Paul Merriman challenges John Bogle

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neomutiny06
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Paul Merriman challenges John Bogle

Post by neomutiny06 » Tue Nov 29, 2016 5:32 pm

Paul Merriman does not agree with John Bogle about market capitalization weighted portfolios. He has a podcast episode called "Is John Bogle the best source of investment advice?"

Can someone help verify if Paul is right here? In the podcast, he says:

"When I look at every 15-year period from 1928 to 2016, how many of those periods made less than a 10% return? It turns out that with large-cap blend, there were 30 periods that made less than 10%.
But with Small-Cap value, there were only 5 periods that made less than 10%.

And by the way, in the 43 years that Large-cap Blend did make over 10%, the average return was 14.1%. With small-cap value, the average return was 17%. Now if I could sit down with John Bogle and Burton Malkiel, I would say "Guys, look at this
!"

He then says "If you look at the compound rate of return for every 40 year period since 1928, Large-Cap blend was 10.9%. Small-Cap was 16.2%."
Last edited by neomutiny06 on Tue Nov 29, 2016 7:30 pm, edited 1 time in total.

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Re: Paul Merriman challenges John Bogle

Post by samsdad » Tue Nov 29, 2016 5:51 pm

Just when I had told myself to "stay the course" with TSM and forget about tilting with IJS or VBR like the big kids do . . . :?

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Re: Paul Merriman challenges John Bogle

Post by Explorer » Tue Nov 29, 2016 5:59 pm

I do have a small portion of my portfolio in both VBR and VSS - the small cap ETFs.

But I am not comfortable (regardless of whose advice it is) to make my entire stock component be in Small Caps.. they are way more volatile than LC and MC...

Nothing against Merriman - but each of us has to answer the quesstion "How much of small cap equity do we want in the portfolio?"

Best wishes.

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Re: Paul Merriman challenges John Bogle

Post by SpaceCowboy » Tue Nov 29, 2016 6:01 pm

Why do you doubt it???
Seems pretty consistent with all the research that says that over the long-term in the past small cap value has outperformed.
"Past performance does not predict future results."

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Re: Paul Merriman challenges John Bogle

Post by Tycoon » Tue Nov 29, 2016 6:04 pm

As I grew older I learned to always ask myself what the motivation was for anyone giving me information. This one question has kept me from getting myself in many harmful situations.
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Re: Paul Merriman challenges John Bogle

Post by garlandwhizzer » Tue Nov 29, 2016 6:19 pm

When it comes to stature in the financial community and furthering the financial health of individual investors, comparing Merriman to Bogle is like comparing a dwarf (Merriman) to a giant (Bogle). As for factor, specifically SCV, investing versus cap weight indexes there is no doubt that based on cost free indexes over long time frames in the past, SCV outperforms TSM. Whether or not that will persist into the future, and if it does persist, whether it will be a significant outperformance after costs and taxes is not at all clear in my cloudy crystal ball. Now that factor investing has become so popular its popularity may end up destroying the very thing it pursues, outperformance, as a result of overcrowding the SCV space which represents only 3% of the cap-weighted market. There's only so much money that can fit in that space without diluting or destroying the value. TSM on the other hand can absorb massive inflows of capital without overcrowding and without illiquidity concerns. Simply put the SCV future may not be replay of the past.

It is also true based not on indexes but on investors who hold those indexes that those who hold TSM appear to abandon ship less than those who hold highly tilted SCV portfolios which are often more volatile and risky, and in addition clearly go through long periods of outperformance. So, ironically, research suggests that although SCV index portfolios may outperform TSM, SCV investors on average do not. If you wish to harvest the SCV premium you must stick with its underperformance through downturns and underperformance that may last a decade or more. Most investors can't do that.

I submit that the question is not quite as simple and straightforward as Mr. Merriman suggests. Merman's seems to be saying that Bogle is lacking in insight and in need of enlightenment from him. I find this laughable and submit that it is not appropriate for dwarves to publicly challenge and disparage acknowledged giants.

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Re: Paul Merriman challenges John Bogle

Post by Wakefield1 » Tue Nov 29, 2016 6:23 pm

Who is the pioneer of the development of (or at least the concept of) the quantitatively managed fund?
Doesn't "Small Cap Value IDX" represent a sort of basic quant management?
Sort of takes an index list through a screen or screens ran by computers but designed by people and changes the index list or weighting somehow-overweight or underweight certain characteristics

"Small cap value" as it is being discussed here-since 1928?- since 1938?- since 1960? Were there pertinent mutual funds available during such period? Or would "small cap value" had to have been individual stock portfolios? Funds in the past that were closed?
Is Vanguard's "VSIAX" small cap value index a reasonable representation of "small cap value" as is being discussed by Merriman and in this thread?
Last edited by Wakefield1 on Wed Nov 30, 2016 10:38 am, edited 2 times in total.

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Re: Paul Merriman challenges John Bogle

Post by nisiprius » Tue Nov 29, 2016 6:29 pm

Oh, please.

And if I look at 1928-present, I see one period of time during which small-cap value lost 89% of its value, and the number of times that's happened to large-cap blend is never.

From 1928-2013, the standard deviation (= "risk") for small-cap value was 32 and for large blend it was only 21.

So small-caps have had more return and more risk.

If someone isn't going to put return in perspective with risk, I don't think it's worth bothering to read what they have to say. It's spin.

