"Why Value Stocks Have Disappointed"

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Taylor Larimore
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"Why Value Stocks Have Disappointed"

Postby Taylor Larimore » Fri May 19, 2017 2:55 pm

Morningstar is featuring a thoughtful article by Vice-President of Research, John Rekenthaler:

Why Value Stocks Have Disappointed

Best wishes.
Taylor
Last edited by Taylor Larimore on Fri May 19, 2017 3:37 pm, edited 1 time in total.
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Re: "Why Value Stocks Have Disappointed"

Postby livesoft » Fri May 19, 2017 3:15 pm

Small-cap value IJS gained about 45% from mid-Feb to mid-Dec last year. I was not disappointed.

At least with small-cap value one has to rebalance and cannot buy once and forget about it.
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Re: "Why Value Stocks Have Disappointed"

Postby garlandwhizzer » Fri May 19, 2017 4:47 pm

Interesting article. I don't fully agree with Grantham about the demise of value due to increasing corporate profitability but clearly the last decade has tested the mettle of SCV investors and also MOM investors who got killed in the 2009-10 recovery if they were long/short MOM. Personally I believe the SCV premium and other premiums have decreased over time due to pervasive knowledge of them and increased efficiency in todays professionally dominated markets, especially in the US. I suspect it will be more difficult to harvest after cost outperformance above beta going forward for investors and it has in fact been so for a decade. Factor approaches and indexes continue to proliferate, many run by brilliant knowledgeable students of the market like Asness, Arnott, DFA, Swedroe, etc., all seeking to exploit these premiums optimally. Beta also proliferates but the difference is that beta has an essentially unlimited dollar capacity since it is dominated by mega-cap and LC stocks, whereas factors have by definition seek limited capacity market slots, especially those who seek a very special slice of very small cap stocks like SCV. Correct me if I"m wrong on this, but I believe as much as 40% of new money going into etfs at this point are taking factor based approaches which is likely to dilute the robust factor gains we see on long term backtesting. There isn't as much alpha supply as there was decades ago due to increased market efficiency and there are a lot more players trying to get at it. IMO there is likely but not certain to be a persistent but modest SCV premium after costs for those true factor believers with iron stomachs who can hold on after a decade or more of underperformance. I personally don't believe that MOM is harvestable after costs except in the long-only LC space where it may offer marginal benefit over LCB or LCG. For the rest of us there is nothing wrong with, and a lot right right with, simple ultra low cost TSM which to me is as solid an investment as there is.

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Re: "Why Value Stocks Have Disappointed"

Postby slowmoney » Fri May 19, 2017 5:03 pm

Rekenthaler Report: “Why Value Stocks Have Disappointed” wrote:

The primary reason value investing has lost its mojo is not because stock buyers are behaving any differently, but because companies are.


It’s a common behavioral trait. It’s always someone else’s fault. Yeah, it’s the companies fault, if only they wouldn’t make money. So, it’s different this time for companies but it’s not different this time for stock investors? Really?

The facts are that stock buyers are behaving differently. From the beginning of time to 1975 the stock market was 0.0000% indexed. As in, not indexed at all. From 1975 to around 2000, the stock market was very nominally indexed. After the 2000 collapse, indexing rose. After 2008, it is somewhere around 20-30% indexed. (I see different amounts on the percentage indexed all the time.)

As the number of indexers grow, the dumb money (including slowmoney) is being removed from the stock market. The dumb money is NOT there to misprice value stocks or growth stocks. As the dumb money is removing itself, the rise of highly skilled CFAs, quants, insiders and professional money managers are pricing the stock market. I think, Vanguard calls it the “Paradox of skill”.

Additionally, the costs of investing are rapidly declining. As transaction costs decline, a clearer, more efficient, accurate price signal can be transmitted to the market, making the entire system more efficient.

There is an unbelievable efficiency war taking place with electronic trading. We are talking nano-second trading, where firms buy land to place their servers or communication equipment next to exchange centers to gain a nano-second arbitrage advantage. Again, extremely efficient stock market pricing.

Grantham is correct. The economy has changed. Corporate profits have changed. The economy has evolved and changed. Are we going back to the economy of the 1960s, 1970s?

There are many factors involved in deciding the price of something. The behavioral aspect is but one small part of that decision. Things like, income, cash flow, general economic conditions, laws, depreciation, etc., impact price as well. To state that behavior has an outsized impact on the price of something is more than a little presumptuous. Is it proven to a fact that value is behavioral? Or just a good story?

