Review with Me - Larry Swedroe's new book

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nedsaid
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Review with Me - Larry Swedroe's new book

Post by nedsaid » Sat Aug 26, 2017 12:17 pm

True to my word, I went to Amazon.com and bought Your Complete Guide to Factor-Based Investing by Andrew L. Berkin and Larry E. Swedroe. It arrived yesterday, and I started on it last night. So far, so good. I have been skipping around through the book.

Please join me in reviewing the book. It will take me a while to get through the whole thing.
A fool and his money are good for business.

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Re: Review with Me Larry Swedroe's new book

Post by oldcomputerguy » Sat Aug 26, 2017 12:43 pm

nedsaid wrote:
Sat Aug 26, 2017 12:17 pm
True to my word, I went to Amazon.com and bought Your Complete Guide to Factor-Based Investing by Andrew L. Berkin and Larry E. Swedroe. It arrived yesterday, and I started on it last night. So far, so good. I have been skipping around through the book.

Please join me in reviewing the book. It will take me a while to get through the whole thing.
And don't forget to use the link to Amazon at the top of the page here, so that Bogleheads gets the referral credit from Amazon.
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Re: Review with Me Larry Swedroe's new book

Post by MotoTrojan » Sat Aug 26, 2017 1:50 pm

I'd have to dig mine out to find a specific example, but I know I found some of the factor premiums confusing/contradictory as to what the % was in relation to.

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Re: Review with Me Larry Swedroe's new book

Post by triceratop » Sat Aug 26, 2017 2:10 pm

I own Larry Swedroe's book. I enjoyed reading it and I believe there is a lot of, excuse me, value, in it. I also met his coauthor and discussed some of the topics involved.

The one critique, and it's admittedly quite mild, is I wish that he could do more to discuss "live" portfolios. That is, showing the diversification across size, value, over time in a portfolio using real funds. Long/short factor premia are one thing, but it would be more convincing to use real funds which have fund costs, transaction costs, rebalancing issues, etc.. It would also help show how and to what extent it is worth paying more for factor funds in hopes of obtaining better factor exposure; that is talked about quite a bit on the forum, and he used to discuss it as well, but never with much specificity.
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Two books to review

Post by Taylor Larimore » Sat Aug 26, 2017 2:24 pm

nedsaid wrote:
Sat Aug 26, 2017 12:17 pm
True to my word, I went to Amazon.com and bought Your Complete Guide to Factor-Based Investing by Andrew L. Berkin and Larry E. Swedroe. It arrived yesterday, and I started on it last night. So far, so good. I have been skipping around through the book.

Please join me in reviewing the book. It will take me a while to get through the whole thing.
Nedsaid:

Amazon has announced that we can pre-order Mr. Bogle's updated edition of The Little Book of Common Sense Investing.

Bogleheads will find it instructive to compare Berkin and Swedroe's higher cost and more complex method of investing with Jack Bogle's lower cost and simple method of investing.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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nedsaid
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Re: Review with Me Larry Swedroe's new book

Post by nedsaid » Sat Aug 26, 2017 2:43 pm

triceratop wrote:
Sat Aug 26, 2017 2:10 pm
I own Larry Swedroe's book. I enjoyed reading it and I believe there is a lot of, excuse me, value, in it. I also met his coauthor and discussed some of the topics involved.

The one critique, and it's admittedly quite mild, is I wish that he could do more to discuss "live" portfolios. That is, showing the diversification across size, value, over time in a portfolio using real funds. Long/short factor premia are one thing, but it would be more convincing to use real funds which have fund costs, transaction costs, rebalancing issues, etc.. It would also help show how and to what extent it is worth paying more for factor funds in hopes of obtaining better factor exposure; that is talked about quite a bit on the forum, and he used to discuss it as well, but never with much specificity.
I flipped through the book. I saw recommended funds and ETFs for the different factors we would want to invest in but I was disappointed not to see model portfolios. At least I have not seen them yet. It's like okay Larry, you got me really excited, I am ready to take massive active, but dude, where is the model portfolio?

In fairness, Larry his published his equity portfolio in other places and I will at some point run it through portfolio visualizer and perform an analysis.

So far, the book looks really good. Glad that I purchased it, it is well worth the money.
A fool and his money are good for business.

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Re: Review with Me Larry Swedroe's new book

Post by patrick013 » Sat Aug 26, 2017 2:53 pm

I'm already behind a book or two I want to read. Mid cap or
small cap I'm going to use the full index. Rumor, I mean
research, has it that the growth stocks in the full index perform
better early in the business cycle. And the value stocks are
observed performing well later in the business cycle. Growth
would start a new bull market and value keep it going but later.