I don't need an expert to tell me that you can get a higher expected return by taking more risk, and I doubt that John C. Bogle or Burton Malkiel would dispute that you can.
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Re: Paul Merriman challenges John Bogle

Post by walletless » Tue Nov 29, 2016 7:02 pm

neomutiny06 wrote:"When I look at every 15-year period from 1928 to 2016, how many of those periods made less than a 10% return? It turns out that with large-cap blend, there were 30 periods that made less than 10%.
But with Small-Cap value, there were only 5 periods that made less than 10%.
If somehow I prove that an Apple is better than an Orange, does that mean we should all stop eating Orange completely?
By this reasoning, Merriman must not even like to invest in Bonds, since the returns from SCV will be higher than Bonds for most 15-year period, no?

IOW, his statement that you should only invest in SCV and not in TSM because SCV gives better results more for 15-year periods can be extended to just about any pair of assets with differing risk profiles.

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Re: Paul Merriman challenges John Bogle

Post by neomutiny06 » Tue Nov 29, 2016 7:29 pm

nisiprius wrote:Oh, please.

And if I look at 1928-present, I see one period of time during which small-cap value lost 89% of its value, and the number of times that's happened to large-cap blend is never.

From 1928-2013, the standard deviation (= "risk") for small-cap value was 32 and for large blend it was only 21.

So small-caps have had more return and more risk.

If someone isn't going to put return in perspective with risk, I don't think it's worth bothering to read what they have to say. It's spin.

I don't need an expert to tell me that you can get a higher expected return by taking more risk, and I doubt that John C. Bogle or Burton Malkiel would dispute that you can.
He says he's trying to do right by the individual investor. And he worries we are missing out on extra percentage points if we don't tilt. He doesn't think the risk is that much higher, especially if you're in for the long haul.

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Re: Paul Merriman challenges John Bogle

Post by aj76er » Tue Nov 29, 2016 7:43 pm

nisiprius wrote:Oh, please.

And if I look at 1928-present, I see one period of time during which small-cap value lost 89% of its value, and the number of times that's happened to large-cap blend is never.

From 1928-2013, the standard deviation (= "risk") for small-cap value was 32 and for large blend it was only 21.

So small-caps have had more return and more risk.

If someone isn't going to put return in perspective with risk, I don't think it's worth bothering to read what they have to say. It's spin.

I don't need an expert to tell me that you can get a higher expected return by taking more risk, and I doubt that John C. Bogle or Burton Malkiel would dispute that you can.
Hi Nisiprius,
I'm curious if you believe that small-cap value (SCV) represents a "different" type of risk as compared to the cap-weighted market (TSM). E.g. akin to holding international-vs-domestic equities. If so, wouldn't it present a better risk-adjusted return as TSM and SCV zig and zag ever-so-slightly differently over the decades? So, with a bit of uncorrelated behavior added with a bit of "historic" outperformance it would seem that it has a decent chance of producing a smoother ride for the same (or better) returns (than simply holding TSM).
I understand the "more risk, more return" argument, and completely agree with it. But I'm curious if you can comment on the "diversified risk, better risk-adjusted return" argument, and if it holds water.
Thanks!
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Re: Paul Merriman challenges John Bogle

Post by arcticpineapplecorp. » Tue Nov 29, 2016 7:54 pm

nisiprius wrote:Oh, please.

And if I look at 1928-present, I see one period of time during which small-cap value lost 89% of its value, and the number of times that's happened to large-cap blend is never.

From 1928-2013, the standard deviation (= "risk") for small-cap value was 32 and for large blend it was only 21.

So small-caps have had more return and more risk.

If someone isn't going to put return in perspective with risk, I don't think it's worth bothering to read what they have to say. It's spin.

I don't need an expert to tell me that you can get a higher expected return by taking more risk, and I doubt that John C. Bogle or Burton Malkiel would dispute that you can.
Great post. I wasn't aware of the 89% loss in SCV compared to that never happening with LCB. In fact I've never heard Merriman say that, but that would only weaken his argument.

With regards to the risk/return relationship...Merriman is fond of saying that the return has been higher (emphasis on past) while the risk has been similar. He uses SD I believe to draw those conclusions. So in his mind tilting to SCV and LCV and SCB wasn't more risky than TSM but provided greater returns. Of course, that was before anyone knew that was the case. YMMV. I'll stick with TSM. If I'm wrong, I'm sure it won't make a difference in the end provided I have "enough".
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Re: Paul Merriman challenges John Bogle

Post by 2b2 » Tue Nov 29, 2016 8:08 pm

It has been noted that many (most?) investors under perform the funds they are invested in by about 2% per year. This is, of course, a result of moving in and out of those funds due to volatility.

Can one imagine the average under performance associated with a 100% equity allocation to small caps?

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Re: Paul Merriman challenges John Bogle

Post by staythecourse » Tue Nov 29, 2016 8:16 pm

nisiprius wrote:Oh, please.

And if I look at 1928-present, I see one period of time during which small-cap value lost 89% of its value, and the number of times that's happened to large-cap blend is never.

From 1928-2013, the standard deviation (= "risk") for small-cap value was 32 and for large blend it was only 21.

So small-caps have had more return and more risk.

If someone isn't going to put return in perspective with risk, I don't think it's worth bothering to read what they have to say. It's spin.