Despite the more efficient pricing of the stock market, it is not perfect and never will be. IMO, the value inefficiency will be significantly reduced and coupled with the mining of this inefficiency by factor players, it is a hopeless bet. Value investing is a magic formula that had its time and place. I am simply not going to bet on going back to Camelot.
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Re: "Why Value Stocks Have Disappointed"

Postby nedsaid » Fri May 19, 2017 5:07 pm

I am reminded of the Dilbert strip where the point haired boss said, "Employees are our most valuable asset, lay some off and the stock price goes up."

Yes, corporations have higher profit margins but this has been caused by the great squeeze: squeeze your suppliers, squeeze your customers, and squeeze your employees. Increased profits are a good thing but at some point suppliers and employees need to make a living and customers will move on if they are not treated well. Corporate America is "lean and mean" to the point of being anorexic, everything goes great until there is a problem. Problems are harder to solve because everyone who knew how to deal with them got laid off. Companies are lean to the point where they function when everything goes well but have trouble dealing with problems. Customer service for the most part is a thing of the past. Larry Swedroe commented that these higher margins were likely not sustainable.

Value actually had a great year in 2016. It appears that 2017 is reverting back to growth but we will have to see what happens longer term. I still remember the late 1990's when Value was declared passe and Warren Buffett a man whom time had passed by. Value will be back.
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Re: "Why Value Stocks Have Disappointed"

Postby lazyday » Fri May 19, 2017 5:33 pm

When Grantham says that times are difficult for a value investor, I don't think he's talking about bad times for value stocks. He seems to be talking about the entire stock market, and an investor who considers stocks too expensive.

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Re: "Why Value Stocks Have Disappointed"

Postby NiceUnparticularMan » Fri May 19, 2017 5:39 pm

Sometimes you win, sometimes you tie, isn't such a bad deal.

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Re: "Why Value Stocks Have Disappointed"

Postby Johnnie » Fri May 19, 2017 6:36 pm

slowmoney wrote:Rekenthaler Report: “Why Value Stocks Have Disappointed” wrote:

The primary reason value investing has lost its mojo is not because stock buyers are behaving any differently, but because companies are.


It’s a common behavioral trait. It’s always someone else’s fault. Yeah, it’s the companies fault, if only they wouldn’t make money. So, it’s different this time for companies but it’s not different this time for stock investors? Really?

The facts are that stock buyers are behaving differently. From the beginning of time to 1975 the stock market was 0.0000% indexed. As in, not indexed at all. From 1975 to around 2000, the stock market was very nominally indexed. After the 2000 collapse, indexing rose. After 2008, it is somewhere around 20-30% indexed. (I see different amounts on the percentage indexed all the time.)

As the number of indexers grow, the dumb money (including slowmoney) is being removed from the stock market. The dumb money is NOT there to misprice value stocks or growth stocks. As the dumb money is removing itself, the rise of highly skilled CFAs, quants, insiders and professional money managers are pricing the stock market. I think, Vanguard calls it the “Paradox of skill”.

Additionally, the costs of investing are rapidly declining. As transaction costs decline, a clearer, more efficient, accurate price signal can be transmitted to the market, making the entire system more efficient.

There is an unbelievable efficiency war taking place with electronic trading. We are talking nano-second trading, where firms buy land to place their servers or communication equipment next to exchange centers to gain a nano-second arbitrage advantage. Again, extremely efficient stock market pricing.

Grantham is correct. The economy has changed. Corporate profits have changed. The economy has evolved and changed. Are we going back to the economy of the 1960s, 1970s?

There are many factors involved in deciding the price of something. The behavioral aspect is but one small part of that decision. Things like, income, cash flow, general economic conditions, laws, depreciation, etc., impact price as well. To state that behavior has an outsized impact on the price of something is more than a little presumptuous. Is it proven to a fact that value is behavioral? Or just a good story?

Despite the more efficient pricing of the stock market, it is not perfect and never will be. IMO, the value inefficiency will be significantly reduced and coupled with the mining of this inefficiency by factor players, it is a hopeless bet. Value investing is a magic formula that had its time and place. I am simply not going to bet on going back to Camelot.


So if the value premium is dead wouldn't that mean value's laggardlyness when it is out of season is also dead? And doesn't what you say apply to all factors, not just value? In fact, aren't you saying the market has become so much more efficient that you might as well just buy TSM and save a few basis points on fees?

