When will Value outpeform Growth?

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butch
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When will Value outpeform Growth?

Post by butch »

I have been following Bogle head principles for over 25 years, I don't time the market and I invest in a diversified mix of Vanguard ETF and funds. However, my portfolio is tilted toward Value, because I read that in the long run, Value outperforms Growth stocks. Numerous studies from Fama and French to Ibbotson Associates all indicate that value investing is a better approach.

I am not trying to time the market but I am frustrated that Growth has outperformed value for the last 10 years- including 2015! Seeing as there must be some gurus out here, are there any market conditions in which Value will finally trump Growth?
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Re: When will Value outpeform Growth?

Post by garlandwhizzer »

I'll add my two cents worth here. Value tends to outperform growth when there is modest (2.5% - 3.5%) but not severe inflation and a robust but not overheated economy with solid consistent real economic growth. In other words favorable economic conditions for struggling small often highly indebted companies allow those undervalued companies to flourish. SCV also does particularly well following the collapse of LCG bubbles where growth stock valuations get stretched while value stocks valuations do not on a relative basis. Such events occur from time to time such as the tech bubble in 2000 following which SCV outperformed quite impressively for several years.

Conditions over the last decade have been otherwise: very low inflation with a real risk of deflation, very sluggish real economic growth largely unresponsive to maximal monetary policy easing, and no persistence of LCG bubbles following their collapse. In fact, Apple (AAPL), a classic LCG stock currently has a PE ratio of 11.45 with tens of billions of cash on the books. In contrast Vanguards SCV fund has PE ratio of 22.9, exactly twice as high as AAPL, and likely lots of debt relative to cash on SCV books. Given these numbers, one might reasonably ask where is the value in SCV at present? In recent years that question has apparently occurred to the market as reflected in SCV's under-performance relative to AAPL.

On the other hand, if inflation heats up a without overheating and the economy starts a period of robust real economic growth, SCV will likely shine again. Like everything else, SCV goes through its own market cycles and we've been in a down cycle of decade or more. Part of this is due to SCV's popularity since the great majority of market participants firmly believe it will eventually outperform. Part is due to the macroeconomic picture of the US economy as described above. SCV will have its day again, but when that will occur and how robust that out-return will be relative to past history are IMHO unknown at present.

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Re: When will Value outpeform Growth?

Post by pkcrafter »

butch wrote:I have been following Bogle head principles for over 25 years, I don't time the market and I invest in a diversified mix of Vanguard ETF and funds. However, my portfolio is tilted toward Value, because I read that in the long run, Value outperforms Growth stocks. Numerous studies from Fama and French to Ibbotson Associates all indicate that value investing is a better approach.

I am not trying to time the market but I am frustrated that Growth has outperformed value for the last 10 years- including 2015! Seeing as there must be some gurus out here, are there any market conditions in which Value will finally trump Growth?
Value will start to outperform as soon as you are convinced you should switch to growth. :happy Welcome to the forum.
I also like value, but my portfolio also contains growth. Don't hold everything in either. See #2 in the telltail Chart. Final comment is, you cannot predict when the switch will occur.

chart.https://www.vanguard.com/bogle_site/sp20020626.html

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Re: When will Value outpeform Growth?

Post by larryswedroe »

Few thoughts for you
First, while value didn't outperform it barely underperformed for last 10 years, both domestically and internationally the value premium was slightly negative. But remember from 00-05 it was close to 14% a year!!!

Second value tends to perform well when you have good economic growth and moderate/rising inflation and we have had the worst economic recovery in the post war era AND disinflation, well below expectations. So if you knew that was going to happen ex-ante you would not have expected a value premium, or much of one. Yet even in this type period it was barely negative.

Third, unfortunately most investors think a few years, let alone 10 years, is a long time and that is why they don't stay discipline and end up underperforming the very funds/asset classes in which they invest.

And finally, just like with equities there are no guarantees, especially if you think value is a risk story. Did you question the ERP when it was negative for the 10 years from 2000-09? I would hope not

Hope that is helpful
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Re: When will Value outpeform Growth?

Post by cfs »

Welcome Aboard!

Butch, welcome aboard. Your first post is a good one.
A couple of tables:
(1) The Callan Periodic Table of Investment Returns
(2) 2015 Asset Class Returns

Good luck with your investments.
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Maynard F. Speer
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Re: When will Value outpeform Growth?

Post by Maynard F. Speer »

Some useful charts from Norbert Keimling https://twitter.com/CAPE_invest

Image

Image
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butch
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Re: When will Value outpeform Growth?

Post by butch »

There are some wonderful responses here, Thanks to all that contributed. I will read and digest.

I am going to stay the course and stay disciplined. I am not questioning the ERP (equity risk premium) but the poor performance of value stocks always makes me question myself when I add to my position as part of my asset allocation strategy.
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Re: When will Value outpeform Growth?