I don't need an expert to tell me that you can get a higher expected return by taking more risk, and I doubt that John C. Bogle or Burton Malkiel would dispute that you can.
Wait... didn't DJ (large cap stocks) lose 89% from peak to trough during the great depression? I believe I have read this NUMEROUS times on this site.

Good luck.
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Re: Paul Merriman challenges John Bogle

Post by nisiprius » Tue Nov 29, 2016 8:25 pm

I'm interested in learning, but I'm not interesting in trying to find a needle of truth in a haystack of exaggeration. I don't think I can learn anything from Merriman, it would just be an exercise in frustration.

As to the other things... the problem with all of the factor and tilt stuff is that it's really in a grey area as to whether it's even there. If it is there, the long-term benefits are not anywhere near as big or as certain as someone like Merriman suggests. And, the benefits in the past have been so "bursty." The benefits have occurred all in a bunch, only a small number of times, and may be separated by long periods of underperformance. So if the benefits are there, it takes a lot of tenacity and faith. You are planning to wait up to thirty years because you think something that happened once or twice before will probably happen again every twenty or thirty years or so.

There's another thing, too. I'm about 2/3rds of the way through Charles Geisst's Wall Street: A History: From Its Beginnings to the Fall of Enron, and I'm becoming more and more and more convinced that modeling financial data in terms of time series and statistical processes is just too silly to take seriously except in the roughest of rough ways. It's not about the statistical distribution of random variables, it's about point-in-time human policy decisions, like:
In 1941 the Treasury changed its tax policy and began taxing the interest paid on its own obligations.
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Re: Paul Merriman challenges John Bogle

Post by nisiprius » Tue Nov 29, 2016 8:31 pm

staythecourse wrote:
nisiprius wrote:...if I look at 1928-present, I see one period of time during which small-cap value lost 89% of its value, and the number of times that's happened to large-cap blend is never.
Wait... didn't DJ (large cap stocks) lose 89% from peak to trough during the great depression? I believe I have read this NUMEROUS times on this site.
Well, find it, then, and tell me where you found it. The number I'm seeing in the SBBI volume in their tabulation of stock market declines is 79%. That would be based on their "large-company stocks" series which is the S&P 500 and its predecessors.
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Re: Paul Merriman challenges John Bogle

Post by neomutiny06 » Tue Nov 29, 2016 9:00 pm

nisiprius wrote:I'm interested in learning, but I'm not interesting in trying to find a needle of truth in a haystack of exaggeration. I don't think I can learn anything from Merriman, it would just be an exercise in frustration.

As to the other things... the problem with all of the factor and tilt stuff is that it's really in a grey area as to whether it's even there. If it is there, the long-term benefits are not anywhere near as big or as certain as someone like Merriman suggests. And, the benefits in the past have been so "bursty." The benefits have occurred all in a bunch, only a small number of times, and may be separated by long periods of underperformance. So if the benefits are there, it takes a lot of tenacity and faith. You are planning to wait up to thirty years because you think something that happened once or twice before will probably happen again every twenty or thirty years or so.

There's another thing, too. I'm about 2/3rds of the way through Charles Geisst's Wall Street: A History: From Its Beginnings to the Fall of Enron, and I'm becoming more and more and more convinced that modeling financial data in terms of time series and statistical processes is just too silly to take seriously except in the roughest of rough ways. It's not about the statistical distribution of random variables, it's about point-in-time human policy decisions, like:
In 1941 the Treasury changed its tax policy and began taxing the interest paid on its own obligations.
Very interesting. I'll stick with my Market-cap weightings. The only "bet" I'm currently making is having REITs as a separate fund. But most authors/experts seem to agree this is a worthwhile component to a retirement portfolio.

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Re: Paul Merriman challenges John Bogle

Post by livesoft » Tue Nov 29, 2016 9:04 pm

neomutiny06 wrote:Very interesting. I'll stick with my Market-cap weightings. The only "bet" I'm currently making is having REITs as a separate fund. But most authors/experts seem to agree this is a worthwhile component to a retirement portfolio.
One doesn't have to do one or the other since one can do both.

A somewhat popular portfolio on the forum consists of total market weights plus some small-cap value funds. Or if you like, the 3-fund portfolio with a couple of funds added.
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Re: Paul Merriman challenges John Bogle

Post by nedsaid » Tue Nov 29, 2016 9:06 pm

I'll come to the defense of Paul Merriman here. He is one of the "good guys" of the financial industry and I learned a lot from a couple of his financial seminars hosted by Tom Cock. I had a free consultation with one of his financial advisors and it was a productive conversation. The Merriman firm is a fine firm though I balked at the 1% Assets Under Management Fee and didn't invest. It was his firm that taught me about the Fama-French academic research and small/value tilting. They not only gave away millions of dollars of free financial advice and education but also show investors how to pursue their strategy with Vanguard, Fidelity, T Rowe Price, and ETF portfolios.

I will agree that John Bogle certainly has much greater stature in the mutual fund industry than does Merriman but Paul Merriman's accomplishments are not minor.

