe's articles. As for Mr. Bernstein, I don't remember seeing much of a push towards tilting (just a little). Actually, his historical illustration of the evolution of the risk of Venetian prestiti was quite a big warning about basing return expectations on past data.

They provide all the data you would ever need. I'm in the middle of Bernstein's latest for instance. I'm sure they think a typical TSM 3-fund portfolio is also quite fine. Here is my bed stand.

Do you think they don't understand what Sharpe wrote. What do you think their motivation is for writing these books and investing in a tilted fashion? (I don't know that Bernstein tilts for a fact but I would bet a ton on it)
That can be a tricky question to answer. Most writers have their own motives. Mr. Bogle himself has good motives to promote total market indexing, Vanguard being his creation. But, his Cost Matter Hypothesis does not require any "believing": it is not based on past data, nor on trusting him or anybody else; it is based on pure mathematical reasoning. One can read the mathematical proof and convince oneself of its validity.

I know that Mr. Swedroe uses DFA funds with his clients. Such funds are not openly available. Most of his arguments require a belief system: you must believe that past anomalies are indicative of the future, and that DFA's filter (it's not an index) for detecting value companies and avoiding lottery ticket ones is good. So, this makes it difficult for me to accept the advice as uninterested.

As I said, I didn't detect a big push for tilting in Mr. Bernstein's book. Maybe his newer books push that more.
Image
I will try to pick Ilmanen's Expected Returns book. Thanks for the recommendations.

Regards,

longinvest
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longinvest
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by longinvest »

AdamP wrote:
longinvest wrote:First, you said the math was wrong. Now, you say that the same math proves my points wrong, and that my reasoning is not logical.
Longinvest, I'm sorry that you confuse math with religious/belief camps. (My god, St. Bogle, is right. No, my interpretation of this text is more accurate because I say so...) First, there is no mathematical PROOF in any of what you've written that you BELIEVE in.
Dear Adam,

Are you are saying that the following statement is a belief, not a mathematical fact?
Gross returns in the financial markets minus the costs of financial intermediation equal the net returns actually delivered to investors. (see http://www.vanguard.com/bogle_site/sp20060101.htm)

If so, I must disagree. By definition, market returns are market returns; it's not a belief. The above definition of net market returns is not based on a belief system. If you have an index fund that mimics the market, it should deliver market returns minus costs, and non-indexers, in the aggregate, must get market returns minus costs. That's basic maths, not beliefs.

Regards,

longinvest
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cowboysFan
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by cowboysFan »

Longtimelurker wrote:
cowboysFan wrote: I think in the first quote, it's very obvious that Fama believes no portfolio can beat the total market on a risk adjusted basis.
LOL this is really what you are getting from that quote????? Cognitive Dissonance / Confirmation Bias is strong in you my friend. Good luck. Lets just hope you don't convince yourself you can breath under-water...

Edit:
1: when Fama says "there is no optimal portfolio" and you interpret that as "TSM is the optimal portfolio" - that is disingenuous at best.
2: still waiting for a quote where Fama states that the small and value premiums are NOT persistent across all studied markets, or that they do not produce risk adjusted returns superior to that of simple beta.

I know. I'll either be waiting forever, since you won't find anything. Or you will find another "there is no optimal portfolio" quote and interpret that as your "evidence"
I don't think I'm guilty of confirmation basis at all. Larry Swedroe is probably the most ardent SCV tilter on this forum and reached the same conclusion on what Fama believes:

Professors Eugene Fama and Kenneth French looked at the evidence in their famous 1992 paper, "The Cross-Section of Expected Stock Returns." Their study covered the period 1963-1990. Their findings were different from Banz's. While they did find that small stocks had higher average returns, they believed the higher returns were compensation for risk, citing several papers that provided risk-based explanations. They certainly didn't state and—to my knowledge, have never stated—that small stocks provided higher risk-adjusted returns.
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schuyler74
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by schuyler74 »

[OT comment removed by admin LadyGeek]
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Taylor Larimore
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Great books.

Post by Taylor Larimore »

Matjen:

I like your second picture much better. Thank you.

If we can absorb half of what is in your great books, we are certain to be successful investors.

Edit: For some reason, your second picture has been removed?

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
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matjen
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Re: Great books.

Post by matjen »

Taylor Larimore wrote:Matjen:

I like your second picture much better. Thank you.

If we can absorb half of what is in your great books, we are certain to be successful investors.

Edit: For some reason, your second picture has been removed?

Best wishes.
Taylor
Agreed! Picture is still there Taylor. It is on page one of this thread. I'm guessing you are looking at the quote someone took of my first picture.
A man is rich in proportion to the number of things he can afford to let alone.
AdamP
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by AdamP »

longinvest wrote:Are you are saying that the following statement is a belief, not a mathematical fact?
Gross returns in the financial markets minus the costs of financial intermediation equal the net returns actually delivered to investors.
Sigh :|. Now you're talking about something else. Let's bring the discussion back to where you started in the first post:
longinvest wrote:One would think that the mathematical proof in favor of low-cost passive market-weighted index funds would convince most Bogleheads, as they seem very bright, rational people.
I am unable to reconcile the promises of better performance for these assets types with the fundamental mathematical proof that among non-"total-market" investors, only a subset of investors can outperform the total market
Sorry, but both times you used that phrase, you were using it incorrectly. A mathematical proof is a very specific thing. One where you start with some axiom(s) and work your way inexorably to a conclusion with a string of absolute mathematical statements in between that link the two ends. You will -never- find one of those regarding financial portfolios. Ever. This is because "proofs are examples of deductive reasoning and are distinguished from inductive or empirical arguments." And until we have a working full-proof mathematical model for how humans will behave, all we ever will have for financial markets that rely on inputs from humans, are empirical data.

Now the fact that you just quoted in a your attempt to change the argument doesn't invalidate my argument, nor does it help your case, because the same "sad sad mathematically challenged bogleheads that tilt" also use that fact. They are counting on the gross returns of, for instance, SCV, minus the cost of intermediation, to be equal to the net return they will get from SCV.