Post by Call_Me_Op »

larryswedroe wrote: And finally, just like with equities there are no guarantees, especially if you think value is a risk story.
Hi Larry,

This is a point I have heard you make before, but I don't completely follow it. If value is a "risk story", why wouldn't one expect to receive a premium for accepting that risk?
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Re: When will Value outpeform Growth?

Post by nisiprius »

Call_Me_Op wrote:
larryswedroe wrote: And finally, just like with equities there are no guarantees, especially if you think value is a risk story.
Hi Larry,

This is a point I have heard you make before, but I don't completely follow it. If value is a "risk story", why wouldn't one expect to receive a premium for accepting that risk?
You would expect that, but what makes risk risky is you don't know for sure, and you certainly don't know when.

In 1999, Glassman and Hassett in Dow 36,000 asserted that stocks were no riskier than bonds and that as that understanding permeated the investing community, the risk premium would vanish, stocks would quickly be bid up to their "perfectly reasonable price," and the Dow would reach 36,000 by the year 2005 at the latest. However, there was, in fact, risk, and therefore they did not in fact know when the Dow would reach 36,000.

With any risk, you'd expect investors to demand a premium for accepting that risk--that is to say, other things being equal, you'd expect investors to pay less for a riskier investment with the same absolute-dollar-value expected return.

But there are two obvious points. The first is that even if the payoff comes, you don't know when. If you did, it wouldn't be risky. You buy a beaten-down company that most investors think has no future, and over the course of time it rebuilds its business and re-established growth, and at that point other investors are now able see that the potential value has become real value and decide the stock is worth more than they used to think, and you get your payday. But you don't know if the company will rebuild successfully, you don't know how long it will take, and you don't know when other investors will realize it.

Second, it still depends on the opinions of investors, and "the market can remain irrational longer than you can remain solvent."

Larry Swedroe's colleague Jared Kizer wrote:
Any transparent strategy... is capable of extended periods of underperformance. There is nothing that preordains these strategies to work over any period of any length. Investors should either commit to these strategies over an extremely long time horizon or not tilt toward these factors at all....

The existence of these premia are likely partially attributable to risk and partially market inefficiency, and it is unlikely that research will ever conclusively determine whether risk or market inefficiency is the dominant explanatory factor.
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Re: When will Value outpeform Growth?

Post by tibbitts »

butch wrote:I have been following Bogle head principles for over 25 years, I don't time the market and I invest in a diversified mix of Vanguard ETF and funds. However, my portfolio is tilted toward Value, because I read that in the long run, Value outperforms Growth stocks. Numerous studies from Fama and French to Ibbotson Associates all indicate that value investing is a better approach.

I am not trying to time the market but I am frustrated that Growth has outperformed value for the last 10 years- including 2015! Seeing as there must be some gurus out here, are there any market conditions in which Value will finally trump Growth?
A value tilt is not a "boglehead principal." You are aware that "long run" can be reasonably expected to be longer than your investing lifetime, correct? Remember that over 25 years, you've been invested (and tilted, we assume) during periods during which the tilt paid off, so essentially you've already benefitted more than you could have reasonably expected.
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Re: When will Value outpeform Growth?

Post by Elysium »

+1 to the post above.

Value tilt isn't a bogle head principle. John Bogle has written an entire chapter on value vs. growth mutual funds in the book Commonsense on Mutual Fund Investing, and he goes over various charts and figures to show there isn't much difference in returns over long periods. It has all been discussed at length here. Value proponents will point to the flaw in this study, as it is not an academic one, but there in lies the problem too. Much of value premium is academic, and in reality there are very few ways to efficiently capture it through mutual funds except specialized ones like DFA or AQR. Even then you have the classic issue with tracking error regret which OP is showing. This is another reason you need an adviser to hand hold you when investing in deep value strategies so you do not quit at the wrong time. Bogle is very smart, there is no one else who understands investor behavior better than him, so his advice is suitable for most average investors. Therefore if you follow bogle head principle then perhaps you should stop worrying so much over value premium. If you want to invest in a small cap value fund then it is probably fine. But don't over do it unless you are fully sold on it.

In the end, it doesn't actually matter. Just save and invest regularly and you will do better than 95% of investors out there including many professionals.

Is that not enough?
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Re: When will Value outpeform Growth?

Post by larryswedroe »

Call me Op

Others have already provided the answer. What's surprising to me is that I get that question all the time about value when you never get it about stocks. No one was asking the same question about stocks when stocks had negative ERP for 10 years from 2000-09. No one. If there's risk then there must be the risk that you'll NEVER get the premium. Just ask Japanese investors since 1990 who have had negative ERP.

Larry
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Re: When will Value outpeform Growth?

Post by dkturner »

The Russell 3000 index of U.S. Stock performance has useful, and consistent, data on growth vs. value stock performance going back to 1979. We now have 37 years of data.