Really, it boils down to whether or not one believes the academic research or not. Those who don't can set up their portfolios with a 3-4 fund portfolio of the very broad index funds. Folks can agree to disagree.
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Re: Paul Merriman challenges John Bogle

Post by investorguy1 » Tue Nov 29, 2016 9:15 pm

nisiprius wrote:...the problem with all of the factor and tilt stuff is that it's really in a grey area as to whether it's even there. If it is there, the long-term benefits are not anywhere near as big or as certain as someone like Merriman suggests. And, the benefits in the past have been so "bursty." The benefits have occurred all in a bunch, only a small number of times, and may be separated by long periods of underperformance. So if the benefits are there, it takes a lot of tenacity and faith. You are planning to wait up to thirty years because you think something that happened once or twice before will probably happen again every twenty or thirty years or so.
Larry Swedroe says that for a factor to be considered as a good investment option it should have the following characteristics "persistent over time, pervasive across markets, robust to different definitions, intuitive to common sense, and investable at reasonable access and expense." That sounds like a pretty different picture of SCV looking at the same data as you have. I'm having a hard time understanding the vast difference in interpretations from "grey area" to "rock solid proof". Can you help explain the difference in how you interpret the data?

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Re: Paul Merriman challenges John Bogle

Post by edge » Tue Nov 29, 2016 9:22 pm

Merriman may be one of the good guys - but his presentations are so pompous and have a stomach turning certainty to them that I can listen to him for maybe 30 seconds.

With respect to Bogle, Merriman is a plankton. Bogle is a whale.
nedsaid wrote:I'll come to the defense of Paul Merriman here. He is one of the "good guys" of the financial industry and I learned a lot from a couple of his financial seminars hosted by Tom Cock. I had a free consultation with one of his financial advisors and it was a productive conversation. The Merriman firm is a fine firm though I balked at the 1% Assets Under Management Fee and didn't invest. It was his firm that taught me about the Fama-French academic research and small/value tilting. They not only gave away millions of dollars of free financial advice and education but also show investors how to pursue their strategy with Vanguard, Fidelity, T Rowe Price, and ETF portfolios.

I will agree that John Bogle certainly has much greater stature in the mutual fund industry than does Merriman but Paul Merriman's accomplishments are not minor.

Really, it boils down to whether or not one believes the academic research or not. Those who don't can set up their portfolios with a 3-4 fund portfolio of the very broad index funds. Folks can agree to disagree.

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Re: Paul Merriman challenges John Bogle

Post by AlohaJoe » Tue Nov 29, 2016 9:28 pm

garlandwhizzer wrote:I find this laughable and submit that it is not appropriate for dwarves to publicly challenge and disparage acknowledged giants.
This attitude is why Max Plank said, "Science advances one funeral at a time."

To the OP's actual question: there is no disputing that Merriman's statement is correct. But you seem to have a further question about the implications of that fact (which is what most of these comments seem to be about).

I'm not entirely sure why the large disagreement with Merriman's statement since Bogle & Malkiel (in the article his podcast refers to) themselves say
We concede that there is some evidence, based on numbers compiled by Ibbotson Associates, that long-run excess returns have been earned from dividend-paying, "value" and small-cap stocks
Bogle & Malkiel's only offered argument is:
the premiums offered by such stocks may well now have been "arbitraged away" in the stock market
That's an acceptable line of argument in a skimpy Wall Street Journal editorial but it can hardly be considered convincing evidence for people who are on the other side of the argument.

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Re: Paul Merriman challenges John Bogle

Post by longinvest » Tue Nov 29, 2016 9:28 pm

investorguy1 wrote:
nisiprius wrote:...the problem with all of the factor and tilt stuff is that it's really in a grey area as to whether it's even there. If it is there, the long-term benefits are not anywhere near as big or as certain as someone like Merriman suggests. And, the benefits in the past have been so "bursty." The benefits have occurred all in a bunch, only a small number of times, and may be separated by long periods of underperformance. So if the benefits are there, it takes a lot of tenacity and faith. You are planning to wait up to thirty years because you think something that happened once or twice before will probably happen again every twenty or thirty years or so.
Larry Swedroe says that for a factor to be considered as a good investment option it should have the following characteristics "persistent over time, pervasive across markets, robust to different definitions, intuitive to common sense, and investable at reasonable access and expense." That sounds like a pretty different picture of SCV looking at the same data as you have. I'm having a hard time understanding the vast difference in interpretations from "grey area" to "rock solid proof". Can you help explain the difference in how you interpret the data?
Investorguy,

"rock solid proof"???!!!! Where?

I love proofs! It's William Sharpe's proof of his theorem that convinced me of the soundness of market-weight indexing.

I've heard of "historical evidence" about SCV, but I have yet to see a formal proof that SCV must outperform the total market, in the past, in the present, and in the future.

Where did you find your proof?

Actually, it is pretty simple to find a counter example, which means that there cannot be such a proof. Remember that a single counter example suffices to prove that something does not hold. We all know that there has been at least one time period when SCV did not outperform the total market. Therefore, SCV does not always outperform the total market. Q.E.D.
Last edited by longinvest on Tue Nov 29, 2016 9:34 pm, edited 2 times in total.
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Re: Paul Merriman challenges John Bogle

Post by sschullo » Tue Nov 29, 2016 9:30 pm

I like Merriman and listened to his podcasts for a decade and his data going back to 1928 seems accurate. But he also annoys me when makes the small cap tilt to get that extra return a big deal, and more complications for new investors. He needs to keep it simple for new investors.
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Re: Paul Merriman challenges John Bogle

Post by AlohaJoe » Tue Nov 29, 2016 9:31 pm

nisiprius wrote:
staythecourse wrote:
nisiprius wrote:...if I look at 1928-present, I see one period of time during which small-cap value lost 89% of its value, and the number of times that's happened to large-cap blend is never.
Wait... didn't DJ (large cap stocks) lose 89% from peak to trough during the great depression? I believe I have read this NUMEROUS times on this site.
Well, find it, then, and tell me where you found it. The number I'm seeing in the SBBI volume in their tabulation of stock market declines is 79%. That would be based on their "large-company stocks" series which is the S&P 500 and its predecessors.
I'm not at all convinced that the average investor would be okay with losing 79% of their portfolio but then flip out if they lost 89% of their portfolio. Both of them seem like they would fall into the area of catastrophe.