It sounds plausible, but also gives an ever so slight "it's different this time" hit. Is this where Larry Swedroe would express faith that behavioral influences will out in the end, meaning odds still favor these dogs will have their day?
Last edited by Johnnie on Fri May 19, 2017 6:44 pm, edited 1 time in total.
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Re: "Why Value Stocks Have Disappointed"

Postby Johnnie » Fri May 19, 2017 6:39 pm

Oh that evil "quote" button drawing my mouse away from "edit." Deleted dupe.
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Re: "Why Value Stocks Have Disappointed"

Postby pkcrafter » Fri May 19, 2017 6:52 pm

I didn't read the article, but the first thing that comes to mind is Mr. Bogle's telltale chart. Growth and value have taken turns outperforming, and then they revert to the mean. Growth has been the recent leader. I noticed a lot of investors have been favoring growth over the past one or two years, just in time to see it revert.

Telltale chart

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

Paul
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Re: "Why Value Stocks Have Disappointed"

Postby chinto » Fri May 19, 2017 7:32 pm

nedsaid wrote:I am reminded of the Dilbert strip where the point haired boss said, "Employees are our most valuable asset, lay some off and the stock price goes up."

Yes, corporations have higher profit margins but this has been caused by the great squeeze: squeeze your suppliers, squeeze your customers, and squeeze your employees. Increased profits are a good thing but at some point suppliers and employees need to make a living and customers will move on if they are not treated well. Corporate America is "lean and mean" to the point of being anorexic, everything goes great until there is a problem. Problems are harder to solve because everyone who knew how to deal with them got laid off. Companies are lean to the point where they function when everything goes well but have trouble dealing with problems. Customer service for the most part is a thing of the past. Larry Swedroe commented that these higher margins were likely not sustainable.

Value actually had a great year in 2016. It appears that 2017 is reverting back to growth but we will have to see what happens longer term. I still remember the late 1990's when Value was declared passe and Warren Buffett a man whom time had passed by. Value will be back.


What a terrific post. :)

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Re: "Why Value Stocks Have Disappointed"

Postby baw703916 » Fri May 19, 2017 8:05 pm

Couldn't this article more accurately be titled "Why actively-managed value investing has disappointed"?
Most of my posts assume no behavioral errors.

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Re: "Why Value Stocks Have Disappointed"

Postby willthrill81 » Fri May 19, 2017 11:19 pm

livesoft wrote:Small-cap value IJS gained about 45% from mid-Feb to mid-Dec last year. I was not disappointed.

At least with small-cap value one has to rebalance and cannot buy once and forget about it.


Considering that SCV has beaten the S&P 500 in every 20 year period except one, I actually don't mind just buying it and holding on (double entendre). :wink:
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Re: "Why Value Stocks Have Disappointed"

Postby in_reality » Sat May 20, 2017 2:01 am

Taylor Larimore wrote:Morningstar is featuring a thoughtful article by Vice-President of Research, John Rekenthaler:

Why Value Stocks Have Disappointed

Best wishes.
Taylor


So is it true US monopoly power has changed things as asserted?

"the general pattern … is entirely compatible with increased monopoly power for U.S. corporations. Put this way, if they had materially more monopoly power [than in the past], we would expect to see exactly what we do see."


This conclusion was drawn looking at US stocks only. I'm not convinced Apple has monopoly power over Samsung. I'd guess that the US is famous for being a safer economy and people pay a premium for that in the form of buying stocks at higher valuations-- call it insurance.

In any case, small value seems to have done OK in the past 10 years overseas for the funds I use (live data for Feb 2008 - Apr 2017 actually).

VGTSX Vanguard Total International Stock Index Fund 100%
7.82% CAGR
17.64% Std Dev

-------------
SFNNX Schwab Fundamental International Lg Company Idx Fd Insti Shs 75.00%
SFILX Schwab Fundamental International Small Company Index Fd 10.00%
SFENX Schwab Fundamental Emerging Markets Large Company Index Fd 15.00%
8.71% CAGR
19.16% Std Dev

-------------
SFILX Schwab Fundamental International Small Company Index Fd 100%
12.60% CAGR
17.01% Std Dev

------------
VTSAX Vanguard Total Stock Market Index Fd Admiral Shs 100.00%
15.10% CAGR
14.25% Std Dev

So obviously US Total Market did best in this time. However, if it's the case of US large cap monopoly power being the explanation, then what explains the relative good performance of International Small Value?

It's a good point to make though Taylor. There are many recent posts suggesting to hold only a US small value/emerging combo or something like that claiming it'll get you your full beta exposure plus other factor exposure. Too extreme for me personally, and this article points to potential changes in the market that would render backtesting less illustrative.
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Re: "Why Value Stocks Have Disappointed"

Postby triceratop » Sat May 20, 2017 5:50 am

pkcrafter wrote:I didn't read the article, but the first thing that comes to mind is Mr. Bogle's telltale chart. Growth and value have taken turns outperforming, and then they revert to the mean. Growth has been the recent leader. I noticed a lot of investors have been favoring growth over the past one or two years, just in time to see it revert.

