1 to 2 year periods of value or growth dominance

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BlueEars
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1 to 2 year periods of value or growth dominance

Post by BlueEars » Fri Dec 23, 2016 2:19 pm

Below is a chart comparing the 12 month returns of a value index versus a growth index. If you look at the magenta, this tracks the small cap value index 12 month gains versus the small cap growth index. The portions above the X-axis are the periods where value wins, and below the X-axis growth wins. Looking at the width of those out performance periods, it appears that out performance of one over the other lasts from 1 year to maybe 2 years and then often is followed by a reversal i.e. mountains become valleys. This seems to be more visible for small caps and midcaps just eyeballing the chart. The indexes I chose are the MSCI indexes up to March 2009 and then the respective Vanguard funds to the present (up to Dec 20 2016).

Image

From this chart it appears that we are quite a ways into the value index dominance phase for the small caps. Just thought I'd post this as I've noticed some value tilt discussions. I don't know if the value tilt discussions have increased lately as value has out performed. But I would not be surprised if we see more tilt towards the value tilt ideas. :happy

For the period March 1993 through Dec 20 2016 I have the following CAGR's differentials:

SV - SG = 11.6 - 10.0 = 1.6%
MV - MG = 12.0 - 9.0 = 3.0%
LV - LG = 9.8 - 8.6 = 1.2%

Thoughts? Speculations?

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nedsaid
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Re: 1 to 2 year periods of value or growth dominance

Post by nedsaid » Fri Dec 23, 2016 4:29 pm

Don't know where you got the graph but it seems that the value vs. growth trends last longer than one or two years. The 1990's were a large growth decade and the 2000's, at least up until the financial crisis, were a small value decade. Value underperformed Growth from about 2009 through 2015. Value is having a gangbuster year in 2016, Small Value even better.

It could be you are seeing counter trends within a longer term trend. To my untrained eye and just watching my own investments, these value vs. growth trends seem to last 6-10 years or so. Trouble is, no one rings a bell and announces when the trend changes.
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Re: 1 to 2 year periods of value or growth dominance

Post by triceratop » Fri Dec 23, 2016 4:46 pm

nedsaid wrote:Don't know where you got the graph but it seems that the value vs. growth trends last longer than one or two years. The 1990's were a large growth decade and the 2000's, at least up until the financial crisis, were a small value decade. Value underperformed Growth from about 2009 through 2015. Value is having a gangbuster year in 2016, Small Value even better.

It could be you are seeing counter trends within a longer term trend. To my untrained eye and just watching my own investments, these value vs. growth trends seem to last 6-10 years or so. Trouble is, no one rings a bell and announces when the trend changes.

It's not a conflict to see bursts of value outperformance in a short-term rolling-return graph, compared to your thinking which appears to be 6-10 year cumulative outperformance. They are different ways of looking at the data.
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Re: 1 to 2 year periods of value or growth dominance

Post by BlueEars » Fri Dec 23, 2016 8:49 pm

triceratop wrote: It's not a conflict to see bursts of value outperformance in a short-term rolling-return graph, compared to your thinking which appears to be 6-10 year cumulative outperformance. They are different ways of looking at the data.
Sounds about right. My graph is geared towards a fairly short term perspective. Partly this is because we see bursts of greed/fear based on short term phenomena. I personally get a charge out of my equities experiencing a burst.

Having a value tilt has been nice this year. But it probably won't last more then a year or so out i.e. growth will have it's turn.

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Re: 1 to 2 year periods of value or growth dominance

Post by LibertyLover » Sat Dec 24, 2016 9:42 am

BlueEars wrote:Having a value tilt has been nice this year. But it probably won't last more then a year or so out i.e. growth will have it's turn.
Perhaps the short cycle may have a year or so left but keep in mind, growth outperformed value for a 6 year period. It is likely that value will outperform growth for a similar time if you compare the next few value periods vs growth periods.

Unless the goal is to become an ultra market timer and try to move in and out of value to growth to catch the short bursts (sounds like a painfully unpredictable idea), the better idea would be either to stick to one or pay more attention to the larger time period. Meaning if after 6 years of growth or value outperforming you wanted to plan for a reversal that would make more sense then trying to predict smaller periods.