However, now that I see how you've responded, I think I know where you're coming from. You think that because the following are true: smaller fees equal less performance drag, TSM indexing does indeed match the performance of the TSM minus fees, studies of active advisors/managers have been shown by and large to trail the average TSM on longer time frames, that this is proof that buying a one-fund TSM index is the way to go. But then you concede that "a subset of investors can outperform the total market", so obviously it is possible to "outperform the total market" - which is exactly what the research on factors such as value tilts have shown. Are they proofs that if you value tilt that your returns will beat the TSM? Nope; because no one can predict the future. However, there is a wealth of information, much of it repeated here, that shows that certain factors have handily beaten the returns of a pure market-weighted portfolio over long time frames over the past century. It isn't proof, but thinking, rational, people realize that because no proofs will ever exist, they must decide for themselves what information to act on. And they get all the "benefits" that so neatly buttress your argument too; if they tilt using index funds they get smaller fees with less performance drag, an index that matches the performance to the subset of the market they want to tilt towards, and they get a mechanized investment product that isn't subject to the whims of a manager.
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matjen
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by matjen »

AdamP wrote: However, now that I see how you've responded, I think I know where you're coming from. You think that because the following are true: smaller fees equal less performance drag, TSM indexing does indeed match the performance of the TSM minus fees, studies of active advisors/managers have been shown by and large to trail the average TSM on longer time frames, that this is proof that buying a one-fund TSM index is the way to go. But then you concede that "a subset of investors can outperform the total market", so obviously it is possible to "outperform the total market" - which is exactly what the research on factors such as value tilts have shown. Are they proofs that if you value tilt that your returns will beat the TSM? Nope; because no one can predict the future. However, there is a wealth of information, much of it repeated here, that shows that certain factors have handily beaten the returns of a pure market-weighted portfolio over long time frames over the past century. It isn't proof, but thinking, rational, people realize that because no proofs will ever exist, they must decide for themselves what information to act on. And they get all the "benefits" that so neatly buttress your argument too; if they tilt using index funds they get smaller fees with less performance drag, an index that matches the performance to the subset of the market they want to tilt towards, and they get a mechanized investment product that isn't subject to the whims of a manager.
^This. Well said AdamP
A man is rich in proportion to the number of things he can afford to let alone.
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longinvest
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by longinvest »

Dear Adam,

I am not attempting to change my arguments; I think that I have been pretty consistent in my arguments. Maybe I have been imprecise, but I have tried to explain my thoughts the best I could without spending hours re-reading each sentence to detect imprecisions. I do ask for some indulgence.
AdamP wrote:
longinvest wrote:Are you are saying that the following statement is a belief, not a mathematical fact?
Gross returns in the financial markets minus the costs of financial intermediation equal the net returns actually delivered to investors.
Sigh :|. Now you're talking about something else. Let's bring the discussion back to where you started in the first post:
longinvest wrote:One would think that the mathematical proof in favor of low-cost passive market-weighted index funds would convince most Bogleheads, as they seem very bright, rational people.
I am unable to reconcile the promises of better performance for these assets types with the fundamental mathematical proof that among non-"total-market" investors, only a subset of investors can outperform the total market
Sorry, but both times you used that phrase, you were using it incorrectly. A mathematical proof is a very specific thing. One where you start with some axiom(s) and work your way inexorably to a conclusion with a string of absolute mathematical statements in between that link the two ends. You will -never- find one of those regarding financial portfolios. Ever. This is because "proofs are examples of deductive reasoning and are distinguished from inductive or empirical arguments." And until we have a working full-proof mathematical model for how humans will behave, all we ever will have for financial markets that rely on inputs from humans, are empirical data.
Ok, I should probably have pointed to the more appropriate The Arithmetic of Active Management article by William Sharpe:
http://www.stanford.edu/~wfsharpe/art/active/active.htm

We could discuss at long whether such article is based on beliefs or scientific reasoning (which I call "maths"). Yes, there exist pure maths, based on pure axioms and proofs. Pure maths are used to validate models of the real world, and of course, models are imperfect.

So, strictly speaking, the arithmetic of active management, when applied to the real world, is a model and, as such, it probably is an imperfect model. Yet, it is fairly easy to see how to put axioms and prove that the model itself is valid.

So, I don't think that I made a big stretch of vocabulary by calling this "math".
Now the fact that you just quoted in a your attempt to change the argument doesn't invalidate my argument, nor does it help your case, because the same "sad sad mathematically challenged bogleheads that tilt" also use that fact. They are counting on the gross returns of, for instance, SCV, minus the cost of intermediation, to be equal to the net return they will get from SCV.

However, now that I see how you've responded, I think I know where you're coming from. You think that because the following are true: smaller fees equal less performance drag, TSM indexing does indeed match the performance of the TSM minus fees, studies of active advisors/managers have been shown by and large to trail the average TSM on longer time frames, that this is proof that buying a one-fund TSM index is the way to go.
Yes, this is mostly it, except that I tried to say that this is proof that buying the market portfolio is the way to go to (more or less) guarantee that one will not underperform. The tail of the sentence is important.
But then you concede that "a subset of investors can outperform the total market", so obviously it is possible to "outperform the total market" - which is exactly what the research on factors such as value tilts have shown. Are they proofs that if you value tilt that your returns will beat the TSM? Nope; because no one can predict the future. However, there is a wealth of information, much of it repeated here, that shows that certain factors have handily beaten the returns of a pure market-weighted portfolio over long time frames over the past century. It isn't proof, but thinking, rational, people realize that because no proofs will ever exist, they must decide for themselves what information to act on. And they get all the "benefits" that so neatly buttress your argument too; if they tilt using index funds they get smaller fees with less performance drag, an index that matches the performance to the subset of the market they want to tilt towards, and they get a mechanized investment product that isn't subject to the whims of a manager.
I will concede that I have trouble perfectly understanding the concept of risk-adjusted returns. This might be the source of my confusion when I read about promises of higher risk-adjusted returns. I really have trouble believing promises of same returns with less risk than a market portfolio.

I will go ahead and read the "Expected Returns" book suggested by Matjen. Maybe this will help me better understand these arguments.

Regards,

longinvest
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matjen
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by matjen »

Longinvest,

I think I have something that may help you a ton. A couple months back Cliff Asness was a guest host on Bloomberg for an hour and they arranged to have Gene Fama, Robert Shiller, and Jack Bogle as guests. It was the best hour of financial televesion I have ever seen. The guests were of incredibly high quality all back-to-back-to-back, and Asness is incredibly smart BUT also very gifted in his ability to explain these concepts to a lay audience. He is much better at it than Fama or Shiller. Bogle is also incredibly gifted I might add. The result was that Asness was able to act as a bit of an interpreter.

What you will find in these interviews is that ALL OF THEM agree that SCV/factors have been a great strategy. Asness, Fama, and Shiller think it will continue to be. Bogle thinks it could be arbitraged away.