Don't know if the book highlights that.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Review with Me - Larry Swedroe's new book

Post by Random Walker » Sat Aug 26, 2017 4:57 pm

Hi nedsaid,
I've misplaced my copy of the book, but remember it pretty well. The rubber meets the road I think in two charts near the end, Chapter 9 I think. It gets a bit confusing. Larry talks about being prepared for each factor displaying long periods of underperformance. I was wondering "underperformance compared to what?". I think I remember him explaining that it is underperformance of each factor relative to its own historical return. Really take note of the 1/n portfolios. Everyone on this board seems to think of Factor investing as an effort to beat the market. Really it's about building more efficient portfolios by diversifying across factors, and thus maximizing likelihood of meeting one's goals. While any one factor can do poorly for a long time, a portfolio diversified across factors looks very robust. Larry chooses the 1/n example I think to remove any bias from his inputs and for simplicity. But it is a step towards something that I believe he is really a fan of, risk parity portfolios. I'm going to go give a hard look for my copy of the book. :-)

Dave

Edit! I've been corrected on the meaning of "underperformance". It simply means the given factor premium is negative
Last edited by Random Walker on Sun Aug 27, 2017 11:55 am, edited 1 time in total.

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Re: Review with Me - Larry Swedroe's new book

Post by nedsaid » Sat Aug 26, 2017 5:35 pm

Random Walker wrote:
Sat Aug 26, 2017 4:57 pm
Hi nedsaid,
I've misplaced my copy of the book, but remember it pretty well. The rubber meets the road I think in two charts near the end, Chapter 9 I think. It gets a bit confusing. Larry talks about being prepared for each factor displaying long periods of underperformance. I was wondering "underperformance compared to what?". I think I remember him explaining that it is underperformance of each factor relative to its own historical return. Really take note of the 1/n portfolios. Everyone on this board seems to think of Factor investing as an effort to beat the market. Really it's about building more efficient portfolios by diversifying across factors, and thus maximizing likelihood of meeting one's goals. While any one factor can do poorly for a long time, a portfolio diversified across factors looks very robust. Larry chooses the 1/n example I think to remove any bias from his inputs and for simplicity. But it is a step towards something that I believe he is really a fan of, risk parity portfolios. I'm going to go give a hard look for my copy of the book. :-)

Dave
I suppose he means underperformance against a market benchmark like the S&P 500 or US Total Stock Market Index.
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Re: Review with Me - Larry Swedroe's new book

Post by Random Walker » Sat Aug 26, 2017 6:00 pm

No, I'm pretty sure he does not mean relative to some index. Underperformance relative to its own historical return I believe.

Dave

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Re: Review with Me - Larry Swedroe's new book

Post by Theoretical » Sat Aug 26, 2017 6:06 pm

Nedsaid, he does talk about what you're describing, but he uses "tracking error" and "tracking regret," while using underperformance to describe relative to its historical returns.

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Re: Two books to review

Post by VictoriaF » Sat Aug 26, 2017 6:16 pm

Taylor Larimore wrote:
Sat Aug 26, 2017 2:24 pm
nedsaid wrote:
Sat Aug 26, 2017 12:17 pm
True to my word, I went to Amazon.com and bought Your Complete Guide to Factor-Based Investing by Andrew L. Berkin and Larry E. Swedroe. It arrived yesterday, and I started on it last night. So far, so good. I have been skipping around through the book.

Please join me in reviewing the book. It will take me a while to get through the whole thing.
Nedsaid:

Amazon has announced that we can pre-order Mr. Bogle's updated edition of The Little Book of Common Sense Investing.

Bogleheads will find it instructive to compare Berkin and Swedroe's higher cost and more complex method of investing with Jack Bogle's lower cost and simple method of investing.

Best wishes.
Taylor
Hi Taylor,

Thank you for your comment. I find Jack's simple approach to investing, as well as your three-fund portfolio, preferable to complex expensive schemes presented by Swedroe in this Forum. I am not interested in Swedroe's book but will check out Jack's.

Victoria
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Re: Review with Me - Larry Swedroe's new book

Post by knpstr » Sat Aug 26, 2017 6:25 pm

Even bogleheads can't resist the urge to "don't do something, just stand there!"
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Re: Review with Me - Larry Swedroe's new book

Post by CantPassAgain » Sat Aug 26, 2017 6:45 pm

knpstr wrote:
Sat Aug 26, 2017 6:25 pm
Even bogleheads can't resist the urge to "don't do something, just stand there!"
Hey, more power to them. They are contributing to price discovery! Meanwhile I will continue to be a no good rotten dirty freeloading indexer :twisted:

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Re: Review with Me - Larry Swedroe's new book

Post by vesalius » Sat Aug 26, 2017 9:38 pm

I utilize one of Mr Swedroe's suggested portfolios and I am at a loss how that three fund portfolio is any more complex or hard to manage than the ubiquitous 3 fund boglehead portfolio as that is where I started. It is more expensive, but historically and so far in my own experience it is also more stable with similar returns. Many roads to Dublin and all that jazz.

Now in regards to the book I enjoyed it and always like the chance to broaden my horizons. I have not bought into all the suggested alternatives and if they hold real value they will prove so through the years.

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Re: Two books to review

Post by pkcrafter » Sat Aug 26, 2017 10:21 pm

Taylor Larimore wrote:
Sat Aug 26, 2017 2:24 pm
nedsaid wrote:
Sat Aug 26, 2017 12:17 pm
True to my word, I went to Amazon.com and bought Your Complete Guide to Factor-Based Investing by Andrew L. Berkin and Larry E. Swedroe. It arrived yesterday, and I started on it last night. So far, so good. I have been skipping around through the book.