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Re: 1 to 2 year periods of value or growth dominance

Post by larryswedroe » Sat Dec 24, 2016 10:07 am

The persistence of the value premium has been as follows, from the table in Your Complete Guide to Factor Based Investing--the first figure.
Note that it isn't that much different than the persistence of the market beta premium--the second figure
1-year 63%/66%
3-year 72%/76%
5-year 78%/82%
10-year 86%/90%
20-year 94%/96%


Larry

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Re: 1 to 2 year periods of value or growth dominance

Post by BlueEars » Sat Dec 24, 2016 11:23 am

LibertyLover wrote:
BlueEars wrote:Having a value tilt has been nice this year. But it probably won't last more then a year or so out i.e. growth will have it's turn.
Perhaps the short cycle may have a year or so left but keep in mind, growth outperformed value for a 6 year period. It is likely that value will outperform growth for a similar time if you compare the next few value periods vs growth periods.

Unless the goal is to become an ultra market timer and try to move in and out of value to growth to catch the short bursts (sounds like a painfully unpredictable idea), the better idea would be either to stick to one or pay more attention to the larger time period. Meaning if after 6 years of growth or value outperforming you wanted to plan for a reversal that would make more sense then trying to predict smaller periods.
Note, I did show the overall longer term value premium numbers for the entire period of that chart. Even if we cut that 23+ years chart into half periods the value premium persisted. Larry's data shows this numerically even better.

What the chart illustrates is the extremes one must be prepare to endure. A bit of a roller coaster. I think that is the point, to set one's value tilt expectations correctly. I'm not proposing trying to time between value and growth although that would be cool if possible.

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Re: 1 to 2 year periods of value or growth dominance

Post by larryswedroe » Sat Dec 24, 2016 5:56 pm

Blueears
DFA wrote a nice paper showing that really not likely to be able to time the value premium. For example, they looked at going long value when the BTM spread was higher than average and long growth when it was lower and it did worse than just staying long value. Reason pretty simple, just like with stocks (beta), there is always an ex ante value premium, just that sometimes it's smaller.
Hope that helps
larry

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Re: 1 to 2 year periods of value or growth dominance

Post by BlueEars » Sat Dec 24, 2016 7:18 pm

larryswedroe wrote:Blueears
DFA wrote a nice paper showing that really not likely to be able to time the value premium. For example, they looked at going long value when the BTM spread was higher than average and long growth when it was lower and it did worse than just staying long value. Reason pretty simple, just like with stocks (beta), there is always an ex ante value premium, just that sometimes it's smaller.
Hope that helps
larry
I'm not proposing to time the value premium. If I did propose it, I would feel obligated here to suggest a methodology.

If I had a methodology that would do that with high probability, I'd probably use it. But there is always a risk that it does not work going forward. Just like most investments.

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Re: 1 to 2 year periods of value or growth dominance

Post by investorguy1 » Sat Dec 24, 2016 7:43 pm

That chart looks pretty "streaky" to me. For example You don't see one month of value followed by one month of growth and back again. I would love to see a chart like this for market beta.

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Re: 1 to 2 year periods of value or growth dominance

Post by investorguy1 » Sat Dec 24, 2016 8:23 pm

larryswedroe wrote:Blueears
DFA wrote a nice paper showing that really not likely to be able to time the value premium. For example, they looked at going long value when the BTM spread was higher than average and long growth when it was lower and it did worse than just staying long value. Reason pretty simple, just like with stocks (beta), there is always an ex ante value premium, just that sometimes it's smaller.
Hope that helps
larry
How about doing a momentum strategy where you would buy value or growth depending on which did better the previous month. I didn't back test it but looking at the chart that would have worked a good majority of the time.

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Re: 1 to 2 year periods of value or growth dominance

Post by larryswedroe » Sun Dec 25, 2016 9:53 am

investorguy
at least before taxes and expenses it likely would work given the persistence and pervasiveness of the MOM premium which works not only in individual assets but asset classes. But cannot ignore those two, at least in taxable accounts. And cannot ignore expenses in tax advantaged accounts.
Keep in mind that rebalancing with bands gives you some exposure to momentum strategy.
Larry

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Re: 1 to 2 year periods of value or growth dominance

Post by pkcrafter » Sun Dec 25, 2016 10:25 am

Thanks BlueEars, this is a great visual of the behavior of value and growth. Hey, here's an idea, hold both. I think total market would do that. :happy If one must try to play this, timing won't work, but an investor might consider a moderate tilt to value.