Start with this 12 minute video of Fama. In it at 6:25 he literally quotes the Arithmetic of Active Investing approvingly. At 8:00 Asness summarizes the discussion we are having. At 11:00 Asness again gives a bit of an overview which I think the slice and dicers and the TSM 3-funders all agree on. If you are going to try and trade a bunch, time the market, or do "traditional" active management then forget it. Go with Jack! They are drawing a distinction between that and factor investing though. They believe factor investing can do a bit better over time. Clearly both are great strategies.

http://www.bloomberg.com/video/professo ... 543qA.html

Then watch them all in order:

http://www.bloomberg.com/video/long-ter ... T4tGw.html
http://www.bloomberg.com/video/stocks-a ... mXqCQ.html
http://www.bloomberg.com/video/professo ... 543qA.html
http://www.bloomberg.com/video/shiller- ... etuWw.html
http://www.bloomberg.com/video/bogle-hi ... knZwA.html
http://www.bloomberg.com/video/the-top- ... I3erQ.html
Last edited by matjen on Mon Jun 09, 2014 8:27 am, edited 2 times in total.
A man is rich in proportion to the number of things he can afford to let alone.
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longinvest
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by longinvest »

matjen wrote:Longinvest,

I think I have something that may help you a ton. A couple months back Cliff Asness was a guest host on Bloomberg for an hour and they arranged to have Gene Fama, Robert Shiller, and Jack Bogle as guests. It was the best hour of financial televesion I have ever seen. The guests were of incredibly high quality all back-to-back-to-back, and Asness is incredibly smart BUT also very gifted in his ability to explain these concepts to a lay audience. He is much better at it than Fama or Shiller. Bogle is also incredibly gifted I might add. The result was that Asness was able to act as a bit of an interpreter.

What you will find in these interviews is that ALL OF THEM agree that SCV/factors have been a great strategy. Asness, Fama, and Shiller think it will continue to be. Bogle thinks it could be arbitraged away.

Start with this 12 minute video of Fama. In it at 6:25 he literally quotes the Arithmetic of Active Investing approvingly. At 8:00 Asness summarizes the discussion we are having. At 11:00 Asness again gives a bit of an overview which I think the slice and dicers and the TSM 3-funders all agree on. If you are going to try and trade a bunch, time the market, or do "traditional" active management then forget it. Go with Jack! They are drawing a distinction between that and factor investing though. They believe factor investing can do a bit better over time. Clearly both are great strategies.

http://www.bloomberg.com/video/professo ... 543qA.html

Then watch them all in order:

http://www.bloomberg.com/video/long-ter ... T4tGw.html
http://www.bloomberg.com/video/stocks-a ... mXqCQ.html
http://www.bloomberg.com/video/professo ... 543qA.html
http://www.bloomberg.com/video/shiller- ... etuWw.html
http://www.bloomberg.com/video/bogle-hi ... knZwA.html
http://www.bloomberg.com/video/the-top- ... I3erQ.html
Thanks for the links, Matjen!
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
Rodc
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by Rodc »

This from an earlier thread on tilting to REITS or not seems germane (with some highlights added):
The issue looks like this to me.

A simple model of the world says the Market Portfolio is optimal in that all assets are properly priced so that so each asset class has the proper weight. That is the Market is an analog computer that computes expected returns, risk, covariance and then optimally balances assets to give the best trade of expected returns vs risk.

This Market Portfolio is not TSM. The Market Portfolio includes all risky investable assets. Stocks, Bonds, Private Real Estate, Public REITS, Oil, Timber, Gold, Copper, on and on. The Market has access to all of these assets and sets prices of each given expectations for the others. So for example stock prices are dependent on among other things, bonds. So TSM is not expected to be optimal in and of itself; it is only optimal in the context of holding all other assets and in this simple model world.

If we believe that the Market Portfolio is an ideal archetype after which we should model our personal portfolios we have some issues to address.

One is that our costs might not be the same as the market (average) cost. If I can get US TSM at lower than the global average cost and can only get X-US stocks at higher than global average price I would rationally and optimally tilt a bit from the Market towards US TSM. This has become a very minor issue over the last few years, but used to be more significant.

Another issue is I may have different ability and willingness to take on certain types of risk, again leading to some tilt away from the Market Portfolio. Currency risk, or employment based risk might fit in here.

Now to the point of this thread. If I want my portfolio to look like the Market Portfolio I would need to include private real estate. Private real estate is an important component of the Market Portfolio and asset price and Market portfolio asset weight optimality is dependent on consideration of private real estate.

The problem is as a small investor, unlike Mr Market, I don’t have access to private real estate. I can shrug my shoulders, say well, no big deal, I’m otherwise close enough; my real estate allocation is too small but I have one sub-asset covered at market weight. This is fine as far as I can tell. Or, you might say, well REITS are kind of like private real estate, not perfect but close enough, so I’ll bump that up. My real estate allocation will be the right size, but my sub-asset allocation won’t match the Market portfolio. Of course you could split the difference.

Regardless, no one on this thread is holding real estate in a way that matches the Market portfolio. So among other things all claims that rely on TSM holding some optimal amount of real estate based on appeals to market efficiency or some presumed optimality of US TSM’s real estate allocation, or even global TSM are logically false.

If the Market is correct, every one of us is wrong. :) The issue is then who is most wrong, or even better is the “wrongness” large enough to matter?

Near as I can tell there is no particularly strong case either way. Unfortunately.
I am at this point somewhat agnostic regarding either side of this argument. There are sound arguments both pro and con (and some arguments pro and con that seem either irrelevant or simply wrong). In the end though I think if you make a rational plan to hold a widely diversified portfolio at low cost and execute your plan consistently for a few to several decades, you'll be fine either way.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.
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matjen
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by matjen »

longinvest wrote:
matjen wrote:Longinvest,

I think I have something that may help you a ton. A couple months back Cliff Asness was a guest host on Bloomberg for an hour and they arranged to have Gene Fama, Robert Shiller, and Jack Bogle as guests. It was the best hour of financial televesion I have ever seen. The guests were of incredibly high quality all back-to-back-to-back, and Asness is incredibly smart BUT also very gifted in his ability to explain these concepts to a lay audience. He is much better at it than Fama or Shiller. Bogle is also incredibly gifted I might add. The result was that Asness was able to act as a bit of an interpreter.

What you will find in these interviews is that ALL OF THEM agree that SCV/factors have been a great strategy. Asness, Fama, and Shiller think it will continue to be. Bogle thinks it could be arbitraged away.