That said, I agree that Merriman is cherry-picking one particular measure of risk (which is increasingly accepted as flawed) to make his case, while ignoring other ways of measuring risk. "My investments did worse than my brother's and now I feel bad at family gatherings during the holidays" is probably a more common definition of risk than "standard deviations", anyway.

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Re: Paul Merriman challenges John Bogle

Post by investorguy1 » Tue Nov 29, 2016 9:33 pm

longinvest wrote:Where did you find your proof?
By that I just mean that it meets all the criteria that Swedroe suggests. If indeed a factor does have all of those characteristics I think a reasonable person would agree that the evidence is pretty convincing. I think those who don't buy into factors is because they don't think those criteria are met. If you disagree then I would ask what criteria would you suggest an should be met that would convince you?

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Re: Paul Merriman challenges John Bogle

Post by longinvest » Tue Nov 29, 2016 9:37 pm

investorguy1 wrote:
longinvest wrote:Where did you find your proof?
By that I just mean that it meets all the criteria that Swedroe suggests. If indeed a factor does have all of those characteristics I think a reasonable person would agree that the evidence is pretty convincing. I think those who don't buy into factors is because they don't think those criteria are met. If you disagree then I would ask what criteria would you suggest an should be met that would convince you?
Investorguy,

Words have meanings. If you use words to mean something they don't mean, I can't understand you.

Let's agree that there is no proof. I edited my previous post to actually prove that there can't exist a proof that SCV always beats the total market.
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Re: Paul Merriman challenges John Bogle

Post by triceratop » Tue Nov 29, 2016 9:42 pm

garlandwhizzer wrote:When it comes to stature in the financial community and furthering the financial health of individual investors, comparing Merriman to Bogle is like comparing a dwarf (Merriman) to a giant (Bogle). As for factor, specifically SCV, investing versus cap weight indexes there is no doubt that based on cost free indexes over long time frames in the past, SCV outperforms TSM. Whether or not that will persist into the future, and if it does persist, whether it will be a significant outperformance after costs and taxes is not at all clear in my cloudy crystal ball. Now that factor investing has become so popular its popularity may end up destroying the very thing it pursues, outperformance, as a result of overcrowding the SCV space which represents only 3% of the cap-weighted market. There's only so much money that can fit in that space without diluting or destroying the value. TSM on the other hand can absorb massive inflows of capital without overcrowding and without illiquidity concerns. Simply put the SCV future may not be replay of the past.

It is also true based not on indexes but on investors who hold those indexes that those who hold TSM appear to abandon ship less than those who hold highly tilted SCV portfolios which are often more volatile and risky, and in addition clearly go through long periods of outperformance. So, ironically, research suggests that although SCV index portfolios may outperform TSM, SCV investors on average do not. If you wish to harvest the SCV premium you must stick with its underperformance through downturns and underperformance that may last a decade or more. Most investors can't do that.

I submit that the question is not quite as simple and straightforward as Mr. Merriman suggests. Merman's seems to be saying that Bogle is lacking in insight and in need of enlightenment from him. I find this laughable and submit that it is not appropriate for dwarves to publicly challenge and disparage acknowledged giants.

Garland Whizzer
I strongly disagree, as would I expect many academics familiar with the need to challenge orthodoxy and test ideas against evidence. Here's a famous example of where this clawing to the giants can lead you astray (Note: I do not mean to start any discussion of the substance of the critique which is of course political, just to show that relative unknowns can successfully challenge giants in a field): Does high public debt consistently stifle economic growth? A critique of Reinhart and Rogoff.
Thomas Herndon, Michael Ash and Robert Pollin Abstract wrote:We replicate Reinhart and Rogoff (2010A and 2010B) and find that selective exclusion of available data, coding errors and inappropriate weighting of summary statistics lead to serious miscalculations that inaccurately represent the relationship between public debt and GDP growth among 20 advanced economies. Over 1946–2009, countries with public debt/GDP ratios above 90% averaged 2.2% real annual GDP growth, not −0.1% as published. The published results for (i) median GDP growth rates for the 1946–2009 period and (ii) mean and median GDP growth figures over 1790–2009 are all distorted by similar methodological errors, although the magnitudes of the distortions are somewhat smaller than with the mean figures for 1946–2009. Contrary to Reinhart and Rogoff’s broader contentions, both mean and median GDP growth when public debt levels exceed 90% of GDP are not dramatically different from when the public debt/GDP ratios are lower. The relationship between public debt and GDP growth varies significantly by period and country. Our overall evidence refutes RR’s claim that public debt/GDP ratios above 90% consistently reduce a country’s GDP growth.
This appears to be a respectful and yet forceful challenge of giants' published work. It was also successful.
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Re: Paul Merriman challenges John Bogle

Post by investorguy1 » Tue Nov 29, 2016 9:48 pm

longinvest wrote:
investorguy1 wrote:
longinvest wrote:Where did you find your proof?
By that I just mean that it meets all the criteria that Swedroe suggests. If indeed a factor does have all of those characteristics I think a reasonable person would agree that the evidence is pretty convincing. I think those who don't buy into factors is because they don't think those criteria are met. If you disagree then I would ask what criteria would you suggest an should be met that would convince you?
Investorguy,

Words have meanings. If you use words to mean something they don't mean, I can't understand you.