Please join me in reviewing the book. It will take me a while to get through the whole thing.
Nedsaid:

Amazon has announced that we can pre-order Mr. Bogle's updated edition of The Little Book of Common Sense Investing.

Bogleheads will find it instructive to compare Berkin and Swedroe's higher cost and more complex method of investing with Jack Bogle's lower cost and simple method of investing.

Best wishes.
Taylor
Hmm, is there a message in here somewhere? :idea:


Paul
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Re: Review with Me - Larry Swedroe's new book

Post by nedsaid » Sat Aug 26, 2017 11:54 pm

I got a personal message where somebody asked me a great question. I spent so much time on the answer that I decided to post this separately.
In plain English how is factor investing different from large growth, large value, small growth, small value etc.?
Well, there is a difference between the nine categories in Morningstar stylebox and the factors.

Size and Value are factors. Pretty much Morningstar rates stocks as Value, Core, and Growth in terms of valuation characteristics and rates stocks by small, mid, and large in terms of market capitalization. So really the Morningstar stylebox is a good visual representation of two of the factors. The thing is, there are more factors than just Size and Value. We can't create boxes for the other factors but we know in which boxes where those other factors are likely to show up.

The major factors are market, size, value, profitability/quality, momentum, and possibly low volatility. Haven't read too far in the book but Cliff Asness clearly believes in low volatility and Larry Swedroe and his co-author seem more agnostic on that issue.

Factors relate to stock characteristics that tend to outperform the market itself over long periods of time. According to the academics, Small outperforms large and Value outperforms Growth over long periods of time. It seems that Value has the smallest premium in the Large-Cap space and a larger premium in the Mid-Cap and Small-Cap space.

One reason the Morningstar stylebox is helpful is that you can visualize the sectors where different factors are likely to appear. For example, Value is associated with negative momentum, so you won't find momentum in the three Value boxes in the stylebox. You will find momentum in the Growth areas of the stylebox. I looked up the iShares Momentum Factor ETF (MTUM) and it shows up mostly in Large Growth. Momentum exists in Mid-Cap and Small-Cap but it is more difficult to capture momentum with smaller stocks because of lower trading volumes and it is more difficult and expensive to short. iShares also has a Quality ETF with the ticker symbol QUAL and it is right on the border of Large Core and Large Growth. Low Volatility funds that I looked at show up in the Large Core and Large Value areas of the market.

Okay, I can hear what you are thinking. This seems contradictory doesn't it? We are told that the sweet spot for factor tilters is Small Value. And yet stuff like Momentum and Quality tend to show up in that Large Cap Growth space. Hmmm. We know that Momentum outperforms and that Value outperforms but the contradiction is that Value is associated with negative momentum. Pulling your hair out yet? Also, isn't Quality the antithesis of Value? Pretty much Quality is consistently growing earnings and strong balance sheets while Value has more volatile earnings and weaker balance sheets. Are you really confused now? There seem to be paradoxes with factors.

Well, we hear that Small Growth is the "black hole" of investing. Larry talks about the lottery stocks which seemingly congregate there. Lottery stocks are iffy companies that mostly bomb out but which hit it big every once in a while. But yet when you compare Vanguard Small Value Index with Vanguard Small Growth Index, the performance is very similar. The answer is two fold, first Vanguard doesn't load for factors very well and the indexes screen out those bad lottery stocks. In fact, I talk about the "anti-factors" which pretty much are the lottery stocks and the value traps.

Okay, one last step in my explanation. Dimensional Fund Advisors found that if they set momentum in their Value funds from negative to neutral, that performance improved. DFA found that if they did this that they screened out the value traps. Value traps are companies that pass the value screens but that just never recover and sometimes go out of business altogether. They are in the bargain bin for a very good reason, their problems are just too big to overcome.

Okay, one more thing. DFA then took the screen one step further and screened for Value, set momentum to neutral, and further screened for Quality. These funds show up more in the Core styleboxes as of course Quality tends to reside more in the growth area.

So this might be the best post of factors ever or perhaps has confused you even more. Hopefully, this will answer your question. Hopefully combining the factor concept with the Morningstar styleboxes will help you to visualize this.
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Re: Review with Me - Larry Swedroe's new book

Post by nedsaid » Sun Aug 27, 2017 12:19 am

My thinking has gone beyond just factors, I am also thinking about the "anti-factors." I know, I know, I have watched too much Star Trek. Matter, anti-matter, dilithium crystals, warp drive and all of that.

The thing is, if factors are the positive stock characteristics that will outperform the market over time, then logically you would ask the question about the existence of anti-factors. Well, anti-factors would involve those stock characteristics you want to avoid. I have identified two: lottery stocks on the growth side of things and value traps on the value side.