FWIW the Russell 3000 Growth Index had annualized returns of 10.9% vs. 12.1% for the Russell 3000 Value Index. Value outperformed Growth from 1979-1988 by an average of 3.5 percentage points. Growth outperformed Value from 1989-1999 by an average of 4.9 percentage points. Value outperformed Growth from 2000-2006 by an average of 13.1 percentage points. Growth outperformed Value from 2007-2015 by an average of 4.0 percentage points.

Things change, and the changes stick for quite a few years, but value has trumped growth by an annualized 1.2 percentage points for the full 37 years, despite the fact that growth was in the drivers seat for 20 of those 37 years.

Question: which "style" is next up to bat?
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Re: When will Value outpeform Growth?

Post by Rodc »

dkturner wrote:The Russell 3000 index of U.S. Stock performance has useful, and consistent, data on growth vs. value stock performance going back to 1979. We now have 37 years of data.

FWIW the Russell 3000 Growth Index had annualized returns of 10.9% vs. 12.1% for the Russell 3000 Value Index. Value outperformed Growth from 1979-1988 by an average of 3.5 percentage points. Growth outperformed Value from 1989-1999 by an average of 4.9 percentage points. Value outperformed Growth from 2000-2006 by an average of 13.1 percentage points. Growth outperformed Value from 2007-2015 by an average of 4.0 percentage points.

Things change, and the changes stick for quite a few years, but value has trumped growth by an annualized 1.2 percentage points for the full 37 years, despite the fact that growth was in the drivers seat for 20 of those 37 years.

Question: which "style" is next up to bat?
Disclosure: I have a small value tilt, though if I were starting today I am not sure I would - but I see no compelling reason to change.

To the quoted post - a roughly 1% advantage in something that bounces up and down frequently by 4% and sometimes by as much as 13% could easily be noise. If in fact the 1% gain were driven by the aftermath of the great tech bubble bursting, an event we may not see again, it might even be likely to be noise. Now it is hopeful that it existed farther back in theoretical portfolios and has been seen overseas.
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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Re: When will Value outpeform Growth?

Post by Maynard F. Speer »

Again just my 2c, and I may realise the error of my ways ... But I don't fully subscribe to the factor model, and I don't really feel value (as an investing style) does go through periods of out and under-performance

I think the principle behind value investing works at the stock level quite consistently, but the screen we use simply concentrates you in certain sectors ... Right now, Large Value puts you in financials, energy, industrials ... The UK's All Share index is 'value', because it has you in those sectors

But add an extra element to the screen - such as earning growth or momentum - and value tilts you away from those sectors while they're in free-fall .. My top performing investments every year have all been value .. I think the premium's very consistent, I think the long-term premium with the simple screen is probably very similar, but much more cyclic
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Re: When will Value outpeform Growth?

Post by dkturner »

Rodc wrote:
dkturner wrote:a roughly 1% advantage in something that bounces up and down frequently by 4% and sometimes by as much as 13% could easily be noise. If in fact the 1% gain were driven by the aftermath of the great tech bubble bursting, an event we may not see again, it might even be likely to be noise. Now it is hopeful that it existed farther back in theoretical portfolios and has been seen overseas.
Agreed, but I approach the issue of the existence, or absence, of a "value" premium differently. I don't really know if it actually exists, but I'm confident that we're not going to be reading about the existence of a long undiscovered "growth" premium anytime soon. That being the case what is the downside of having a "value" tilt? If the value premium doesn't really exist over time what am I losing by tilting my portfolio towards value? I only tilt my tax deferred equities. I maintain a strict total market indexed approached with my taxable equities.
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Re: When will Value outpeform Growth?

Post by Rodc »

dkturner wrote:
Rodc wrote:
dkturner wrote:a roughly 1% advantage in something that bounces up and down frequently by 4% and sometimes by as much as 13% could easily be noise. If in fact the 1% gain were driven by the aftermath of the great tech bubble bursting, an event we may not see again, it might even be likely to be noise. Now it is hopeful that it existed farther back in theoretical portfolios and has been seen overseas.
Agreed, but I approach the issue of the existence, or absence, of a "value" premium differently. I don't really know if it actually exists, but I'm confident that we're not going to be reading about the existence of a long undiscovered "growth" premium anytime soon. That being the case what is the downside of having a "value" tilt? If the value premium doesn't really exist over time what am I losing by tilting my portfolio towards value? I only tilt my tax deferred equities. I maintain a strict total market indexed approached with my taxable equities.
I think at this point the downside is minimal. If really all there is a "market premium" then one expects to get the standard risk adjusted return minus costs. So if one holds a low cost low turnover fund (low trading costs) one should be fine. And unless one is massively tilted the difference at the portfolio level is likely modest either way. This is why although I have become more agnostic I have not changed course.
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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Re: When will Value outpeform Growth?