Start with this 12 minute video of Fama. In it at 6:25 he literally quotes the Arithmetic of Active Investing approvingly. At 8:00 Asness summarizes the discussion we are having. At 11:00 Asness again gives a bit of an overview which I think the slice and dicers and the TSM 3-funders all agree on. If you are going to try and trade a bunch, time the market, or do "traditional" active management then forget it. Go with Jack! They are drawing a distinction between that and factor investing though. They believe factor investing can do a bit better over time. Clearly both are great strategies.

http://www.bloomberg.com/video/professo ... 543qA.html

Then watch them all in order:

http://www.bloomberg.com/video/long-ter ... T4tGw.html
http://www.bloomberg.com/video/stocks-a ... mXqCQ.html
http://www.bloomberg.com/video/professo ... 543qA.html
http://www.bloomberg.com/video/shiller- ... etuWw.html
http://www.bloomberg.com/video/bogle-hi ... knZwA.html
http://www.bloomberg.com/video/the-top- ... I3erQ.html
Thanks for the links, Matjen!
Longinvest,

Every second of these videos is worthwhile but take note of the following:

Shiller video:
3:30, 8:30, and 10:45

Bogle video:
8:30, 11:30 (again the arithmetic of active investing), and 13:20
A man is rich in proportion to the number of things he can afford to let alone.
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by rca1824 »

Since returns converge to a narrow distribution over long holding periods, it seems that if you go out far enough, small stocks strictly dominate the market:

http://us.dimensional.com/pdf/the_risk_ ... eliver.pdf

At 25 years it a 97% chance of dominating large stocks. Imagine taking that out to 40-50-years and it approaches 100%.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
rca1824
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by rca1824 »

Look at Portfolio 5 at the bottom. It has almost the same risk but much higher rewards than the simple portfolio:
http://quantitativesolutionsllc.com/the ... -frontier/
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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Clearly_Irrational
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by Clearly_Irrational »

In general people have different philosophies about investing and arrived at them from different directions which results in different portfolios. For me, I prefer an evidence based approach, though some prefer appeal to authority.

Specifically with regards to equity "risk" you have two main choices:

A single factor beta model that uses SD as it's main measure of "risk".

A multi factor model which uses "risk factor" loadings as it's main measure of "risk".

If you use the single factor model you have a problem, TSM has a sharpe ratio of 0.32 (simba data 1972-2013) while SCV has a sharpe ratio of 0.45 which suggests that TSM is not the optimal portfolio and that you'd be better off using SCV on a risk adjusted basis. In my mind this conclusion leaves something to be desired and since CAPM only "explains" about 70% of the price a more robust model seems warranted.

If you do a multi-factor analysis of SCV you see that the extra return wasn't free, it was due to higher loadings on the small and value "risk factors". A four factor model explains about 94% of the price so that explanations seems like a much better fit.

If you're a one factor person and you're holding total market you've essentially decided to ignore what the numbers are telling you, while a multi factor person who holds total market just has different "risk factor" preferences since there is no longer an "optimum" portfolio.
MrMatt2532
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by MrMatt2532 »

Here is what most people agree on:
1) Value and/or Small exposure leads to greater expected returns.
2) Value and/or Small exposure leads to greater risk.

With just this in mind, it doesn't necessarily make sense to tilt (unless your only goal is just to maximize expected returns). The big question is if tilting produces greater risk-adjusted returns. In the past, it absolutely has. Therefore, if you knew this would be true in the future, then it absolutely makes sense to tilt.

Here are the 3 broad camps I think most bogleheads are in:
1) They believe SV exposure will continue to increase risk-adjusted returns moving forward (as compared to TSM).
2) They believe SV exposure will decrease risk-adjusted returns moving forward (as compared to TSM).
3) They believe that SV exposure might(hopefully) produce increased risk-adjusted returns moving forward, and if not it will likely produce similar risk-adjusted returns as compared to TSM.

If you are in camps 1 or 3, then it would make sense to tilt. I expect that the majority of bogleheads are in camps 1 or 3, so I would argue this is the reason it appears that most bogleheads do, in fact, tilt.
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matjen
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by matjen »

Clearly_Irrational wrote:In general people have different philosophies about investing and arrived at them from different directions which results in different portfolios. For me, I prefer an evidence based approach, though some prefer appeal to authority.

Specifically with regards to equity "risk" you have two main choices:

A single factor beta model that uses SD as it's main measure of "risk".

A multi factor model which uses "risk factor" loadings as it's main measure of "risk".

If you use the single factor model you have a problem, TSM has a sharpe ratio of 0.32 (simba data 1972-2013) while SCV has a sharpe ratio of 0.45 which suggests that TSM is not the optimal portfolio and that you'd be better off using SCV on a risk adjusted basis. In my mind this conclusion leaves something to be desired and since CAPM only "explains" about 70% of the price a more robust model seems warranted.

If you do a multi-factor analysis of SCV you see that the extra return wasn't free, it was due to higher loadings on the small and value "risk factors". A four factor model explains about 94% of the price so that explanations seems like a much better fit.

If you're a one factor person and you're holding total market you've essentially decided to ignore what the numbers are telling you, while a multi factor person who holds total market just has different "risk factor" preferences since there is no longer an "optimum" portfolio.
Excellent post. My posts are a mixture on these threads. I think there is plenty of evidence that factor-based investing is a worthwhile endeavor. However, I'm not the most qualified to explain all the evidence so I use an appeal to authority in these threads. Leading people to Ferri, Swedroe, Bernstein, Fama, Asness, Robert T., etc.
A man is rich in proportion to the number of things he can afford to let alone.
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Taylor Larimore
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Jack Bogle on "slice & dice."

Post by Taylor Larimore »

Bogleheads:

A Conversation about "slice and dice" is not complete without Mr. Bogle's opinion:

THE TELLTALE CHART

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle
Tamahome
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by Tamahome »

Personally, I do not like putting all (or most) of my eggs in one basket. If there is a Total Stock Market fund with a low expense ratio and high expenses for other funds, of course I would be in the TSM fund without tilt. As it is, I do have tilt. In part, it is the idea of risk/return. Mostly, though, it is a rational decision outside of mathematics. Sometimes one part zigs while another zags.

If I have 100% TSM, when I am retired, I sell the whole lot, whether it is up or down. I like different baskets for my eggs. If one basket needs mending, I take from another basket. I am 64% US and 34% International on the equities side of my investments. My funds break down into these proportions:

US FUNDS (64%) are broken into:
16% Large Cap Blend
16% Large Cap Value
16% Mid Cap Blend
16% Small Cap Blend (no mid or small cap value in my 401k)

INTERNATIONAL (36%):
16% International Core
10% International Small
10% Emerging Markets

I am not locked into selling all of a category. If large caps are up and small caps are having a hard time, I can select from that basket. If Emerging is down, but international small is up, I will pull from there. For me, Larry Swedroe's book explaining that one asset zigs while another zags helped me to understand that investing is more than numbers. It is also risk management.