The well constructed indexes like the S&P Indexes have quality measurements built right into their screens. A big one is that a company actually has to have earnings. My thesis is that one reason indexing works so well is that good index construction screens out for the most part the anti-factors. The really, really crummy companies just don't show up in the indexes. Also the indexes in my view have a slight quality tilt as over time, the most successful companies tend to have the largest market caps.

I really ought to get anti-factors trademarked, but probably somebody (like Larry) will steal the idea. If Larry ever writes a book on anti-factors, then I want my cut! I also wonder if I planted in his mind the concept that setting momentum to neutral in value funds avoids the value traps. I even noticed in an article that Larry published that he used the famous Nedsaid quotation marks when he mentioned "value traps." Darn it, I should have trademarked that too. But then again, I am just an avatar on an internet forum. I might not be a real human being but a very clever algorithm attached to a bot.

I am joking of course. Larry and his co-author and a team of people put in a huge amount of effort to write his book and we all get the benefit of their work. I am pretty much like one of the two old guys heckling the Muppet show.
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Re: Review with Me - Larry Swedroe's new book

Post by nedsaid » Sun Aug 27, 2017 12:25 am

Theoretical wrote:
Sat Aug 26, 2017 6:06 pm
Nedsaid, he does talk about what you're describing, but he uses "tracking error" and "tracking regret," while using underperformance to describe relative to its historical returns.
Frank Sinatra said:

Regrets, I've had a few;
But then again, too few to mention.
I did what I had to do
And saw it through without exemption.
Unlike Frank, I have a lot of regrets and a lot of regrets regarding investing.
A fool and his money are good for business.

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Re: Did you click on this thread accidentally?

Post by saltycaper » Sun Aug 27, 2017 12:34 am

Taylor Larimore wrote:
Sat Aug 26, 2017 2:24 pm

Nedsaid:

Amazon has announced that we can pre-order Mr. Bogle's updated edition of The Little Book of Common Sense Investing.

Bogleheads will find it instructive to compare Berkin and Swedroe's higher cost and more complex method of investing with Jack Bogle's lower cost and simple method of investing.

Best wishes.
Taylor
pkcrafter wrote:
Sat Aug 26, 2017 10:21 pm

Hmm, is there a message in here somewhere? :idea:

Paul
VictoriaF wrote:
Sat Aug 26, 2017 6:16 pm

Hi Taylor,

Thank you for your comment. I find Jack's simple approach to investing, as well as your three-fund portfolio, preferable to complex expensive schemes presented by Swedroe in this Forum. I am not interested in Swedroe's book but will check out Jack's.

Victoria
knpstr wrote:
Sat Aug 26, 2017 6:25 pm
Even bogleheads can't resist the urge to "don't do something, just stand there!"
CantPassAgain wrote:
Sat Aug 26, 2017 6:45 pm

Hey, more power to them. They are contributing to price discovery! Meanwhile I will continue to be a no good rotten dirty freeloading indexer :twisted:
Have any of you actually read the book that is supposed to be the subject of this thread? If so, what did you think of it? If not, why are you commenting in this thread?
"I guess I should warn you, if I turn out to be particularly clear, you've probably misunderstood what I've said." --Alan Greenspan

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Re: Review with Me - Larry Swedroe's new book

Post by randomizer » Sun Aug 27, 2017 12:44 am

I read it and enjoyed it and continued happily along holding my untilted three-fund-ish portfolio.

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Re: Review with Me - Larry Swedroe's new book

Post by chinto » Sun Aug 27, 2017 2:39 am

I guess what stops me cold is the title of another books of his:

The Only Guide to a Winning Investment Strategy You'll Ever Need

Just sayin'.

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Re: Review with Me - Larry Swedroe's new book

Post by selters » Sun Aug 27, 2017 5:21 am

What exactly are long/short portfolios? Portfolios where you buy stocks that you expect to increase in value and short sell stocks that expect to decrease in value? If that's what this book is talking about, how can long only investors (like most Bogleheads) implement the information in the book?

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Re: Two books to review

Post by Jiu Jitsu Fighter » Sun Aug 27, 2017 6:05 am

Taylor Larimore wrote:
Sat Aug 26, 2017 2:24 pm
nedsaid wrote:
Sat Aug 26, 2017 12:17 pm
True to my word, I went to Amazon.com and bought Your Complete Guide to Factor-Based Investing by Andrew L. Berkin and Larry E. Swedroe. It arrived yesterday, and I started on it last night. So far, so good. I have been skipping around through the book.

Please join me in reviewing the book. It will take me a while to get through the whole thing.
Nedsaid:

Amazon has announced that we can pre-order Mr. Bogle's updated edition of The Little Book of Common Sense Investing.

Bogleheads will find it instructive to compare Berkin and Swedroe's higher cost and more complex method of investing with Jack Bogle's lower cost and simple method of investing.