Post by nedsaid »

garlandwhizzer wrote:I'll add my two cents worth here. Value tends to outperform growth when there is modest (2.5% - 3.5%) but not severe inflation and a robust but not overheated economy with solid consistent real economic growth. In other words favorable economic conditions for struggling small often highly indebted companies allow those undervalued companies to flourish. SCV also does particularly well following the collapse of LCG bubbles where growth stock valuations get stretched while value stocks valuations do not on a relative basis. Such events occur from time to time such as the tech bubble in 2000 following which SCV outperformed quite impressively for several years.

Nedsaid: This is why I spend a lot of time on this forum. I learn a lot here. Why have I been a Value oriented investor? I guess that Value appeals to my natural frugality and love of a bargain. It makes sense to buy things when they go on sale.

But to be honest, I didn't know exactly why value worked or when it worked. Kind of like stocks, I knew they went up 2/3 of the time and that seemed like a pretty good bet to me. I'll take 2:1 odds any time. Value also seemed to work most of the time.

I knew there were growth/value cycles but I didn't know what caused those cycles. I figured it was like hemlines and the width of ties. I'd watch the old Perry Mason episodes from the 1950's and saw that they wore narrow ties. In the 1970's, ties were wide.

Value stocks have lower expectations built into them than growth stocks and so I figured the odds for beating market expectations were higher with Value stocks than Growth stocks. Plus I knew that the successful investors that I admired so much were Value investors or at least Value oriented.


Conditions over the last decade have been otherwise: very low inflation with a real risk of deflation, very sluggish real economic growth largely unresponsive to maximal monetary policy easing, and no persistence of LCG bubbles following their collapse. In fact, Apple (AAPL), a classic LCG stock currently has a PE ratio of 11.45 with tens of billions of cash on the books. In contrast Vanguards SCV fund has PE ratio of 22.9, exactly twice as high as AAPL, and likely lots of debt relative to cash on SCV books. Given these numbers, one might reasonably ask where is the value in SCV at present? In recent years that question has apparently occurred to the market as reflected in SCV's under-performance relative to AAPL.

Nedsaid: I did check the Vanguard Growth Index fund which seems like a better proxy for the large cap space. I wouldn't recommend that an investor sell Small Value Index to buy Apple, but Garland's point still holds. The forward P/E for Vanguard Growth Index is 22.45 and Price to Book is 4.12. The forward P/E for Vanguard Small Cap Value Index is 17.57 and Price to Book is 1.57. Whoops. Also I am looking at forward P/E ratios based on earnings estimates where Garland's P/E's are based on historical data. What I will say is that Vanguard Small Cap Value Index doesn't look too valuey. We certainly are in a Large Growth cycle here.

On the other hand, if inflation heats up a without overheating and the economy starts a period of robust real economic growth, SCV will likely shine again. Like everything else, SCV goes through its own market cycles and we've been in a down cycle of decade or more. Part of this is due to SCV's popularity since the great majority of market participants firmly believe it will eventually outperform. Part is due to the macroeconomic picture of the US economy as described above. SCV will have its day again, but when that will occur and how robust that out-return will be relative to past history are IMHO unknown at present.

Nedsaid: Yep, that Small/Value restaurant is so crowded that nobody goes there anymore. Cheaper fare is available elsewhere. Congratulations on a good post.

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Re: When will Value outpeform Growth?

Post by Mel Lindauer »

butch wrote:I have been following Bogle head principles for over 25 years, I don't time the market and I invest in a diversified mix of Vanguard ETF and funds. However, my portfolio is tilted toward Value, because I read that in the long run, Value outperforms Growth stocks. Numerous studies from Fama and French to Ibbotson Associates all indicate that value investing is a better approach.

I am not trying to time the market but I am frustrated that Growth has outperformed value for the last 10 years- including 2015! Seeing as there must be some gurus out here, are there any market conditions in which Value will finally trump Growth?
If, as Jack Bogle suggests (own the haystack), you wouldn't have to worry about trying to outperform the market when you may well underperform it for decades. Bogleheads believe in owning the market and accepting the market's returns, knowing that they'll never underperform. Nothing else can guarantee that.
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Re: When will Value outpeform Growth?

Post by wander »

Value outperform Growth? Quick answer is "don't know".
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Re: When will Value outpeform Growth?

Post by Toons »

Value will start outperforming growth This year. :D
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Re: When will Value outpeform Growth?

Post by stlutz »

Historically, the value premium has been larger in down markets than up markets. If today is the beginning of 20% market drop, my bet would be on value.
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Re: When will Value outpeform Growth?