Edited to add: All of my funds are low-cost, or it would not make sense to use them.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
rca1824
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by rca1824 »

MrMatt2532 wrote:Here is what most people agree on:
1) Value and/or Small exposure leads to greater expected returns.
2) Value and/or Small exposure leads to greater risk.

With just this in mind, it doesn't necessarily make sense to tilt (unless your only goal is just to maximize expected returns). The big question is if tilting produces greater risk-adjusted returns. In the past, it absolutely has. Therefore, if you knew this would be true in the future, then it absolutely makes sense to tilt.

Here are the 3 broad camps I think most bogleheads are in:
1) They believe SV exposure will continue to increase risk-adjusted returns moving forward (as compared to TSM).
2) They believe SV exposure will decrease risk-adjusted returns moving forward (as compared to TSM).
3) They believe that SV exposure might(hopefully) produce increased risk-adjusted returns moving forward, and if not it will likely produce similar risk-adjusted returns as compared to TSM.

If you are in camps 1 or 3, then it would make sense to tilt. I expect that the majority of bogleheads are in camps 1 or 3, so I would argue this is the reason it appears that most bogleheads do, in fact, tilt.
Even if you are in camp 2, can it still make sense to tilt if you have very high risk tolerance?
The problem with risk-adjusted returns as an objective measure of risk is that everyone has different risk/return preferences.
If I want very high returns and I have a very high risk tolerance, then it doesn't matter if SV has lower RAR than TSM. As long as I prefer SV's bundle of risk and expected returns more than TSM's bundle, SV is the better choice for me.

It's kind of like when you buy airplane tickets and have the option to pay 10x more for a first class ticket. You aren't get 10x the space, so the space/$ is actually less than an economy ticket. But if you happen to very quality-sensitive and also very rich, buying the first class ticket is optimal.

Risk and return preferences are heterogenous so that cannot be one objective measure of "risk-adjusted returns".
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
MrMatt2532
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by MrMatt2532 »

rca1824 wrote: Even if you are in camp 2, can it still make sense to tilt if you have very high risk tolerance?
Right, sure. I hinted at this in the first paragraph: if your only goal is to maximize expected return (or you have off the charts risk tolerance), then risk doesn't matter and you should tilt towards small value. However, I have a hard time believing that this is the case for many people. Risk must matter to some degree in most practical applications. Also, careful, if you take this argument too far (having an extremely high risk tolerance), than you should probably be using leverage to take even more risk than a 100% equity portfolio offers you.

Anyways, I would argue risk should always be considered and that it's probably the single most important step in determining asset allocation, etc.
Bracket
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by Bracket »

matjen wrote:Longinvest,

I think I have something that may help you a ton. A couple months back Cliff Asness was a guest host on Bloomberg for an hour and they arranged to have Gene Fama, Robert Shiller, and Jack Bogle as guests. It was the best hour of financial televesion I have ever seen. The guests were of incredibly high quality all back-to-back-to-back, and Asness is incredibly smart BUT also very gifted in his ability to explain these concepts to a lay audience. He is much better at it than Fama or Shiller. Bogle is also incredibly gifted I might add. The result was that Asness was able to act as a bit of an interpreter.

What you will find in these interviews is that ALL OF THEM agree that SCV/factors have been a great strategy. Asness, Fama, and Shiller think it will continue to be. Bogle thinks it could be arbitraged away.

Start with this 12 minute video of Fama. In it at 6:25 he literally quotes the Arithmetic of Active Investing approvingly. At 8:00 Asness summarizes the discussion we are having. At 11:00 Asness again gives a bit of an overview which I think the slice and dicers and the TSM 3-funders all agree on. If you are going to try and trade a bunch, time the market, or do "traditional" active management then forget it. Go with Jack! They are drawing a distinction between that and factor investing though. They believe factor investing can do a bit better over time. Clearly both are great strategies.

http://www.bloomberg.com/video/professo ... 543qA.html

Then watch them all in order:

http://www.bloomberg.com/video/long-ter ... T4tGw.html
http://www.bloomberg.com/video/stocks-a ... mXqCQ.html
http://www.bloomberg.com/video/professo ... 543qA.html
http://www.bloomberg.com/video/shiller- ... etuWw.html
http://www.bloomberg.com/video/bogle-hi ... knZwA.html
http://www.bloomberg.com/video/the-top- ... I3erQ.html

I enjoyed these great videos. Thanks for posting the links.
cowboysFan
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by cowboysFan »

matjen wrote:Longinvest,

I think I have something that may help you a ton. A couple months back Cliff Asness was a guest host on Bloomberg for an hour and they arranged to have Gene Fama, Robert Shiller, and Jack Bogle as guests. It was the best hour of financial televesion I have ever seen. The guests were of incredibly high quality all back-to-back-to-back, and Asness is incredibly smart BUT also very gifted in his ability to explain these concepts to a lay audience. He is much better at it than Fama or Shiller. Bogle is also incredibly gifted I might add. The result was that Asness was able to act as a bit of an interpreter.

What you will find in these interviews is that ALL OF THEM agree that SCV/factors have been a great strategy. Asness, Fama, and Shiller think it will continue to be. Bogle thinks it could be arbitraged away.
Did we watch the same Fama video? I didn't see Fama discuss SCV/factors at all and Asness at least acknowledged the argument that the SCV premium was nothing more than compensation for increased risk.
rca1824
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by rca1824 »

MrMatt2532 wrote:
rca1824 wrote: Even if you are in camp 2, can it still make sense to tilt if you have very high risk tolerance?
Right, sure. I hinted at this in the first paragraph: if your only goal is to maximize expected return (or you have off the charts risk tolerance), then risk doesn't matter and you should tilt towards small value. However, I have a hard time believing that this is the case for many people. Risk must matter to some degree in most practical applications. Also, careful, if you take this argument too far (having an extremely high risk tolerance), than you should probably be using leverage to take even more risk than a 100% equity portfolio offers you.

Anyways, I would argue risk should always be considered and that it's probably the single most important step in determining asset allocation, etc.
How can you use leverage to invest more in equity? Wouldn't the interest rate on a personal loan be almost as high as the expected market returns?
I guess I am leveraging to an extent because I still have student loans but I just make the min payment and max my retirement contributions.

Also I don't think you need to be very risk tolerant but just have a long investment horizon. If you don't plan to touch the money for 40-50 years, then small cap value beats total market with over 99% confidence.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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matjen
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by matjen »

cowboysFan wrote:
matjen wrote:Longinvest,

I think I have something that may help you a ton. A couple months back Cliff Asness was a guest host on Bloomberg for an hour and they arranged to have Gene Fama, Robert Shiller, and Jack Bogle as guests. It was the best hour of financial televesion I have ever seen. The guests were of incredibly high quality all back-to-back-to-back, and Asness is incredibly smart BUT also very gifted in his ability to explain these concepts to a lay audience. He is much better at it than Fama or Shiller. Bogle is also incredibly gifted I might add. The result was that Asness was able to act as a bit of an interpreter.