Telltale chart

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

Paul


This theory has been debunked N times on this board; shall we make it N+1?

The reason is the telltale chart doesn't plot passive value vs passive growth, so as a measure of value performance it is meaningless.
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Re: "Why Value Stocks Have Disappointed"

Postby tennisplyr » Sat May 20, 2017 5:56 am

All things come to an end...both the bad and the good.
Those who move forward with a happy spirit will find that things always work out.

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Re: "Why Value Stocks Have Disappointed"

Postby harvestbook » Sat May 20, 2017 6:50 am

I read the full Grantham memo. It's refreshing and rare when some so-called guru admits they might be wrong. Most double down on whatever their identity is tied to.
https://www.gmo.com/docs/default-source ... letter.pdf

In truth, it IS different now since the 1990s: rise of indexing, shrinking of public companies in the US, big companies gobbling little companies, availability of cheap debt, globalization, tech companies dominating, even the "products" sold-- for example, Facebook's product is its voluntary audience. But is it "different different"? I don't know and don't really care. I'll just own a piece of everything and let the winners fall where they may over the next 30 years.

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Re: "Why Value Stocks Have Disappointed"

Postby Robert T » Sat May 20, 2017 6:57 am

.
Interest and inflation rates, and not a new story, if we believe Bernstein's earlier article - "Who Killed Value?" on the 15 years of value underperformance from mid 1980s. From the article - "So, value enthusiasts, rejoice, investing in cheap stocks has not gone the way of John Cleese’s parrot."
.

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Re: "Why Value Stocks Have Disappointed"

Postby pkcrafter » Sat May 20, 2017 8:46 am

triceratop wrote:
pkcrafter wrote:I didn't read the article, but the first thing that comes to mind is Mr. Bogle's telltale chart. Growth and value have taken turns outperforming, and then they revert to the mean. Growth has been the recent leader. I noticed a lot of investors have been favoring growth over the past one or two years, just in time to see it revert.

Telltale chart

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

Paul


This theory has been debunked N times on this board; shall we make it N+1?

The reason is the telltale chart doesn't plot passive value vs passive growth, so as a measure of value performance it is meaningless.


So, does this mean that long term investors should always prefer a tilt to growth, i.e. growth beats value? Ben Graham was wrong?


Paul
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Re: "Why Value Stocks Have Disappointed"

Postby sener212 » Sat May 20, 2017 10:01 am

Wish Mr. Swedroe was still around these parts to weigh in. This issue is right up his wheel house...

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Re: "Why Value Stocks Have Disappointed"

Postby triceratop » Sat May 20, 2017 1:38 pm

pkcrafter wrote:
triceratop wrote:
pkcrafter wrote:I didn't read the article, but the first thing that comes to mind is Mr. Bogle's telltale chart. Growth and value have taken turns outperforming, and then they revert to the mean. Growth has been the recent leader. I noticed a lot of investors have been favoring growth over the past one or two years, just in time to see it revert.

Telltale chart

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

Paul


This theory has been debunked N times on this board; shall we make it N+1?

The reason is the telltale chart doesn't plot passive value vs passive growth, so as a measure of value performance it is meaningless.


So, does this mean that long term investors should always prefer a tilt to growth, i.e. growth beats value? Ben Graham was wrong?


Paul


No, of course not. That is not what I said.

Here is one of many such discussions: viewtopic.php?t=96282#p1389626
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: "Why Value Stocks Have Disappointed"

Postby nedsaid » Sat May 20, 2017 2:05 pm

triceratop wrote:
pkcrafter wrote:I didn't read the article, but the first thing that comes to mind is Mr. Bogle's telltale chart. Growth and value have taken turns outperforming, and then they revert to the mean. Growth has been the recent leader. I noticed a lot of investors have been favoring growth over the past one or two years, just in time to see it revert.

Telltale chart

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

Paul


This theory has been debunked N times on this board; shall we make it N+1?

The reason is the telltale chart doesn't plot passive value vs passive growth, so as a measure of value performance it is meaningless.


I do think that the "Tell Tale Chart" speech has been debunked but Bogle makes a pretty powerful
"real life" argument. The type of investing that Academia recommends was really not actionable as the investment vehicles needed to efficiently factor invest did not exist until recent years. Indeed, if you wanted to just index your money, the index funds were not available until the mid 1970's. So comparisons back to 1926 don't really apply so much to today's environment. If you could have found a good value fund back in the 1950's, you likely would have paid a pretty big sales load to get in.
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Mr. Bogle's chart "debunked"?