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Last edited by pkcrafter on Sun Dec 25, 2016 11:22 am, edited 1 time in total.
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Re: 1 to 2 year periods of value or growth dominance

Post by rustymutt » Sun Dec 25, 2016 10:31 am

I've always bought into the ideal of value stocks. Yes my portfolio has done well this year, because of that tilt. But now isn't the time to rush out and buy into value. I had it when it wasn't cool. I'll have it in 10 years also. Merry Christmas to all, and to all a good day.
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Re: 1 to 2 year periods of value or growth dominance

Post by BogleTails » Sun Dec 25, 2016 8:06 pm

rustymutt wrote:I've always bought into the ideal of value stocks. Yes my portfolio has done well this year, because of that tilt. But now isn't the time to rush out and buy into value. I had it when it wasn't cool. I'll have it in 10 years also. Merry Christmas to all, and to all a good day.
So if you were planning on timing into value and missed this run up, what would you look for as a change to start buying. I was planning on rebalancing some TSM to SCV.

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Re: 1 to 2 year periods of value or growth dominance

Post by sperry8 » Mon Dec 26, 2016 12:21 am

According to PIMCO value generally leads as the economy strengthens and rates start to rise (and/or are rising). Growth leads generally when the economy is weak and rates are low thereby helping the future earnings growth of growth companies (unsaid but I assume... more than the future growth of the cyclicals and economically sensitive value stocks).

So - if one could accurately predict the economy and rates one could theoretically time value v growth. Harder said than done of course.
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Re: 1 to 2 year periods of value or growth dominance

Post by rustymutt » Mon Dec 26, 2016 9:05 am

BogleTails wrote:
rustymutt wrote:I've always bought into the ideal of value stocks. Yes my portfolio has done well this year, because of that tilt. But now isn't the time to rush out and buy into value. I had it when it wasn't cool. I'll have it in 10 years also. Merry Christmas to all, and to all a good day.
So if you were planning on timing into value and missed this run up, what would you look for as a change to start buying. I was planning on rebalancing some TSM to SCV.
You could dollar cost average into this SCV, lump sum it, or wait til reversion to the mean to take over. But I can't guess what's in your best interest. I have not a clue on market direction. I personally DCA into everything I own.
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Re: 1 to 2 year periods of value or growth dominance

Post by pkcrafter » Mon Dec 26, 2016 10:47 am

BogleTails wrote:
rustymutt wrote:I've always bought into the ideal of value stocks. Yes my portfolio has done well this year, because of that tilt. But now isn't the time to rush out and buy into value. I had it when it wasn't cool. I'll have it in 10 years also. Merry Christmas to all, and to all a good day.
So if you were planning on timing into value and missed this run up, what would you look for as a change to start buying. I was planning on rebalancing some TSM to SCV.
Bogle Tails, switching funds in not rebalancing. Rebalancing is resetting asset percentages back to target.

Asking about timing something is not a good question because you cannot be successful at it. No one knows when is a good time to get in. If you don't really understand the behavior of SCV, then you will have a lot of difficulty staying with it and actually capturing the elusive premium. To capture the premium requires holding through occasional very long periods of no reward. If you really want to do it, it should be written into your investment policy statement contract.



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Re: 1 to 2 year periods of value or growth dominance

Post by BlueEars » Mon Dec 26, 2016 12:33 pm

BogleTails wrote:...

So if you were planning on timing into value and missed this run up, what would you look for as a change to start buying. I was planning on rebalancing some TSM to SCV.
Good question but unfortunately I can't think of a good rule even looking back over the last 24 years. From that chart above, are we at the threshold of a longish SV out perform period (like Jan 1997) or are we at a reversal period (like mid-2005) ? Future unknown economic forces are yet to shape the future market directions.

My own opinion is that the current trend only partly predicts the next month's direction due to momentum considerations.