Post by lack_ey »

Mel Lindauer wrote:
butch wrote:I have been following Bogle head principles for over 25 years, I don't time the market and I invest in a diversified mix of Vanguard ETF and funds. However, my portfolio is tilted toward Value, because I read that in the long run, Value outperforms Growth stocks. Numerous studies from Fama and French to Ibbotson Associates all indicate that value investing is a better approach.

I am not trying to time the market but I am frustrated that Growth has outperformed value for the last 10 years- including 2015! Seeing as there must be some gurus out here, are there any market conditions in which Value will finally trump Growth?
If, as Jack Bogle suggests (own the haystack), you wouldn't have to worry about trying to outperform the market when you may well underperform it for decades. Bogleheads believe in owning the market and accepting the market's returns, knowing that they'll never underperform. Nothing else can guarantee that.
What if you reason that the needle is heavier and perhaps more likely to have fallen in the bottom half of the stack, so you own the bottom half of the haystack? :P
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Re: When will Value outpeform Growth?

Post by chatbotte »

butch wrote:I have been following Bogle head principles for over 25 years, I don't time the market and I invest in a diversified mix of Vanguard ETF and funds. However, my portfolio is tilted toward Value, because I read that in the long run, Value outperforms Growth stocks. Numerous studies from Fama and French to Ibbotson Associates all indicate that value investing is a better approach.

I am not trying to time the market but I am frustrated that Growth has outperformed value for the last 10 years- including 2015! Seeing as there must be some gurus out here, are there any market conditions in which Value will finally trump Growth?
I think the value premium is there. I don't know WHY it's there, as I'm not an economist. But academics and industry practitioners alike seem to be convinced, for the most part.

As to when you'll earn your value premium, think about it along the lines of a Fama/French argument concerning the equity risk premium: Suppose stocks are expected to beat bonds in any period of 50 years. Now, suppose you're in year 49 and bonds have beaten stocks all 49 years. If stocks are sure to beat bonds next year, you can short bonds and buy stocks to earn a RISKFREE profit. In a rational market, such an opportunity would not exist.

If you want to read more on this, try the Fama and French paper titled The Value Premium and the CAPM. If you don't read the technical sections you'll find it quite accessible.
Last edited by chatbotte on Tue Jan 05, 2016 4:18 am, edited 2 times in total.
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Re: When will Value outpeform Growth?

Post by JoMoney »

lack_ey wrote:
Mel Lindauer wrote:... If, as Jack Bogle suggests (own the haystack), you wouldn't have to worry about trying to outperform the market when you may well underperform it for decades. Bogleheads believe in owning the market and accepting the market's returns, knowing that they'll never underperform. Nothing else can guarantee that.
What if you reason that the needle is heavier and perhaps more likely to have fallen in the bottom half of the stack, so you own the bottom half of the haystack? :P
That sounds pretty reasonable until you have to buy the haystack, and you're competing with everybody else on what price to pay for which part of the haystack, and they start asking for a higher price for the bottom of the haystack. It's not like you can keep that information hidden if people really are finding heavier needles at the bottom.
Or maybe there really is some 'unique' risk to owning the bottom of the haystack and the market is efficiently pricing it as a "premium" for those who are willing to bear that risk? The academics who hypothesize about such a "risk premium" continue to study and hardly understand it, how well do you think the buyers of such "risky" funds really understand the risk, and don't just see returns? It could be the "premium" is just picking up pennies in front of a steamroller, a steamroller that's been gone for long enough the participants don't have any idea what happens when they get stuck under it.
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Re: When will Value outpeform Growth?

Post by selftalk »

The best answer I can think of is it will happen when it happens. To solve this I buy the whole market with VTI / VTSAX and don`t think about it. That`s what I`ve learned from my experience in doing and reading. Slicing and dicing can be trying at times and I don`t do it anymore.
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Re: When will Value outpeform Growth?

Post by chatbotte »

selftalk wrote:The best answer I can think of is it will happen when it happens. To solve this I buy the whole market with VTI / VTSAX and don`t think about it. That`s what I`ve learned from my experience in doing and reading. Slicing and dicing can be trying at times and I don`t do it anymore.
If you buy stocks, you're targeting a premium of .65 a month over the T-bill rate, with a t-statistic of 3.64. If you're happy about that game, why not target the value premium, which is .4 a month, with a t-statistic of 3.43? (That means both premiums are reliably different from zero.)

See https://www.ifa.com/articles/calculatio ... tatistics/ for an explanation of the t-statistic.

The figures are taken from the Fama/French paper titled The Value Premium and the CAPM.*

*[Edit: You can calculate the t-statistics for yourself on the IFA website referenced above by plugging in the means, standard deviations and sample size (number of months) provided in the Fama/French paper.]
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Re: When will Value outpeform Growth?

Post by larryswedroe »

Chatbotte
I'd add that the value premium, no matter what horizon you look at, has been about as reliable as the ERP has, whether 1, year, 5 or 10 or 20.
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Re: When will Value outpeform Growth?