Best wishes.
Taylor
I've read several of Jack's books (Common Sense on Mutual Funds is my favorite) and I believe all of Larry's books. All I can say is that I've learned more from Larry than Jack. Jack takes a fundamentalist orthodox approach where he won't dare veer from an S&P500 fund or a Total US Market Fund and age in bonds with a preference for intermediate-term bond fund over total market fund with cost being really the only thing that matters after that. He does not believe in any form of EMH. On the other hand, Larry will change his views as research comes in. You can build a fairly simple portfolio weighting certain factors that costs not much more than the three factor portfolio touted by this forum as the best portfolio anyone can have. For some reason, many subscribe to expense ratios as being the only determinate in cost when building a portfolio. However, it can certainly be beneficial for paying slightly more through an expense ratio to get certain factor exposure that may screen for negative momentum and engage in securities lending while lowering the beta of the portfolio to diversify risks and dampen the impact on fat tail risk.

I highly recommend Your Complete Guide to Factor Based Investing. However, my favorite investment book is Antti Illamen's Expected Returns.

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Re: Review with Me - Larry Swedroe's new book

Post by digarei » Sun Aug 27, 2017 6:35 am

saltycaper wrote:Have any of you actually read the book that is supposed to be the subject of this thread? If so, what did you think of it? If not, why are you commenting in this thread?
Having read a few of these interlopers' 55,000 previous posts I can attest to an exchange of ideas between them and the estimable Larry Swedroe in years past. Does one need to respond at length to each new work or utterance of Mr. Swedroe as qualification to comment upon its latest iteration?
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Re: Two books to review

Post by staythecourse » Sun Aug 27, 2017 8:25 am

pkcrafter wrote:
Sat Aug 26, 2017 10:21 pm
Taylor Larimore wrote:
Sat Aug 26, 2017 2:24 pm
nedsaid wrote:
Sat Aug 26, 2017 12:17 pm
True to my word, I went to Amazon.com and bought Your Complete Guide to Factor-Based Investing by Andrew L. Berkin and Larry E. Swedroe. It arrived yesterday, and I started on it last night. So far, so good. I have been skipping around through the book.

Please join me in reviewing the book. It will take me a while to get through the whole thing.
Nedsaid:

Amazon has announced that we can pre-order Mr. Bogle's updated edition of The Little Book of Common Sense Investing.

Bogleheads will find it instructive to compare Berkin and Swedroe's higher cost and more complex method of investing with Jack Bogle's lower cost and simple method of investing.

Best wishes.
Taylor
Hmm, is there a message in here somewhere? :idea:


Paul
A message? Yes I see one as plain as day. That is it is okay to hijack someone else's thread. That is not correct. Nedsaid started a discussion that he wants to have. He has been gracious not calling out those who are hijacking it for their own purpose.

My suggestion, If one wants to have discussions on multiple factor vs. single factor (beta) then start our own thread. Otherwise, let this one talk about what Nedsaid wanted. Anything less is disrespectful. Doesn't matter how much seniority the folks doing the hijacking have.

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

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Re: Review with Me - Larry Swedroe's new book

Post by dbr » Sun Aug 27, 2017 8:31 am

nedsaid wrote:
Sat Aug 26, 2017 5:35 pm
Random Walker wrote:
Sat Aug 26, 2017 4:57 pm
Hi nedsaid,
I've misplaced my copy of the book, but remember it pretty well. The rubber meets the road I think in two charts near the end, Chapter 9 I think. It gets a bit confusing. Larry talks about being prepared for each factor displaying long periods of underperformance. I was wondering "underperformance compared to what?". I think I remember him explaining that it is underperformance of each factor relative to its own historical return. Really take note of the 1/n portfolios. Everyone on this board seems to think of Factor investing as an effort to beat the market. Really it's about building more efficient portfolios by diversifying across factors, and thus maximizing likelihood of meeting one's goals. While any one factor can do poorly for a long time, a portfolio diversified across factors looks very robust. Larry chooses the 1/n example I think to remove any bias from his inputs and for simplicity. But it is a step towards something that I believe he is really a fan of, risk parity portfolios. I'm going to go give a hard look for my copy of the book. :-)

Dave
I suppose he means underperformance against a market benchmark like the S&P 500 or US Total Stock Market Index.
No, it is underperformance relative to itself. The warning is that the benefits of tilted portfolios can fail to appear for extended periods of time. This should be obvious as variability of investment returns implies that any expected result can fail to appear over a period of time. The S&P 500 itself underpeforms over periods of time. I think it is a warning of the obvious to act as a sort of CYA that naive investors will not try to jump on a free lunch and then hurt themselves by bailing out when instant gratification does not materialize.

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Re: Review with Me - Larry Swedroe's new book

Post by dbr » Sun Aug 27, 2017 8:36 am

selters wrote:
Sun Aug 27, 2017 5:21 am
What exactly are long/short portfolios? Portfolios where you buy stocks that you expect to increase in value and short sell stocks that expect to decrease in value? If that's what this book is talking about, how can long only investors (like most Bogleheads) implement the information in the book?
I would have to go back and verify the context, but it shouldn't be about shorting stocks. Holding a loading to a factor involves holding more of certain asset classes than the total market and less of those assets that are of opposite measure on the given factor. I think it can happen in theory that one can contemplate a "negative" holding of something, aka a short, but that isn't advocated as a practice for actual investors.