Postby Taylor Larimore » Sat May 20, 2017 2:36 pm

triceratop wrote:
pkcrafter wrote:I didn't read the article, but the first thing that comes to mind is Mr. Bogle's telltale chart. Growth and value have taken turns outperforming, and then they revert to the mean. Growth has been the recent leader. I noticed a lot of investors have been favoring growth over the past one or two years, just in time to see it revert.

Telltale chart

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

Paul


This theory has been debunked N times on this board; shall we make it N+1?

Mr. Bogle's chart "debunked." I don't think so.

This is what Nobel Laureate, Eugene Fama said about "value" illustrated
in one of Mr. Bogle's charts:
'Whether you decide to tilt towards value depends on whether you are willing to bear the associated risk. The market portfolio is always efficient. For most people, the market portfolio is the most sensible decision."

The investment industry hates the market portfolio because it is difficult for them to make money from investors who use it.
Jack Bogle: "You get to keep exactly what you don't pay for."

Best wishes.
Taylor
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Re: "Why Value Stocks Have Disappointed"

Postby triceratop » Sat May 20, 2017 2:39 pm

Taylor,
Fama thinking most people should hold the market portfolio, as I have heard him say before, does not validate Mr. Bogle's chart; nor does the appeal to authority of a Nobel Laureate. The value premium could indeed be nonexistent in the future, but that also wouldn't make Mr. Bogle's chart correct in this context. The only thing thing that would make Mr. Bogle's chart germane to value vs. growth would be if it compared passive value performance (i.e. index) to passive growth. But it does not, so it is not.

The investment industry makes precious little money off of index value investing: Vanguard Small-Cap Value is either 0.08% or 0.20% in gross expense (run at-cost, too) depending on which fund you choose.
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Re: "Why Value Stocks Have Disappointed"

Postby patrick013 » Sat May 20, 2017 3:21 pm

My instinct tells me not to put a whole lot of weight on
factor studies and these "real return" philosophers. Show
me a 30 year study with normal econometrics and it will
show diseconomies of scale will favor smaller caps with
other growth characteristics being a good diversification
even with large cap sustainability and index replacement.
Putting up large permanent gains but concentrated at certain
times unfortunately for steady income needs.

It's very tempting to overallocate something after the gains
have occurred. It's amazing - buy small cap value they just had
a 20% gain. No, buy at a market correction and keep your tilt
and AA. Hold for several decades and the total return has been
over the market portfolio. Start reading real return and factor
studies ?
age in bonds, buy-and-hold, 10 year business cycle

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Re: "Why Value Stocks Have Disappointed"

Postby willthrill81 » Sat May 20, 2017 3:30 pm

patrick013 wrote:My instinct tells me not to put a whole lot of weight on
factor studies and these "real return" philosophers. Show
me a 30 year study with normal econometrics and it will
show diseconomies of scale will favor smaller caps with
other growth characteristics being a good diversification
even with large cap sustainability and index replacement.
Putting up large permanent gains but concentrated at certain
times unfortunately for steady income needs.

It's very tempting to overallocate something after the gains
have occurred. It's amazing - buy small cap value they just had
a 20% gain. No, buy at a market correction and keep your tilt
and AA. Hold for several decades and the total return has been
over the market portfolio. Start reading real return and factor
studies ?


+1

I really don't understand why econometrics are needed here at all. The most telling data I've seen regarding SCV, for instance, was provided by Paul Merriman; in every twenty year period (about 64), SCV has beaten LCB except one. What more do you really want?
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Re: "Why Value Stocks Have Disappointed"

Postby stlutz » Sat May 20, 2017 4:10 pm

Sometimes you win, sometimes you tie, isn't such a bad deal.


Yeah, to an extent this sentiment was in the back of my mind as I was reading the article. If I look at the VG since inception returns for their various indexes growth/value funds, value leads for all of them. However, it's by <1% per year in all cases. So, "disappointing" depends on your perspective. By tiling you've come out just a bit ahead. On the other hand, if you read a lot of value tilting threads on BH and believed that you would beat the market by 4 percentage points pear year on average, well yeah, you've been disappointed.

Bogle's telltalle chart


This theory has been debunked N times on this board; shall we make it N+1?

The reason is the telltale chart doesn't plot passive value vs passive growth, so as a measure of value performance it is meaningless.


???? The performance of AAPL isn't different for indexed mutual funds vs. active mutual funds.