What you will find in these interviews is that ALL OF THEM agree that SCV/factors have been a great strategy. Asness, Fama, and Shiller think it will continue to be. Bogle thinks it could be arbitraged away.
Did we watch the same Fama video? I didn't see Fama discuss SCV/factors at all and Asness at least acknowledged the argument that the SCV premium was nothing more than compensation for increased risk.
As host, Asness did most of the talking but there is no doubt Fama agrees with his position(s). Having said that, at 8:20 Asness is discussing strategy and says "Both the Professor and I would tilt toward value stocks" Fama chimes in: "That's true." Asness then goes on immediately to say "cheap beats expensive either because they are cheaper in an efficient market or because the people on average make errors." (this is the behavioral explanation). Fama doesn't correct him or state another opinion. He agrees with this interpretation (in my opinion) because that is the generally understood interpretation by the industry. Fama would probably lean much more toward the efficient side of the story of course.

So what video did you watch?
A man is rich in proportion to the number of things he can afford to let alone.
steve_14
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by steve_14 »

matjen wrote:As host, Asness did most of the talking but there is no doubt Fama agrees with his position(s). Having said that, at 8:20 Asness is discussing strategy and says "Both the Professor and I would tilt toward value stocks" Fama chimes in: "That's true."...
I like this method of re-enforcing the investment style you like - simply listen only to people who sell funds following that strategy for a living. I bought a Ford after its CEO (who is clearly a very smart industry expert) confirmed they were the best cars around!
cowboysFan
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by cowboysFan »

matjen wrote:
As host, Asness did most of the talking but there is no doubt Fama agrees with his position(s). Having said that, at 8:20 Asness is discussing strategy and says "Both the Professor and I would tilt toward value stocks" Fama chimes in: "That's true." Asness then goes on immediately to say "cheap beats expensive either because they are cheaper in an efficient market or because the people on average make errors." (this is the behavioral explanation). Fama doesn't correct him or state another opinion. He agrees with this interpretation (in my opinion) because that is the generally understood interpretation by the industry. Fama would probably lean much more toward the efficient side of the story of course.
So what video did you watch?
If the efficient side of the story is right, then there's no benefit to tilting. Asness's explanation isn't really self consistent unless his target audience consists of only people who want more risk than obtainable with a 100% TSM portfolio. Maybe my hearing is going, but I can't make out what the professor says at 8:26. He's talking softly and Asness is talking louder and at the same time.
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matjen
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by matjen »

cowboysFan wrote:
matjen wrote:
As host, Asness did most of the talking but there is no doubt Fama agrees with his position(s). Having said that, at 8:20 Asness is discussing strategy and says "Both the Professor and I would tilt toward value stocks" Fama chimes in: "That's true." Asness then goes on immediately to say "cheap beats expensive either because they are cheaper in an efficient market or because the people on average make errors." (this is the behavioral explanation). Fama doesn't correct him or state another opinion. He agrees with this interpretation (in my opinion) because that is the generally understood interpretation by the industry. Fama would probably lean much more toward the efficient side of the story of course.
So what video did you watch?
If the efficient side of the story is right, then there's no benefit to tilting. Asness's explanation isn't really self consistent unless his target audience consists of only people who want more risk than obtainable with a 100% TSM portfolio. Maybe my hearing is going, but I can't make out what the professor says at 8:26. He's talking softly and Asness is talking louder and at the same time.
Really? Was your hearing so bad that you didn't hear Asness very clearly give both the risk and behavior side of the value tilt strategy? I think you just hear what you want to hear. There is simply no other explanation because what you wrote earlier: "and Asness at least acknowledged the argument that the SCV premium was nothing more than compensation for increased risk." Is clearly wrong and a complete misstatement of what he said.
A man is rich in proportion to the number of things he can afford to let alone.
HornedToad
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by HornedToad »

I think one thing that is potentially confusing in this discussion is that you can add an asset that is riskier than your portfolio as a whole and decrease the overall portfolio risk due to how the assets interact together and if there is negative correlation between the asset and the overall portfolio. That's one of the keys of Modern Portfolio Theory.

That concept is key to the idea that you can potentially tilt to SCV and lower overall portfolio risk. All of this is hypothetical in the future based on historical returns.
MrMatt2532
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by MrMatt2532 »

rca1824 wrote: How can you use leverage to invest more in equity? Wouldn't the interest rate on a personal loan be almost as high as the expected market returns?
I guess I am leveraging to an extent because I still have student loans but I just make the min payment and max my retirement contributions.

Also I don't think you need to be very risk tolerant but just have a long investment horizon. If you don't plan to touch the money for 40-50 years, then small cap value beats total market with over 99% confidence.
There are a variety of ways. As far as I know, using the futures market will get you the closest to borrowing at the risk free rate. I'm not necessarily recommending this, but I'm only trying to emphasize that you can take more risk and increase expected return beyond 100% stocks. Heck, it's not that difficult to find experts that recommend young investors do this.

Btw, I saw your other thread asking about your asset allocation, and it looked good to me. I have a somewhat similar asset allocation with a few other goodies:
20% US TSM
20% US SV
20% ex-US TSM
20% ex-US SV
5% US REIT
5% ex-US REIT
5% CCF
5% Gold

My reasoning is as follows:
1) I expect the breakdown will give me better risk-adjusted returns than say 50% US TSM/50% ex-US TSM.
2) I also have a high risk tolerance and a long investment horizon and because of that can afford to take plenty of risk (100% stock/high risk).
The main difference is that I recognize I could take more risk than 100% stocks and choose not to. Partially due to the hassle/mechanics involved and partially due to the extra risk that I'd like to avoid.
cowboysFan
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by cowboysFan »