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Re: Review with Me - Larry Swedroe's new book

Post by dbr » Sun Aug 27, 2017 8:44 am

Two comments: People interested in factor investing should really just go read this book. That is true whether or not you have any intention of doing anything about it.

Second, if people want to understand the idea of factors and what it is that is being discussed it would be very helpful to go read up on the Fama and French work that started all this. The actual definition of what a factor is starts there. It is a technical topic that does not benefit from being described loosely. If I have a criticism of Larry it is precisely his use of language that sometimes seems to be less than clarifying regarding some of these things.

The starting point is to make sure this from Wikipedia means something to you:

The traditional asset pricing model, known formally as the capital asset pricing model (CAPM) uses only one variable to describe the returns of a portfolio or stock with the returns of the market as a whole. In contrast, the Fama–French model uses three variables. Fama and French started with the observation that two classes of stocks have tended to do better than the market as a whole: (i) small caps and (ii) stocks with a high book-to-market ratio (B/P, customarily called value stocks, contrasted with growth stocks). They then added two factors to CAPM to reflect a portfolio's exposure to these two classes:[1]

r = R f + β 3 ( K m − R f ) + b s ⋅ S M B + b v ⋅ H M L + α

Here r is the portfolio's expected rate of return, Rf is the risk-free return rate, and Km is the return of the market portfolio. The "three factor" β is analogous to the classical β but not equal to it, since there are now two additional factors to do some of the work. SMB stands for "Small [market capitalization] Minus Big" and HML for "High [book-to-market ratio] Minus Low"; they measure the historic excess returns of small caps over big caps and of value stocks over growth stocks. These factors are calculated with combinations of portfolios composed by ranked stocks (BtM ranking, Cap ranking) and available historical market data. Historical values may be accessed on Kenneth French's web page.
Last edited by dbr on Sun Aug 27, 2017 8:45 am, edited 1 time in total.

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Re: Review with Me Larry Swedroe's new book

Post by in_reality » Sun Aug 27, 2017 8:45 am

triceratop wrote:
Sat Aug 26, 2017 2:10 pm
The one critique, and it's admittedly quite mild, is I wish that he could do more to discuss "live" portfolios. That is, showing the diversification across size, value, over time in a portfolio using real funds. Long/short factor premia are one thing, but it would be more convincing to use real funds which have fund costs, transaction costs, rebalancing issues, etc..
I suspect it might be quite relevant actually.

For example transaction costs would be more likely when targeting factors such as momentum and low beta which typically have higher turnover. Small caps too have higher trading costs and much of the various premia are found in those smaller caps

Also, shorting has costs as well. And in some cases it's just not possible despite the desire. Palm is an interesting case study and internet stocks in the bubble weren't always short-able despite clearly indefensible valuations. https://www.gsb.stanford.edu/insights/s ... ond-prices.

When Research Affiliates did factor regression analysis on all mutual funds (including non-survivors) in the Morningstar database from January 1990–December 2016, they found that realized premiums were less than the academic long/short portfolios would suggest. They attribute much of the difference due to trading costs.

Interestingly, they point out that the possible criticisms of their work could include not accurately measuring time-varying factor exposures which factor loadings from regressions don't capture well. Lack of data to do that is a concern of course, but they note "the same criticism could equally apply to factor-based historical return attribution".

In any case, they found "The average factor premia captured by the managers is significantly lower than that suggested by the theoretical returns for all factors with the exception of the size factor." Managers captured "close to the full size premium, about half the market and value premiums, and almost none of the momentum premium.

In fact they state that "for the momentum factor the end-investor seems to have enjoyed no benefit whatsoever from fund momentum loadings nor any penalty for funds that have an anti-momentum bias."
triceratop wrote:
Sat Aug 26, 2017 2:10 pm
It would also help show how and to what extent it is worth paying more for factor funds in hopes of obtaining better factor exposure; that is talked about quite a bit on the forum, and he used to discuss it as well, but never with much specificity.
That's a very interesting question. I am particularly thinking about the AQR momentum funds which I believe have quite high costs (due to leverage and said to be worth it for the exposure they provide). I use iShares MTUM and IMTM myself which are relatively cheap long only funds and am curious about this.

When Research Affiliates controlled for expenses, they found that "the factor return shortfalls realized by fund managers are not driven by differences in expenses". There wasn't complete data on expenses though and even as late as 2004, it appears 25% of funds didn't have data on expenses. Today it's reaching zero per their graph.

In any case, it seems there might be a difference between academic/theoretical and actual performance due to the realities involved in making a trade.

https://www.researchaffiliates.com/en_u ... idged.html

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Re: Review with Me - Larry Swedroe's new book

Post by dbr » Sun Aug 27, 2017 8:51 am

An added comment is that at one time there was a survey here of whether or not participants on this forum actually held portfolios tilted to small and/or value stocks. As I recall the result was that more than half responding do/did so tilt.

My personal position is the following:

1. I don't tilt or generally invest in "factors" because I don't need to and I don't want to.

2. If you have to ask you probably shouldn't be messing around with it. There is nothing wrong with investigating the subject to the point you don't have to ask.