The way these studies are done (e.g. https://papers.ssrn.com/sol3/papers.cfm ... _id=879291) is that they look at how the funds actually behave, not is what is in the name. If is acts like a value fund but it's called "Taylor's Super Duper Growth Fund", it's a value fund. Conversely, if it's called "Nedsaid's Deep Value Trust" but it acts like a growth fund, then it's a growth fund.

It's the same thing we do here all of the time when comparing various funds with "value" in the name. We look at regressions and ignore what's in the name.

Now, what the paper I linked to above shows is that value and growth funds have had pretty much the same average arithmetic returns over time. However, the paper understates the fact that value does have higher geometric/compound returns. That means that value has outperformed because it had exhibited less realized volatility than growth over time.

A better argument against Bogle's chart is that he doesn't detail what the mean is. He kind of assumes that the mean is zero--that value and growth always net out. However, the mean could be +1 for value. So, if value wins by 5% 3 years in a row, then growth wins by 3% the next 3 years, it would appear that you've regressed to a mean of +1%.

Note that I'm not saying that the mean is, simply that it can be different from zero. Bogle can be right about RTM and Fama can be right about a value premium. (My own position is that the mean is unknown ahead of time so RTM only a helpful concept in hindsight and thus not particularly actionable).

Going back to the article linked in the OP, we need more analysis like this. Any long-term performance trend can simply be due to the fact that the economic events unfolded in a way that could not have been expected ahead of time. We have a lot of debates as to whether outperformance indicates something intrinsic to how markets work or if it is due to some type of market error. In real life, however, the performance I get will be dominated by things that happen that I could not have an any way foreseen.

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Re: "Why Value Stocks Have Disappointed"

Postby triceratop » Sat May 20, 2017 4:34 pm

stlutz wrote:
Bogle's telltalle chart


This theory has been debunked N times on this board; shall we make it N+1?

The reason is the telltale chart doesn't plot passive value vs passive growth, so as a measure of value performance it is meaningless.


???? The performance of AAPL isn't different for indexed mutual funds vs. active mutual funds.

The way these studies are done (e.g. https://papers.ssrn.com/sol3/papers.cfm ... _id=879291) is that they look at how the funds actually behave, not is what is in the name. If is acts like a value fund but it's called "Taylor's Super Duper Growth Fund", it's a value fund. Conversely, if it's called "Nedsaid's Deep Value Trust" but it acts like a growth fund, then it's a growth fund.

It's the same thing we do here all of the time when comparing various funds with "value" in the name. We look at regressions and ignore what's in the name.

Now, what the paper I linked to above shows is that value and growth funds have had pretty much the same average arithmetic returns over time. However, the paper understates the fact that value does have higher geometric/compound returns. That means that value has outperformed because it had exhibited less realized volatility than growth over time.


That paper may be informative to the discussion (I cannot view any of the Tables in that paper). At first glance it seems the methodology is along the right idea: use portfolio correlations. But it isn't what Bogle did, so it seems odd to defend his argument methodology with it.

The performance of AAPL isn't different for indexed vs. active. But if a self-declared value fund chooses a growth stock and the study methodology doesn't account for that, don't you think that is concerning? This is what larry has referred to as style drift. I see no evidence that Bogle did a factor regression on these funds.

But my point wasn't to defend the idea of the value premia: it was to say that the telltale chart that Mr. Bogle used is not convincing. That's a critique of methodology not to make any particular claim of truth.

But I digress, because as expected this has been definitively covered....

Someone will refer to John Bogle's telltale chart, which shows that value/growth funds have always reverted to the mean since the time of Christ.

Someone will then say Bogle is an idiot. Value managers actually invest in growth stocks. That's why the risky stop at the free dessert tray exists--active managers won't touch real value stocks. Hence, value stocks outperform.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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Re: "Why Value Stocks Have Disappointed"

Postby nedsaid » Sat May 20, 2017 5:08 pm

stlutz wrote:The way these studies are done (e.g. https://papers.ssrn.com/sol3/papers.cfm ... _id=879291) is that they look at how the funds actually behave, not is what is in the name. If is acts like a value fund but it's called "Taylor's Super Duper Growth Fund", it's a value fund. Conversely, if it's called "Nedsaid's Deep Value Trust" but it acts like a growth fund, then it's a growth fund.


Just for fun, I thought I would look at the 17 individual stocks with one of my retirement accounts.
The Morningstar Style Box for my stock portfolio is as follows:

49 31 15
00 00 00
05 00 00

So yes, I am a value investor but not deep value.