Let's agree that there is no proof. I edited my previous post to actually prove that there can't exist a proof that SCV always beats the total market.
I'll explain. When I wrote rock solid proof I was referring to the odds being in your favor to factor tilt. There are many on this site who believe they have extremely good reason to tilt. Do they think they have 100% chance of success? of course not no one does. But they believe that the evidence is stronger for factors than anything else and yes they believe that the 100's of studies done across the world, time periods and asset classes is rock solid evidence of the existence of factors and that they provide the best chance for the best risk adjust returns.

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Re: Paul Merriman challenges John Bogle

Post by investorguy1 » Tue Nov 29, 2016 9:54 pm

longinvest wrote:Actually, it is pretty simple to find a counter example, which means that there cannot be such a proof. Remember that a single counter example suffices to prove that something does not hold. We all know that there has been at least one time period when SCV did not outperform the total market. Therefore, SCV does not always outperform the total market. Q.E.D.
No one is claiming that SCV always outperforms. In fact the argument is that there are long periods that it under performs and that is precisely why there is a premium, it is compensation for taking on risk.
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Re: Paul Merriman challenges John Bogle

Post by pkcrafter » Tue Nov 29, 2016 9:55 pm

There is somewhat of a disconnect here. The article Turn on a Paradigm is all about market cap vs fundamental weighting while Merriman is arguing for small caps and value as part of a fully diversified portfolio. He does not argue the point of market cap weighting except for the idea of overweighting small value. He's not suggesting fundamental weighting.

Turn on a Paradigm was difficult to find, but I did find it.

http://www.lifetimefp.net/Turn%20on%20a%20Paradigm.pdf


Paul
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Re: Paul Merriman challenges John Bogle

Post by AlohaJoe » Tue Nov 29, 2016 9:57 pm

pkcrafter wrote: Turn on a Paradigm was difficult to find, but I did find it.
For me it was the first result in a Google search, leading me to the original Wall Street Journal: http://www.wsj.com/articles/SB115137454384691506

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Re: Paul Merriman challenges John Bogle

Post by Watty » Tue Nov 29, 2016 10:09 pm

I would be cautious when looking very far back at the historical date for small cap stocks.

The market for them is much different now than it was even 20 years ago when the internet was just getting started.

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A good laugh

Post by Taylor Larimore » Tue Nov 29, 2016 10:10 pm

Paul Merriman wrote:Now if I could sit down with John Bogle and Burton Malkiel, I would say "Guys, look at this!"
Mr. Bogle and Mr. Malkiel would laugh. They know that past performance does not forecast future performance.

Best wishes
Taylor
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Re: Paul Merriman challenges John Bogle

Post by pkcrafter » Tue Nov 29, 2016 10:29 pm

AlohaJoe wrote:
pkcrafter wrote: Turn on a Paradigm was difficult to find, but I did find it.
For me it was the first result in a Google search, leading me to the original Wall Street Journal: http://www.wsj.com/articles/SB115137454384691506
Yes, I found that too, but it requires a sign in/sign up.


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Re: A good laugh

Post by neomutiny06 » Tue Nov 29, 2016 10:31 pm

Taylor Larimore wrote:
Paul Merriman wrote:Now if I could sit down with John Bogle and Burton Malkiel, I would say "Guys, look at this!"
Mr. Bogle and Mr. Malkiel would laugh. They know that past performance does not forecast future performance.

Best wishes
Taylor
I just can't believe how much bigger the returns were for small-cap value, according to Merriman. I've never seen those numbers.

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Re: Paul Merriman challenges John Bogle

Post by staythecourse » Tue Nov 29, 2016 10:35 pm

nisiprius wrote:
staythecourse wrote:
nisiprius wrote:...if I look at 1928-present, I see one period of time during which small-cap value lost 89% of its value, and the number of times that's happened to large-cap blend is never.
Wait... didn't DJ (large cap stocks) lose 89% from peak to trough during the great depression? I believe I have read this NUMEROUS times on this site.
Well, find it, then, and tell me where you found it. The number I'm seeing in the SBBI volume in their tabulation of stock market declines is 79%. That would be based on their "large-company stocks" series which is the S&P 500 and its predecessors.
Oh... 79% vs. 89%. Thanks for the correction. Either one is a disaster.

Just curious for the sake of continuing this end of the argument... How many years did SCV take to get back to even vs. LCB during that time period. I saw a great chart from a book showing that the V is much steeper on both sides from bear to bull vs. Large cap. My guess is that SCV plummetted faster and larger, but gained back faster and larger then its LC stocks.

Good luck.
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Re: Paul Merriman challenges John Bogle

Post by longinvest » Tue Nov 29, 2016 10:40 pm

staythecourse wrote: Oh... 79% vs. 89%. Thanks for the correction. Either one is a disaster.
But one ended up 50% lower than the other. I would say it was riskier. Wouldn't you?
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Re: Paul Merriman challenges John Bogle

Post by AlohaJoe » Wed Nov 30, 2016 12:22 am

staythecourse wrote: Oh... 79% vs. 89%. Thanks for the correction. Either one is a disaster.