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Re: Two books to review

Post by nedsaid » Sun Aug 27, 2017 9:01 am

Taylor Larimore wrote:
Sat Aug 26, 2017 2:24 pm
nedsaid wrote:
Sat Aug 26, 2017 12:17 pm
True to my word, I went to Amazon.com and bought Your Complete Guide to Factor-Based Investing by Andrew L. Berkin and Larry E. Swedroe. It arrived yesterday, and I started on it last night. So far, so good. I have been skipping around through the book.

Please join me in reviewing the book. It will take me a while to get through the whole thing.
Nedsaid:

Amazon has announced that we can pre-order Mr. Bogle's updated edition of The Little Book of Common Sense Investing.

Bogleheads will find it instructive to compare Berkin and Swedroe's higher cost and more complex method of investing with Jack Bogle's lower cost and simple method of investing.

Best wishes.
Taylor
Taylor, I have read a fair amount of John Bogle's writings. I own the Little Book of Common Sense Investing (pretty much a condensed version of his book on mutual funds), his book on mutual funds, and his book on American capitalism, Enough. I deeply respect Mr. Bogle and deep respect for his accomplishments and his published works.

I do think that people should investigate both simple index fund investing and factor tilting. I have recommended both as solid investment approaches. It really hinges on one's belief in the academic research and in one's willingness to construct more complex portfolios.

Taylor, note also my discussion of the "anti-factors". I am very surprised nobody ever comments on this though I have brought this up several times. My belief is that the well constructed indexes for the most part screen out the "anti-factors" and that is one reason that indexing works so well. It might also account for much of the difference between the factor premiums that the academics find and what is achieved in real life. I also believe that since the best and most successful companies tend to have the largest market caps, that the broad US Indexes like US Total Stock Market and the S&P 500 have a bit of a Quality tilt. I suspect Larry hasn't commented on my assertions because it is a counter argument to factor investing.

This is a very healthy discussion to have and I do not consider this to be a thread hijack.
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Re: Review with Me - Larry Swedroe's new book

Post by staythecourse » Sun Aug 27, 2017 9:04 am

dbr wrote:
Sun Aug 27, 2017 8:51 am
An added comment is that at one time there was a survey here of whether or not participants on this forum actually held portfolios tilted to small and/or value stocks. As I recall the result was that more than half responding do/did so tilt.

My personal position is the following:

1. I don't tilt or generally invest in "factors" because I don't need to and I don't want to.

2. If you have to ask you probably shouldn't be messing around with it. There is nothing wrong with investigating the subject to the point you don't have to ask.
Small correction. You do invest in a factor. You invest in only the beta factor. I know you know that just wanted to make it clear for our less experienced investors that even if one is 100% TSM they are still invested in a factor as it is a single factor (beta) which is the market itself. Those who choose multifactor investing are attempting to invest in other factors (small premiums, value premium, momentum premium, illiquidity, etc...)

My personal opinion, the question investors need to ask first is: 1. Do I believe the data mining actually has uncovered these real premiums or is it a matter of "torturing the data"? , 2. Even if they are real can they be exploited in the current mousetraps to gain its premiums AFTER fees, costs, taxes, etc..., and 3. Do you have the inclination to make your portfolio more complex to try to gain the premiums. A decision ALL investors must make on their own based on knowing themselves.

Good luck.
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Re: Review with Me - Larry Swedroe's new book

Post by nedsaid » Sun Aug 27, 2017 9:11 am

Theoretical wrote:
Sat Aug 26, 2017 6:06 pm
Nedsaid, he does talk about what you're describing, but he uses "tracking error" and "tracking regret," while using underperformance to describe relative to its historical returns.
You are probably right on this, my bad, I made an assumption. It is a point that Larry himself doesn't seem to make very clear, at least to me. Thanks for the clarification.
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Re: Review with Me - Larry Swedroe's new book

Post by in_reality » Sun Aug 27, 2017 9:24 am

staythecourse wrote:
Sun Aug 27, 2017 9:04 am

Small correction. You do invest in a factor. You invest in only the beta factor. I know you know that just wanted to make it clear for our less experienced investors that even if one is 100% TSM they are still invested in a factor as it is a single factor (beta) which is the market itself. Those who choose multifactor investing are attempting to invest in other factors (small premiums, value premium, momentum premium, illiquidity, etc...)
And also point out to new investors that by holding the total market, they do hold the companies that would return the small premium. Same with value, momentum, illiquidity etc. Holding the total market offers market weight exposure to all those companies that offer those premiums. However holding total market also means you have an offsetting holding of large, growth etc, so that your portfolio is neutral, and any premium that is earned by those factors will by offset by your holdings which don't give you access to them.

Trying to capture a factor premium then involves tilting your portfolio away from market cap weighting to hold a concentrated position in the stocks with characteristics (size, value, momentum etc.) that you think will outperform over time. It means you may underperform the market for a significant time before seeing a premium. It means that there is a chance in your investment horizon that you will underperform the market. And that you will be faced with higher costs in your attempt.
Last edited by in_reality on Sun Aug 27, 2017 9:25 am, edited 1 time in total.