Post by Call_Me_Op »

nisiprius wrote:
Call_Me_Op wrote:
larryswedroe wrote: And finally, just like with equities there are no guarantees, especially if you think value is a risk story.
Hi Larry,

This is a point I have heard you make before, but I don't completely follow it. If value is a "risk story", why wouldn't one expect to receive a premium for accepting that risk?
You would expect that, but what makes risk risky is you don't know for sure, and you certainly don't know when.
Certainly. We are talking about expectation, not certainty. But if in fact small stocks remain riskier than large stocks, I expect higher return. I also expect higher return from stocks compared to bonds, since I expect that stocks will remain riskier. Perhaps a concise definition of risk would help here, but I know that seems to be nearly impossible.
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Re: When will Value outpeform Growth?

Post by Call_Me_Op »

Call_Me_Op wrote:
nisiprius wrote:
Call_Me_Op wrote:
larryswedroe wrote: And finally, just like with equities there are no guarantees, especially if you think value is a risk story.
Hi Larry,

This is a point I have heard you make before, but I don't completely follow it. If value is a "risk story", why wouldn't one expect to receive a premium for accepting that risk?
You would expect that, but what makes risk risky is you don't know for sure, and you certainly don't know when.
Certainly. We are talking about expectation, not certainty. But it is quite reasonable to expect that small stocks will remain riskier than large stocks, since small companies are less established and more likely to fail. This seems to me as guaranteed as anything in life. In the same vein, I expect that stocks will also be riskier than treasury bills. Therefore, I expect higher returns from stocks over a long period of time.
Last edited by Call_Me_Op on Tue Jan 05, 2016 10:32 am, edited 1 time in total.
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Re: When will Value outpeform Growth?

Post by chatbotte »

Call_Me_Op wrote:
nisiprius wrote:
Call_Me_Op wrote:
larryswedroe wrote: And finally, just like with equities there are no guarantees, especially if you think value is a risk story.
Hi Larry,

This is a point I have heard you make before, but I don't completely follow it. If value is a "risk story", why wouldn't one expect to receive a premium for accepting that risk?
You would expect that, but what makes risk risky is you don't know for sure, and you certainly don't know when.
Certainly. We are talking about expectation, not certainty. But if in fact small stocks remain riskier than large stocks, I expect higher return. I also expect higher return from stocks compared to bonds, since I expect that stocks will remain riskier. Perhaps a concise definition of risk would help here, but I know that seems to be nearly impossible.
How about market beta + HML + SMB for stocks and term + default risk for bonds? That's a nice little package.
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Re: When will Value outpeform Growth?

Post by Call_Me_Op »

Please clarify the question charlotte.
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Re: When will Value outpeform Growth?

Post by chatbotte »

Call_Me_Op wrote:Please clarify the question charlotte.
Charlotte here. :) That was my concise definition of risk. The FF five-factor model for stocks and bonds.
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Re: When will Value outpeform Growth?

Post by Call_Me_Op »

Those are risk factors, but they do not give insight into how risk is defined.
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Re: When will Value outpeform Growth?

Post by chatbotte »

Call_Me_Op wrote:Those are risk factors, but they do not give insight into how risk is defined.
Do you have a definition of risk? Clearly, you must have one because you're talking about the "riskiness" of stocks versus bonds and small versus big firms. So how did you define it before you made those statements about the "riskiness" of various asset classes?
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Re: When will Value outpeform Growth?

Post by lack_ey »

JoMoney wrote:
lack_ey wrote:
Mel Lindauer wrote:... If, as Jack Bogle suggests (own the haystack), you wouldn't have to worry about trying to outperform the market when you may well underperform it for decades. Bogleheads believe in owning the market and accepting the market's returns, knowing that they'll never underperform. Nothing else can guarantee that.
What if you reason that the needle is heavier and perhaps more likely to have fallen in the bottom half of the stack, so you own the bottom half of the haystack? :P
That sounds pretty reasonable until you have to buy the haystack, and you're competing with everybody else on what price to pay for which part of the haystack, and they start asking for a higher price for the bottom of the haystack. It's not like you can keep that information hidden if people really are finding heavier needles at the bottom.
Or maybe there really is some 'unique' risk to owning the bottom of the haystack and the market is efficiently pricing it as a "premium" for those who are willing to bear that risk? The academics who hypothesize about such a "risk premium" continue to study and hardly understand it, how well do you think the buyers of such "risky" funds really understand the risk, and don't just see returns? It could be the "premium" is just picking up pennies in front of a steamroller, a steamroller that's been gone for long enough the participants don't have any idea what happens when they get stuck under it.
The problem here is that we've stretched what wasn't a serious model way too far. Any effect in the past, no matter what the driving forces were, are on the opportunity set of securities after prices have been set.