P/E Ratio 17.75 (90% of S&P 500)
Price/Book 2.42 (88% of S&P 500)
Dividend Yield 2.70% (150% of S&P 500)

You can see I like those dividends. Yield on Vanguard Total Bond Index ETF is 2.43%.

So you can see that the "Nedsaid Deep Value Trust" is not really deep value but it ain't growth either. :wink:
A fool and his money are good for business.

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Re: "Why Value Stocks Have Disappointed"

Postby NiceUnparticularMan » Sat May 20, 2017 9:12 pm

nedsaid wrote:I do think that the "Tell Tale Chart" speech has been debunked but Bogle makes a pretty powerful
"real life" argument. The type of investing that Academia recommends was really not actionable as the investment vehicles needed to efficiently factor invest did not exist until recent years. Indeed, if you wanted to just index your money, the index funds were not available until the mid 1970's. So comparisons back to 1926 don't really apply so much to today's environment. If you could have found a good value fund back in the 1950's, you likely would have paid a pretty big sales load to get in.


I believe the oldest small value INDEX fund is DFA's DFSVX. It has in fact out-performed VTSMX since its inception in 1993.

This is is not a conclusive argument, but a profitable SV option has been available at least that long now.

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Re: "Why Value Stocks Have Disappointed"

Postby NiceUnparticularMan » Sat May 20, 2017 9:26 pm

stlutz wrote: On the other hand, if you read a lot of value tilting threads on BH and believed that you would beat the market by 4 percentage points pear year on average, well yeah, you've been disappointed.


Yeah, you can tilt with VBR at 0.07 ER versus 0.04 ER for VTI. So that is rather low stakes and a pretty easy bar to get over. It gets a little trickier when the cost of tilting gets significantly higher.

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Re: "Why Value Stocks Have Disappointed"

Postby nedsaid » Sat May 20, 2017 11:19 pm

NiceUnparticularMan wrote:
nedsaid wrote:I do think that the "Tell Tale Chart" speech has been debunked but Bogle makes a pretty powerful
"real life" argument. The type of investing that Academia recommends was really not actionable as the investment vehicles needed to efficiently factor invest did not exist until recent years. Indeed, if you wanted to just index your money, the index funds were not available until the mid 1970's. So comparisons back to 1926 don't really apply so much to today's environment. If you could have found a good value fund back in the 1950's, you likely would have paid a pretty big sales load to get in.


I believe the oldest small value INDEX fund is DFA's DFSVX. It has in fact out-performed VTSMX since its inception in 1993.

This is is not a conclusive argument, but a profitable SV option has been available at least that long now.


I think Mr. Bogle would say that 1993 is a long ways from 1926! :D
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Re: "Why Value Stocks Have Disappointed"

Postby NiceUnparticularMan » Sun May 21, 2017 6:53 am

nedsaid wrote:I think Mr. Bogle would say that 1993 is a long ways from 1926! :D


Sure.

On the other hand, that was when Fama-French published. One might have been concerned whatever might have been true before then would no longer be true after. Fortunately for SV investors, that turned out not to be the case.

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Re: "Why Value Stocks Have Disappointed"

Postby Ketawa » Sun May 21, 2017 8:32 am

NiceUnparticularMan wrote:
nedsaid wrote:I do think that the "Tell Tale Chart" speech has been debunked but Bogle makes a pretty powerful
"real life" argument. The type of investing that Academia recommends was really not actionable as the investment vehicles needed to efficiently factor invest did not exist until recent years. Indeed, if you wanted to just index your money, the index funds were not available until the mid 1970's. So comparisons back to 1926 don't really apply so much to today's environment. If you could have found a good value fund back in the 1950's, you likely would have paid a pretty big sales load to get in.


I believe the oldest small value INDEX fund is DFA's DFSVX. It has in fact out-performed VTSMX since its inception in 1993.

This is is not a conclusive argument, but a profitable SV option has been available at least that long now.


DFSVX is not an index fund, but it is passively managed.

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Re: "Why Value Stocks Have Disappointed"

Postby NiceUnparticularMan » Sun May 21, 2017 10:54 am

Ketawa wrote:
NiceUnparticularMan wrote:
nedsaid wrote:I do think that the "Tell Tale Chart" speech has been debunked but Bogle makes a pretty powerful
"real life" argument. The type of investing that Academia recommends was really not actionable as the investment vehicles needed to efficiently factor invest did not exist until recent years. Indeed, if you wanted to just index your money, the index funds were not available until the mid 1970's. So comparisons back to 1926 don't really apply so much to today's environment. If you could have found a good value fund back in the 1950's, you likely would have paid a pretty big sales load to get in.