Just curious for the sake of continuing this end of the argument... How many years did SCV take to get back to even vs. LCB during that time period
Scott Leonard looked at this in his paper, "U.S. Equity Returns After Major Market Crashes". Among his findings, he wrote
One could argue that large cap stocks seriously underperform in a market recovery.
He based that on looking at the 1-year, 3-year, and 5-year performance of large-blend, large-value, small-value, and micro-cap after the three major market crashes in US history (Great Depression, Oil Embargo, Dot-com Crash). (The paper came out shortly after the 2008 crash so there wasn't enough historical evidence then to include it.)

Image

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Re: A good laugh

Post by saltycaper » Wed Nov 30, 2016 1:47 am

Taylor Larimore wrote:
Paul Merriman wrote:Now if I could sit down with John Bogle and Burton Malkiel, I would say "Guys, look at this!"
Mr. Bogle and Mr. Malkiel would laugh. They know that past performance does not forecast future performance.

Best wishes
Taylor
Taylor: Surely you forecast--meaning to estimate or predict--the stocks in your portfolio will outperform a savings account, Treasury bills, and many other places you could stash your money outside of the stock market. If you don't forecast that will happen, it doesn't make sense to hold stocks, as you are taking on a lot of risk while expecting to receive no compensation for doing so. I hope we can agree on that.

I also hope we can agree that if you looked at the historical performance of the stock market, and it never outperformed, say, cash, that you would have second thoughts about forecasting the stock market to outperform cash in the future. So, you do look to historical performance to forecast future performance.

I don't think I'm going too far to say, also, that you would reasonably look to the historical performance of the stock market, and, seeing how it allowed long-term investors to "eat well" in the past, you forecast that it will allow them to "eat well" in the future, even while admitting and even rightly shouting from the rooftops that there is no guarantee that will happen.

I'm also confident that when you are examining past performance and forecasting future performance (whether or not you are thinking of those terms while you are doing those things) that you do not merely look at a table or chart and see a pattern and expect it to go on forever, but that you consider the characteristics of the investment you are examining, such as what a stock is, what a bond is, why one might be riskier than the other, why investors might demand compensation for the added risk, why one might outperform the other, and so on. Again, you might define these terms differently than I have defined them here, or you might use entirely different terms, or you might use no terms at all while you are engaging in what might be called a qualitative analysis to further examine the quantitative observation you made by looking at, for instance, the extraordinary growth of the S&P 500 from the time you started investing until today.

All of this is to say that factor-based investing, in the most general and elementary way, relies on similar principles and methods at work in your analysis of whether you forecast stocks will outperform Treasury bills. You don't know that stocks will outperform T-bills over any particular time period, but you make the general forecast they will do so, while also forecasting there will be times that T-bills massively outperform stocks. You don't make these forecasts just by looking at a bunch of charts, which taken alone would steer you in all sorts of random (and unfortunate) directions, but you consider why the past performance was what it was, whether it is reasonable to forecast it will continue in the future, the general or relative chances and consequences of past performance not enduring, and how the portfolio can be constructed to make those consequences tolerable if the chances are too high or the negative consequences too great.
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Re: Paul Merriman challenges John Bogle

Post by whodidntante » Wed Nov 30, 2016 2:08 am

Real men only invest in EM small cap value, fully leveraged.

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Re: Paul Merriman challenges John Bogle

Post by Call_Me_Op » Wed Nov 30, 2016 7:37 am

nisiprius wrote:Oh, please.

And if I look at 1928-present, I see one period of time during which small-cap value lost 89% of its value, and the number of times that's happened to large-cap blend is never.

From 1928-2013, the standard deviation (= "risk") for small-cap value was 32 and for large blend it was only 21.

So small-caps have had more return and more risk.

If someone isn't going to put return in perspective with risk, I don't think it's worth bothering to read what they have to say. It's spin.

I don't need an expert to tell me that you can get a higher expected return by taking more risk, and I doubt that John C. Bogle or Burton Malkiel would dispute that you can.
Paul Merriman does discuss risk. He does point-out that small-cap blend and value have had more risk (as measured by SD and max draw-down) compared to large cap. He also points out that a mix of all of the "asset classes", equally-weighted, has enjoyed a significantly-higher risk-adjusted return compared to a total market index alone.

I have listened to Paul Merriman for a long time. And I have never heard him make a misrepresentation or engage in obfuscation of any kind. From everything I have heard, his goal is to help investors achieve the best unit of return per unit risk. He does make use of past data unapologetically, but points out that he cannot guarantee that the future will look like the past.
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Re: Paul Merriman challenges John Bogle

Post by moghopper » Wed Nov 30, 2016 8:44 am

Call_Me_Op wrote: Paul Merriman does discuss risk. He does point-out that small-cap blend and value have had more risk (as measured by SD and max draw-down) compared to large cap. He also points out that a mix of all of the "asset classes", equally-weighted, has enjoyed a significantly-higher risk-adjusted return compared to a total market index alone.

I have listened to Paul Merriman for a long time. And I have never heard him make a misrepresentation or engage in obfuscation of any kind.

Agree 100%. I do see Merriman misrepresented on this board a lot though.

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Re: Paul Merriman challenges John Bogle

Post by Ethelred » Wed Nov 30, 2016 9:49 am

nisiprius wrote:I'm interested in learning, but I'm not interesting in trying to find a needle of truth in a haystack of exaggeration. I don't think I can learn anything from Merriman, it would just be an exercise in frustration.