I don't think the model anyone has for how this all works is quite right but that in of itself doesn't mean it's not possible for a braindead trading strategy to be profitable (potentially even after considering the extra risks) by exploiting something close enough, at least at a rate higher than 50%.
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Re: When will Value outpeform Growth?

Post by Mel Lindauer »

lack_ey wrote:
JoMoney wrote:
lack_ey wrote:
Mel Lindauer wrote:... If, as Jack Bogle suggests (own the haystack), you wouldn't have to worry about trying to outperform the market when you may well underperform it for decades. Bogleheads believe in owning the market and accepting the market's returns, knowing that they'll never underperform. Nothing else can guarantee that.
What if you reason that the needle is heavier and perhaps more likely to have fallen in the bottom half of the stack, so you own the bottom half of the haystack? :P
That sounds pretty reasonable until you have to buy the haystack, and you're competing with everybody else on what price to pay for which part of the haystack, and they start asking for a higher price for the bottom of the haystack. It's not like you can keep that information hidden if people really are finding heavier needles at the bottom.
Or maybe there really is some 'unique' risk to owning the bottom of the haystack and the market is efficiently pricing it as a "premium" for those who are willing to bear that risk? The academics who hypothesize about such a "risk premium" continue to study and hardly understand it, how well do you think the buyers of such "risky" funds really understand the risk, and don't just see returns? It could be the "premium" is just picking up pennies in front of a steamroller, a steamroller that's been gone for long enough the participants don't have any idea what happens when they get stuck under it.
The problem here is that we've stretched what wasn't a serious model way too far. Any effect in the past, no matter what the driving forces were, are on the opportunity set of securities after prices have been set.

I don't think the model anyone has for how this all works is quite right but that in of itself doesn't mean it's not possible for a braindead trading strategy to be profitable (potentially even after considering the extra risks) by exploiting something close enough, at least at a rate higher than 50%.
Just about anything's possible, but only owning the haystack GUARANTEES that you won't underperform. None of the other options offer that guarantee. You makes your bets and takes your changes if you deviate form owning the market. You may win but you may also lose. Do you feel lucky?
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Re: When will Value outpeform Growth?

Post by Call_Me_Op »

chatbotte wrote:
Call_Me_Op wrote:Those are risk factors, but they do not give insight into how risk is defined.
Do you have a definition of risk? Clearly, you must have one because you're talking about the "riskiness" of stocks versus bonds and small versus big firms. So how did you define it before you made those statements about the "riskiness" of various asset classes?
When I speak about risk, I am using the metric used by the academics - SD of returns. They (and I) use that because it is easy to measure.
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Re: When will Value outpeform Growth?

Post by chatbotte »

Call_Me_Op wrote:
chatbotte wrote:
Call_Me_Op wrote:Those are risk factors, but they do not give insight into how risk is defined.
Do you have a definition of risk? Clearly, you must have one because you're talking about the "riskiness" of stocks versus bonds and small versus big firms. So how did you define it before you made those statements about the "riskiness" of various asset classes?
When I speak about risk, I am using the metric used by the academics - SD of returns. They (and I) use that because it is easy to measure.
That's not risk. That's volatility.
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Re: When will Value outpeform Growth?

Post by Call_Me_Op »

Mel Lindauer wrote: Just about anything's possible, but only owning the haystack GUARANTEES that you won't underperform. None of the other options offer that guarantee. You makes your bets and takes your changes if you deviate form owning the market. You may win but you may also lose. Do you feel lucky?
But that's really like saying that the only way to guarantee that you match the return of McDonalds stock is to buy McDonalds. It doesn't mean that you are best served, on an expectation basis, by owning McDonalds. I think there is some validity to the idea that different asset classes have different long-term expected risks and returns, and I cannot fault someone for wanting to invest in a particular asset class (or a combination thereof) with the expectation of achieving higher return than the market as a whole.
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Re: When will Value outpeform Growth?

Post by Call_Me_Op »

chatbotte wrote:
Call_Me_Op wrote:
chatbotte wrote:
Call_Me_Op wrote:Those are risk factors, but they do not give insight into how risk is defined.
Do you have a definition of risk? Clearly, you must have one because you're talking about the "riskiness" of stocks versus bonds and small versus big firms. So how did you define it before you made those statements about the "riskiness" of various asset classes?
When I speak about risk, I am using the metric used by the academics - SD of returns. They (and I) use that because it is easy to measure.
That's not risk. That's volatility.
No, that is the measure of risk used by academics. If the SD is high, there is more chance that you will lose a lot of money.
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Re: When will Value outpeform Growth?

Post by retiredjg »

butch wrote: However, my portfolio is tilted toward Value, because I read that in the long run, Value outperforms Growth stocks. Numerous studies from Fama and French to Ibbotson Associates all indicate that value investing is a better approach/
Butch, I think your problem lies right here. The studies show that value outperformed in the past. You've made the assumption that the future will look like the past. It may not.