I believe the oldest small value INDEX fund is DFA's DFSVX. It has in fact out-performed VTSMX since its inception in 1993.

This is is not a conclusive argument, but a profitable SV option has been available at least that long now.


DFSVX is not an index fund, but it is passively managed.


Good correction, thank you.

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Re: "Why Value Stocks Have Disappointed"

Postby selftalk » Sun May 21, 2017 11:47 am

Read Bogel`s book Common Sense on Mutual Funds pages 231-232. The guru`s (experts) are trying to market time value stocks and found out what we already here know and what John Bogle has told us : " I don`t know anyone who can time the market consistently and in fact I don`t know anyone who knows anyone who can consistently time the market." Can`t these guru`s read and learn ?

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Re: "Why Value Stocks Have Disappointed"

Postby michaelsieg » Sun May 21, 2017 5:01 pm

"So, value enthusiasts, rejoice, investing in cheap stocks has not gone the way of John Cleese’s parrot."


Thanks for posting Robert, I liked the 2001 quote of Bill Bernstein in the linked article "Of Mines, Farms, Forests, and Impatience":
A much more reasonable supposition is that the Nasdaq 100 sits at the far left end of the blue curve with earnings growth in the teens, yielding long-term bond-like returns accompanied by Ivana Trump-like volatility.

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Re: "Why Value Stocks Have Disappointed"

Postby rkhusky » Mon May 22, 2017 11:32 am

Ketawa wrote:DFSVX is not an index fund, but it is passively managed.

Is there any information available on how often or how many times that DFA has changed stock selection criteria for DFSVX since its inception?

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Re: "Why Value Stocks Have Disappointed"

Postby nedsaid » Mon May 22, 2017 11:34 am

rkhusky wrote:
Ketawa wrote:DFSVX is not an index fund, but it is passively managed.

Is there any information available on how often or how many times that DFA has changed stock selection criteria for DFSVX since its inception?


My understanding is that DFA made a change a few years back, they used to screen only for value but screen for Momentum to get their fund at least to neutral. Value is normally associated with negative momentum.
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Re: "Why Value Stocks Have Disappointed"

Postby Phineas J. Whoopee » Mon May 22, 2017 3:04 pm

Nobody claims Value Stocks are better than Growth Stocks. They're just different, not better.
Everybody knows Value Stocks are better.
It is intuitively obvious that Value Stocks are better.
Even to write such an article, you must be a Growth Stock.
No true Value Stock would fail to deliver a premium.

PJW

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Re: "Why Value Stocks Have Disappointed"

Postby lazyday » Sat Jul 01, 2017 5:27 am

Grantham clarifies his position which was discussed in the OP article:

https://www.gmo.com/docs/default-source ... slowly.pdf

I have suggested that although mean reversion in margins and price earnings ratios is still
probable, the speed of regression has slowed way down and become sticky. This slowdown is
because nearly all of the factors causing it are themselves unlikely to change fast. These include
Fed policy including moral hazard, lower interest rates, an aging population, slower growth, and
productivity; and increased political and monopoly power for corporations.

Because of this stickiness, I have suggested that regression of P/Es and profit share will take 20 years
as opposed to the 7 years (the basis of GMO’s official 7-year forecast) that is more typical of the
period 1900-1997 and that even then those measures will have only regressed back two-thirds of
the way to the old normals.

.... we should be braced for a long-drawn-out and painful flight path back toward the old ratios we know
so well. As a value manager, I wish it were not so.

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Re: "Why Value Stocks Have Disappointed"

Postby selters » Sat Jul 01, 2017 5:48 am

garlandwhizzer wrote: Correct me if I"m wrong on this, but I believe as much as 40% of new money going into etfs at this point are taking factor based approaches which is likely to dilute the robust factor gains we see on long term backtesting.
Garland Whizzer


If I were to take a wild guess, I would guess a lot lower, something like 2-3%, especially if you leave out simple value and growth funds. But I don't think it would matter much even if you included them.

http://www.etf.com/sections/monthly-etf ... s-may-2017

Based on the numbers above, all of the top gainers are market cap weighted.

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Re: "Why Value Stocks Have Disappointed"

Postby Lieutenant.Columbo » Sat Jul 01, 2017 6:30 am

Phineas J. Whoopee wrote:Nobody claims Value Stocks are better than Growth Stocks. They're just different, not better.
Everybody knows Value Stocks are better.
It is intuitively obvious that Value Stocks are better.
Even to write such an article, you must be a Growth Stock.
No true Value Stock would fail to deliver a premium.
PJW,
I can't tell if you sprinkled irony on the whole post or if just on the last two sentences. I like it, though.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!


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