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Re: 1 to 2 year periods of value or growth dominance

Post by larryswedroe » Mon Dec 26, 2016 3:02 pm

Blue ears
What we can say is that the wider the spread between valuations of value and growth the larger the ex post value premium has been--again demonstrating that valuations matter a great deal. Value certainly isn't expensive now so that argues for a likely continuation as would momentum. But of course economic risks can show up derailing expectations

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Re: 1 to 2 year periods of value or growth dominance

Post by BogleTails » Mon Dec 26, 2016 4:04 pm

pkcrafter wrote:
BogleTails wrote:
rustymutt wrote:I've always bought into the ideal of value stocks. Yes my portfolio has done well this year, because of that tilt. But now isn't the time to rush out and buy into value. I had it when it wasn't cool. I'll have it in 10 years also. Merry Christmas to all, and to all a good day.
So if you were planning on timing into value and missed this run up, what would you look for as a change to start buying. I was planning on rebalancing some TSM to SCV.
Bogle Tails, switching funds in not rebalancing. Rebalancing is resetting asset percentages back to target.

Asking about timing something is not a good question because you cannot be successful at it. No one knows when is a good time to get in. If you don't really understand the behavior of SCV, then you will have a lot of difficulty staying with it and actually capturing the elusive premium. To capture the premium requires holding through occasional very long periods of no reward. If you really want to do it, it should be written into your investment policy statement contract.
Paul
Maybe "timing" wasn't the best choice of word, but since RustyMutt said "now isn't the time to rush out and buy into value", the term was on my mind. I have been considering tilting toward SCV for several months now, so maybe DCA'ing some funds would be best for my investment plan.

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Re: 1 to 2 year periods of value or growth dominance

Post by BlueEars » Mon Dec 26, 2016 6:47 pm

larryswedroe wrote:Blue ears
What we can say is that the wider the spread between valuations of value and growth the larger the ex post value premium has been--again demonstrating that valuations matter a great deal. Value certainly isn't expensive now so that argues for a likely continuation as would momentum. But of course economic risks can show up derailing expectations
I don't know what you are looking at to say this Larry, but the data (below) from Vanguard for P/E ratios (for the indexes used in my original chart above) seem to support your statement. If anything, the value versus growth valuation has widened in favor of value.

PE ratio data from Vanguard:
Image

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Re: 1 to 2 year periods of value or growth dominance

Post by pkcrafter » Mon Dec 26, 2016 7:31 pm

Bogle Tails wrote:
Maybe "timing" wasn't the best choice of word, but since RustyMutt said "now isn't the time to rush out and buy into value", the term was on my mind. I have been considering tilting toward SCV for several months now, so maybe DCA'ing some funds would be best for my investment plan.
Ok, if you want to get into small value you need to make a commitment to stay with it at least 10 years. Payoffs look good, but SV can underperform for 5-10 years at a time. Look at the chart above, SV has not been this high since 2004.

Honestly I'd say SV may have some breath left, but the drop will be hard. Are you impressed with my forecast? Spoiler: I'm not any good at forecasting and don't do it, except for this one, which is worth the same as everyone else's forecasts. :happy

The key to successful investing is - Don't make behavioral errors. Buy in to SV and own it for a very long time.

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Re: 1 to 2 year periods of value or growth dominance

Post by sperry8 » Mon Dec 26, 2016 7:54 pm

larryswedroe wrote:Blue ears
What we can say is that the wider the spread between valuations of value and growth the larger the ex post value premium has been--again demonstrating that valuations matter a great deal. Value certainly isn't expensive now so that argues for a likely continuation as would momentum. But of course economic risks can show up derailing expectations
This is true - but is also true of most asset classes. When the spread of valuations increases between large v small you'll (likely) eventually see the lowered valuation area increase more over time. Same goes for sectors. That is part of why rebalancing helps increase portfolio returns. Buy low, sell high.
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Re: 1 to 2 year periods of value or growth dominance

Post by larryswedroe » Tue Dec 27, 2016 10:52 am

Sperry
I would just change most asset classes to ALL.
Valuations matter
Larry

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Re: 1 to 2 year periods of value or growth dominance

Post by billyv » Tue Dec 27, 2016 11:05 am

For me, the big takeaway from BlueEars' chart is the speed with which markets go from favoring value to growth and back again. If you've ever doubted the futility of market timing, here's the proof -- and in Technicolor hues to boot!

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Re: 1 to 2 year periods of value or growth dominance

Post by BlueEars » Tue Dec 27, 2016 11:26 am

billyv wrote:For me, the big takeaway from BlueEars' chart is the speed with which markets go from favoring value to growth and back again. If you've ever doubted the futility of market timing, here's the proof -- and in Technicolor hues to boot!
I work hard to make nicely colored charts. :happy

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