There is nothing in those studies that indicate that value investing is a better approach going forward. There is evidence in those studies that value was a better approach over the time periods studied. That says nothing about what will happen in the future.
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Re: When will Value outpeform Growth?

Post by chatbotte »

Call_Me_Op wrote:
chatbotte wrote:
Call_Me_Op wrote:
chatbotte wrote:
Call_Me_Op wrote:Those are risk factors, but they do not give insight into how risk is defined.
Do you have a definition of risk? Clearly, you must have one because you're talking about the "riskiness" of stocks versus bonds and small versus big firms. So how did you define it before you made those statements about the "riskiness" of various asset classes?
When I speak about risk, I am using the metric used by the academics - SD of returns. They (and I) use that because it is easy to measure.
That's not risk. That's volatility.
No, that is the measure of risk used by academics. If the SD is high, there is more chance that you will lose a lot of money.
If you say that the higher the SD of an asset, the greater its expected return, then you're wrong. I don't think there is any such relationship.

Now, you might argue that the higher the MARKET BETA of an asset, the greater its expected return, but that doesn't seem to be true either.
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Re: When will Value outpeform Growth?

Post by lee1026 »

In theory, if you know that assets with high market beta will perform no better than assets with low market beta, then you can generate a positive return by going long on the low beta stuff and short the high beta stuff. I have seen papers to this effect, but it doesn't seem to be a popular thing to do around here.
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Re: When will Value outpeform Growth?

Post by chatbotte »

lee1026 wrote:In theory, if you know that assets with high market beta will perform no better than assets with low market beta, then you can generate a positive return by going long on the low beta stuff and short the high beta stuff. I have seen papers to this effect, but it doesn't seem to be a popular thing to do around here.
I think it's called a betting-against-beta (BAB) factor.
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Re: When will Value outpeform Growth?

Post by chatbotte »

retiredjg wrote:
butch wrote: However, my portfolio is tilted toward Value, because I read that in the long run, Value outperforms Growth stocks. Numerous studies from Fama and French to Ibbotson Associates all indicate that value investing is a better approach/
Butch, I think your problem lies right here. The studies show that value outperformed in the past. You've made the assumption that the future will look like the past. It may not.

There is nothing in those studies that indicate that value investing is a better approach going forward. There is evidence in those studies that value was a better approach over the time periods studied. That says nothing about what will happen in the future.
The studies tell you that the value premium is there, as statistically significant as the equity premium itself. If you question the value premium, you should also question the equity premium.
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Re: When will Value outpeform Growth?

Post by chatbotte »

Maynard F. Speer wrote:Some useful charts from Norbert Keimling https://twitter.com/CAPE_invest
Maynard,

Could you please expand on the Star Capital idea (see the column on the right-hand side of your second image) that "investors should be aware that HML is a long-value short-growth factor, whereas the MSCI USA Value index represents a long-value strategy only"? I'm not sure I understand why investors should be aware of this. It's kind of like saying that equities haven't beaten T-bills because you haven't borrowed money at the T-bill rate. I think HML is "long-value short-growth" just because you want to separate the value premium, not to somehow "enlarge" it. Thanks for your insights.
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Re: When will Value outpeform Growth?

Post by MIretired »

chatbotte wrote:
Maynard F. Speer wrote:Some useful charts from Norbert Keimling https://twitter.com/CAPE_invest
Maynard,

Could you please expand on the Star Capital idea (see the column on the right-hand side of your second image) that "investors should be aware that HML is a long-value short-growth factor, whereas the MSCI USA Value index represents a long-value strategy only"? I'm not sure I understand why investors should be aware of this. It's kind of like saying that equities haven't beaten T-bills because you haven't borrowed money at the T-bill rate. I think HML is "long-value short-growth" just because you want to separate the value premium, not to somehow "enlarge" it. Thanks for your insights.
Right.
Someone recently posted saying that value isn't (necessarily?) the opposite of growth.
Paul Merriman?, Larry S.?

Think it was Larry?
Paraphrase: Growth funds can have more value premium than some value funds. Some value funds have bad value premiums--distressed.
??
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Re: When will Value outpeform Growth?

Post by chatbotte »

MIpreRetirey wrote:Growth funds can have more value premium than some value funds. Some value funds have bad value premiums--distressed.
I don't think that's true. Growth is defined as the opposite of value. And value firms are distressed.
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Re: When will Value outpeform Growth?

Post by dkturner »

chatbotte wrote:
MIpreRetirey wrote:Growth funds can have more value premium than some value funds. Some value funds have bad value premiums--distressed.
I don't think that's true. Growth is defined as the opposite of value. And value firms are distressed.
They may be talking about actively managed funds, where anything is possible. Remember the Legg Mason Value Fund?
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