matjen wrote:
cowboysFan wrote:
matjen wrote:
As host, Asness did most of the talking but there is no doubt Fama agrees with his position(s). Having said that, at 8:20 Asness is discussing strategy and says "Both the Professor and I would tilt toward value stocks" Fama chimes in: "That's true." Asness then goes on immediately to say "cheap beats expensive either because they are cheaper in an efficient market or because the people on average make errors." (this is the behavioral explanation). Fama doesn't correct him or state another opinion. He agrees with this interpretation (in my opinion) because that is the generally understood interpretation by the industry. Fama would probably lean much more toward the efficient side of the story of course.
So what video did you watch?
If the efficient side of the story is right, then there's no benefit to tilting. Asness's explanation isn't really self consistent unless his target audience consists of only people who want more risk than obtainable with a 100% TSM portfolio. Maybe my hearing is going, but I can't make out what the professor says at 8:26. He's talking softly and Asness is talking louder and at the same time.
Really? Was your hearing so bad that you didn't hear Asness very clearly give both the risk and behavior side of the value tilt strategy? I think you just hear what you want to hear. There is simply no other explanation because what you wrote earlier: "and Asness at least acknowledged the argument that the SCV premium was nothing more than compensation for increased risk." Is clearly wrong and a complete misstatement of what he said.
What Asness said exactly was: "cheap can beat expensive either because they're riskier in an efficient market ...". Do you understand what an efficient market is? An efficient market by definition is a market where arbitrage opportunities don't exist or at least don't persist long enough to consistently make money after transaction costs.
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matjen
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by matjen »

cowboysFan wrote:
matjen wrote:
cowboysFan wrote:
matjen wrote:
As host, Asness did most of the talking but there is no doubt Fama agrees with his position(s). Having said that, at 8:20 Asness is discussing strategy and says "Both the Professor and I would tilt toward value stocks" Fama chimes in: "That's true." Asness then goes on immediately to say "cheap beats expensive either because they are cheaper in an efficient market or because the people on average make errors." (this is the behavioral explanation). Fama doesn't correct him or state another opinion. He agrees with this interpretation (in my opinion) because that is the generally understood interpretation by the industry. Fama would probably lean much more toward the efficient side of the story of course.
So what video did you watch?
If the efficient side of the story is right, then there's no benefit to tilting. Asness's explanation isn't really self consistent unless his target audience consists of only people who want more risk than obtainable with a 100% TSM portfolio. Maybe my hearing is going, but I can't make out what the professor says at 8:26. He's talking softly and Asness is talking louder and at the same time.
Really? Was your hearing so bad that you didn't hear Asness very clearly give both the risk and behavior side of the value tilt strategy? I think you just hear what you want to hear. There is simply no other explanation because what you wrote earlier: "and Asness at least acknowledged the argument that the SCV premium was nothing more than compensation for increased risk." Is clearly wrong and a complete misstatement of what he said.
What Asness said exactly was: "cheap can beat expensive either because they're riskier in an efficient market ...". Do you understand what an efficient market is? An efficient market by definition is a market where arbitrage opportunities don't exist or at least don't persist long enough to consistently make money after transaction costs.
Hey Cowboysfan. How about we forget about the EMH for a sec and perhaps concentrate on a bit of honesty. You can't just leave out the damn second half of what he said!!! I'm not sure who you think you are fooling but it is kind of embarrassing and silly to say Asness said EXACTLY something and end that something with an ellipsis (...) which cuts out the part that proves you wrong. What does that ...signify? Well it signifies "...or because people on average make errors." As I wrote earlier that is the FULL quote. And that crucial part doesn't match with what you originally wrote does it?

You wrote: "and Asness at least acknowledged the argument that the SCV premium was nothing more than compensation for increased risk."
He obviously didn't say that. He said there is a risk story and an error story. Error really meaning behavioral. All this is around the 8:20/8:30 mark.
A man is rich in proportion to the number of things he can afford to let alone.
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longinvest
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by longinvest »

Thanks to all that have responded.

This very interesting discussion helped me better understand why some Bogleheads tilt to different factors, and why we see so many discussions about it in the forum.

As for my personal taste... I am sensitive to the various presented arguments, but I am not willing to give away the guarantee of not underperforming the market, even if it costs me the possibility of overperforming using tilts to small, value, momentum, quality, profit, etc.

I am confident that my savings combined with bond and stock market returns will be sufficient to reach to my financial objectives. So, I will "Go with Jack!" (as Cliff Assness says in the Bloomberg videos) and stick to my boring balanced portfolio of total market funds. I do really like the simplicity, low-cost, and tax-efficiency of Jack Bogle's approach.
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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Index Fan
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by Index Fan »

One component of why slice and dice is so popular is the sheer amount of fun some people have fiddling and juggling about their different funds, and collecting more funds. This is true of many hobbies- doing things actively with something they really like is a common trait.
"Optimum est pati quod emendare non possis." | -Seneca
rca1824
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by rca1824 »

MrMatt2532 wrote:Btw, I saw your other thread asking about your asset allocation, and it looked good to me. I have a somewhat similar asset allocation with a few other goodies:
20% US TSM
20% US SV
20% ex-US TSM
20% ex-US SV
5% US REIT
5% ex-US REIT
5% CCF
5% Gold

My reasoning is as follows:
1) I expect the breakdown will give me better risk-adjusted returns than say 50% US TSM/50% ex-US TSM.
2) I also have a high risk tolerance and a long investment horizon and because of that can afford to take plenty of risk (100% stock/high risk).
The main difference is that I recognize I could take more risk than 100% stocks and choose not to. Partially due to the hassle/mechanics involved and partially due to the extra risk that I'd like to avoid.
What ex-US SV fund do you use? With Fidelity I have only been able to find IV and IS, so I do 10% each. But I would prefer to just do 20% ISV.

QUESTION: Since a tilted asset's returns can be predicted from its factor loadings, isn't it redundant to own 25/25/25/25 LB/LV/SB/SV? Wouldn't 50/50 LB/SV achieve the same effect?

LB/LV/SB/SV: 50% value tilt, 50% small tilt
LB/SV: 50% value tilt, 50% small tilt

And if you look at this chart http://www.bogleheads.org/forum/viewtopic.php?t=9445
Both of the above portfolios have almost identical outcomes. Their dots overlap.
So since the outcome is the same, I would choose TSM/SV for simplicity.
I think people slice it 4 ways because they think they're "diversifying" but I think this is a myth. Tilting is NOT diversifying. Tilting is simply overloading certain factor exposure. There is no expected rebalancing bonus. It just doesn't work that way.
longinvest wrote:Thanks to all that have responded.
This very interesting discussion helped me better understand why some Bogleheads tilt to different factors, and why we see so many discussions about it in the forum.
As for my personal taste... I am sensitive to the various presented arguments, but I am not willing to give away the guarantee of not underperforming the market, even if it costs me the possibility of overperforming using tilts to small, value, momentum, quality, profit, etc.
I am confident that my savings combined with bond and stock market returns will be sufficient to reach to my financial objectives. So, I will "Go with Jack!" (as Cliff Assness says in the Bloomberg videos) and stick to my boring balanced portfolio of total market funds. I do really like the simplicity, low-cost, and tax-efficiency of Jack Bogle's approach.
I think TSM is a safe, sound investment strategy but remember that over long investment horizons, the high-risk/high-return asset dominates the relatively lower-risk/lower-return asset even in the worst case scenario.
Since 100% S&P500 dominates any other allocation including bonds after 30 years, it's reasonable to expect that, if your investment horizon is greater than 30 years, say 35-40+, then you would want to increase your risk/return beyond 100% equity. The only way to do this (besides leveraging, which I am not an expert on and don't think I want to get into) is by factor tilting.
Factors offer higher risk and higher rewards, so they can be invaluable for turning the risk/return knob to 11 when 10 is just not enough.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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longinvest
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by longinvest »