As to the other things... the problem with all of the factor and tilt stuff is that it's really in a grey area as to whether it's even there. If it is there, the long-term benefits are not anywhere near as big or as certain as someone like Merriman suggests. And, the benefits in the past have been so "bursty." The benefits have occurred all in a bunch, only a small number of times, and may be separated by long periods of underperformance. So if the benefits are there, it takes a lot of tenacity and faith. You are planning to wait up to thirty years because you think something that happened once or twice before will probably happen again every twenty or thirty years or so.
There are a lot of what come across as very dogmatic posts in this thread. I'm quoting this one because it's one of several you've made like this, that aren't supported by the historical data.

I used the backtesting spreadsheet to actually look at this last night. Use the portfolio comparison sheet and set up portfolio 1 with 70% TSM and 30% TBM, and then in portfolio 2, add in some SCV, so you have 50% TSM, 20% SCV and 30% TBM. Possibly I used LCB not TSM, but the results will be similar.

First, look at the numbers and the scatter plot - portfolio 2 has CAGR over 1% higher than portfolio 1, yet standard deviation is lower. Then, look at the relative growth plot between the two portfolios. When 2 goes up relative to 1, it is outperforming it. Unsurprisingly, with the significantly higher CAGR, that happens most of the time, it doesn't happen "every twenty or thirty years or so".

There are good reasons presented in this thread to be wary about tilting to small cap value, but there are also several statements that make claims about the historical data that aren't true.

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Re: Paul Merriman challenges John Bogle

Post by investorguy1 » Wed Nov 30, 2016 10:34 am

whodidntante wrote:Real men only invest in EM small cap value, fully leveraged.
:D That's the closest smile I could find to one that is laughing. The one fund portfolio.
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Re: Paul Merriman challenges John Bogle

Post by staythecourse » Wed Nov 30, 2016 10:34 am

Nisi,

Just curious. Your stance (as mine) is that small value is a risk story and thus appropriately gives higher return to those who take on the extra risk, i.e. No free lunch. Yet you don't believe it should be counted on as it is so sporadic. How does that make sense in an efficient market?

In the end I invest based on the sniff test of common sense. If the returns are the same then why would anyone who has $1 to invest invest in some small no name company in that it is likely to go bankrupt vs. Apple or Walmart? Why take on the higher risk of principle loss with no HIGH chance of earning more? That just doesn't make sense.

Dr. Bernstein awhile back when discussing some of this charts in his books even changed his mind stating even small changes in return are important as they are compounded exponentially into the future.

Just wondering how you resolve some of these issues?

Good luck.
"The stock market [fluctuation], therefore, is noise. A giant distraction from the business of investing.” | -Jack Bogle

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Re: Paul Merriman challenges John Bogle

Post by investorguy1 » Wed Nov 30, 2016 10:41 am

staythecourse wrote:
In the end I invest based on the sniff test of common sense. If the returns are the same then why would anyone who has $1 to invest invest in some small no name company in that it is likely to go bankrupt vs. Apple or Walmart? Why take on the higher risk of principle loss with no HIGH chance of earning more? That just doesn't make sense.
The sniff test is important but I think it is only one test of many that should be done. You are assuming that people are logical. We know that low volatility stocks beat high volatility stocks. Does that make sense? Maybe owning Apple will make more money than that small company because it is a better company and they will sell lots of great stuff and big markups and the other company will disappear?

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Re: Paul Merriman challenges John Bogle

Post by Portfolio7 » Wed Nov 30, 2016 11:18 am

I think it's a judgement call. History is not evidence, but it's indicative. That's why we invest in stocks in the first place (that's a little simplistic. There is also established theory to support the higher returns of stocks) . Tilts make a lot of sense to me, so I use them. I don't argue with the guy who isn't convinced, and doesn't, though I'd be happy to discuss my thinking with anyone. The one thing I will say is that if you combine several high risk / high return segments of the market, it looks to me as if the volatility in each segment tends to offset the others satisfactorily, at least over the past 3 or 4 decades, and such a portfolio has yielded strong returns. Hence, I use such a portfolio. 7 to 9 asset classes depending on how you handle bonds - it's not super simple, but it's really not complex either. Could I be wrong? Sure. That's why I don't stray too far from the basic 3 fund portfolio; I always keep MPT in mind. I think I have a high probability of better returns than a 3 fund portfolio, but if I'm wrong, I shouldn't trail it by very much. That's my assessment, given what I know... and there's plenty I don't know. Guys like Swedroe and Bernstein give me more than I can handle, and it's wonderful, but there are clearly limits to everyone's knowledge. Also, everyone's goals differ somewhat. I wouldn't fight with anyone else over tilts and factors, but it's fair to lay out one's thinking as an option for like-minded investors.
"An investment in knowledge pays the best interest" - Benjamin Franklin

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Nice post

Post by Taylor Larimore » Wed Nov 30, 2016 11:30 am

Portfolio7:

Nice reasonable post!

Thank you and best wishes
Taylor
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Re: Paul Merriman challenges John Bogle

Post by Quark » Wed Nov 30, 2016 11:52 am

If risk has any meaning, it should mean that we can't be comfortable that a riskier investment will have a higher return over any given time frame, short or long. If we're comfortable, it's hard to say we really believe that something is riskier.

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