rca1824 wrote:
longinvest wrote:Thanks to all that have responded.
This very interesting discussion helped me better understand why some Bogleheads tilt to different factors, and why we see so many discussions about it in the forum.
As for my personal taste... I am sensitive to the various presented arguments, but I am not willing to give away the guarantee of not underperforming the market, even if it costs me the possibility of overperforming using tilts to small, value, momentum, quality, profit, etc.
I am confident that my savings combined with bond and stock market returns will be sufficient to reach to my financial objectives. So, I will "Go with Jack!" (as Cliff Assness says in the Bloomberg videos) and stick to my boring balanced portfolio of total market funds. I do really like the simplicity, low-cost, and tax-efficiency of Jack Bogle's approach.
I think TSM is a safe, sound investment strategy but remember that over long investment horizons, the high-risk/high-return asset dominates the relatively lower-risk/lower-return asset even in the worst case scenario.
Since 100% S&P500 dominates any other allocation including bonds after 30 years, it's reasonable to expect that, if your investment horizon is greater than 30 years, say 35-40+, then you would want to increase your risk/return beyond 100% equity. The only way to do this (besides leveraging, which I am not an expert on and don't think I want to get into) is by factor tilting.
Factors offer higher risk and higher rewards, so they can be invaluable for turning the risk/return knob to 11 when 10 is just not enough.
I am aware that increasing risk has the potential to substantially increase returns for long term horizons. It works most of the time, but the additional wealth is often quite ephemeral; it can disappear in the blink of an eye when a bear market comes (see the thread link, below), unless, I guess, you're good at timing the market and move to bonds at the right time...

I have good savings abilities, and I was 100% in individual equities for a number of years, then 100% in equity index funds from 2008 to 2013. After analyzing my need, ability, and willingness to take risk, I chose a more balanced 50/50 allocation (see the Is 50/50 the best 20-years defensive plan? thread). I am happy with it and my wife too! So, I have no need to tinker with it. :)
Variable Percentage Withdrawal (bogleheads.org/wiki/VPW) | One-Fund Portfolio (bogleheads.org/forum/viewtopic.php?t=287967)
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stemikger
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by stemikger »

longinvest wrote:One would think that the mathematical proof in favor of low-cost passive market-weighted index funds would convince most Bogleheads, as they seem very bright, rational people.

Yet, not a day goes by on this forum without new threads about tilting portfolios towards something: small, value, reits, momentum, profitability, gold, silver, commodities, short-term bonds, treasuries, CDs, etc. (I'm sorry if I forgot your preferred asset type).

I am unable to reconcile the promises of better performance for these assets types with the fundamental mathematical proof that among non-"total-market" investors, only a subset of investors can outperform the total market (and probably a fairly small subset, after costs and taxes). Why would you believe anybody that claimed having discovered a superior asset, and think that the market wouldn't have already arbitraged its future advantage away, already? If you had discovered the magic formula, would you give it away for free and lose your secret advantage?

So, are these threads just a trick to keep the forum alive (as nothing is more boring than a passive portfolio)? Are they started by a small vocal minority? Or am I in the minority trusting mathematics?
I guess they don't agree with Jack when he says fall back on the majesty of simplicity and for some reason think they need to make this wonderful invention of indexing the total stock and total bond market hard. Jack has said numerous times that the ultimate in simplicity is investing in one fund (the Vanguard Balanced Index Fund) and it works! Investing doesn't get much better than that. He still believes in his heart that most investors would be well served investing in the pristine all U.S. stock and bond market but many here feel the need to invest more in international and now in international bonds.

I'm sticking with Jack and practicing simplicity. When it comes to stocks Warren Buffett and Jack are on the same page. Warren goes a step further and advises the average 55 year old investor should hold enough in cash and put the rest in a low-cost index fund that buys America (his choice is the Vanguard Index 500). This is where his personal money is going to go for his wife if he dies before her.

Where they don't agree is in bonds. Warren thinks it is a bad idea right now and Jack still feels it necessary to protect the investor from themselves and to have some dry powder. However, Jack has also said (not as vocal as age in bonds) you can count social security as a bond holding. I've never seen him say this in his books but I did see him say it on some internet articles. I'm not sure I could do that because that would put me (at 50 years old) 90% in stocks and I just don't have the stomach for that.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
rca1824
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by rca1824 »

I am aware that increasing risk has the potential to substantially increase returns for long term horizons.
Not the potential--the near certainty. Make the horizon long enough, and the high-risk, high-return asset always dominates in all outcomes. If your horizon is 30+ years, seriously consider tilting. Otherwise you're not efficiently using your horizon. If you're less than 30 years out from retirement, then that can be a good argument to not tilt, but only if you're <30. >30: tilt.
Monthly or yearly movements of stocks are often erratic and not indicative of changes in intrinsic value. Over time, however, stock prices and intrinsic value almost invariably converge. ~ WB
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by placeholder »

Index Fan wrote:One component of why slice and dice is so popular is the sheer amount of fun some people have fiddling and juggling about their different funds, and collecting more funds. This is true of many hobbies- doing things actively with something they really like is a common trait.
There might be some people here who do that but the vast majority of those who use a slice approach seem to have fixed allocations and rebalancing criteria just like three fund people but with more funds and don't do a lot of changing of the fund lineup or weighting.
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Re: Why is Tilting and Slice&Dice so popular in this forum?

Post by vesalius »

rca1824 wrote:
I am aware that increasing risk has the potential to substantially increase returns for long term horizons.
Not the potential--the near certainty. Make the horizon long enough, and the high-risk, high-return asset always dominates in all outcomes. If your horizon is 30+ years, seriously consider tilting. Otherwise you're not efficiently using your horizon. If you're less than 30 years out from retirement, then that can be a good argument to not tilt, but only if you're <30. >30: tilt.
I actually tilt heavily with a Larry portfolio, but, IMO, most are more certain to do better with a total market approach because the behavioral aspect of investing will cause them to underperform with a high tilt. That doesn't make them wrong or deficient or somehow make you are me better. It is simply the most efficient means by which they can achieve their goals given their personality types and comfort level. There are many roads to Dublin.
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