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Re: Review with Me - Larry Swedroe's new book

Post by saltycaper » Sun Aug 27, 2017 9:25 am

digarei wrote:
Sun Aug 27, 2017 6:35 am

Having read a few of these interlopers' 55,000 previous posts I can attest to an exchange of ideas between them and the estimable Larry Swedroe in years past. Does one need to respond at length to each new work or utterance of Mr. Swedroe as qualification to comment upon its latest iteration?
When some posters (not all whom I quoted), in my opinion, have demonstrated not only a failure to understand what Mr. Swedroe is saying but also an indication that they have no interest in understanding, then yes, reading their detailed response to a book-length iteration of Mr. Swedroe's ideas would be informative. :happy
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Re: Review with Me - Larry Swedroe's new book

Post by nedsaid » Sun Aug 27, 2017 9:26 am

chinto wrote:
Sun Aug 27, 2017 2:39 am
I guess what stops me cold is the title of another books of his:

The Only Guide to a Winning Investment Strategy You'll Ever Need

Just sayin'.
This is a valid critique of the academic research, that is it is dynamic. The academics have pretty well stuck to their guns on the Size and Value factors but further research has turned up Momentum and Profitability/Quality. In other words, factors don't just exist on the Value side of the Morningstar stylebox any more, you see them on the Growth side as well. I can see why people get frustrated with the research.
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Re: Review with Me - Larry Swedroe's new book

Post by dbr » Sun Aug 27, 2017 9:27 am

staythecourse wrote:
Sun Aug 27, 2017 9:04 am
dbr wrote:
Sun Aug 27, 2017 8:51 am
An added comment is that at one time there was a survey here of whether or not participants on this forum actually held portfolios tilted to small and/or value stocks. As I recall the result was that more than half responding do/did so tilt.

My personal position is the following:

1. I don't tilt or generally invest in "factors" because I don't need to and I don't want to.

2. If you have to ask you probably shouldn't be messing around with it. There is nothing wrong with investigating the subject to the point you don't have to ask.
Small correction. You do invest in a factor. You invest in only the beta factor. I know you know that just wanted to make it clear for our less experienced investors that even if one is 100% TSM they are still invested in a factor as it is a single factor (beta) which is the market itself. Those who choose multifactor investing are attempting to invest in other factors (small premiums, value premium, momentum premium, illiquidity, etc...)

Yes, that is technically correct from the point of view of a person structuring their understanding of the behavior of investments using a factor model. My own investing does not extend to a more detailed explication of the properties of investments than that stocks are more risky than and have higher expected return than bonds and that therefore I dilute said risk by holding bonds as well as stocks. Otherwise within stocks I just hold total market funds, some US and some OUS at an arbitrary proportion. That would be called investing "in" the beta factor, but I would hardly think of it that way.

It is perfectly fine for people who want to explore the nuances of factor models, how that might enlighten their understanding of investments, and how that might be of practical advantage to them to proceed to do so. However, I suggest that this is not necessary. Before that decision is made it is wise to go ahead and read the book.


My personal opinion, the question investors need to ask first is: 1. Do I believe the data mining actually has uncovered these real premiums or is it a matter of "torturing the data"? , 2. Even if they are real can they be exploited in the current mousetraps to gain its premiums AFTER fees, costs, taxes, etc..., and 3. Do you have the inclination to make your portfolio more complex to try to gain the premiums. A decision ALL investors must make on their own based on knowing themselves.

Yes, those are the good questions to ask. I would add the further question that the analysis cannot be only about the expected returns but must also show a benefit in reducing the hazards of investing, aka risk, relative to those increased expected returns. Taking more risk to get more return involves nothing marvelous at all. The Fama-French model itself is only a predictor if investment returns that does not tell us what the hazards are. We have already mentioned that one hazard is the one that goes by the mysterious label of "tracking error regret." This, again is a recommendation to go ahead and read the book.

Good luck.
Last edited by dbr on Sun Aug 27, 2017 9:28 am, edited 1 time in total.

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Re: Review with Me - Larry Swedroe's new book

Post by Johnnie » Sun Aug 27, 2017 9:27 am

nedsaid wrote:
Sat Aug 26, 2017 11:54 pm
It seems that Value has the smallest premium in the Large-Cap space and a larger premium in the Mid-Cap and Small-Cap space.
I'm not finding it but didn't Larry write recently that in the international realm small and value are preferred because they provide better exposure to their home country markets, vs. big firms that are more closely integrated into the world economy?
nedsaid wrote:
Sun Aug 27, 2017 12:19 am
Well, anti-factors would involve those stock characteristics you want to avoid. I have identified two: lottery stocks on the growth side of things and value traps on the value side.
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Re: Review with Me - Larry Swedroe's new book

Post by nedsaid » Sun Aug 27, 2017 9:35 am

Random Walker wrote:
Sat Aug 26, 2017 4:57 pm
Hi nedsaid,
I've misplaced my copy of the book, but remember it pretty well. The rubber meets the road I think in two charts near the end, Chapter 9 I think. It gets a bit confusing. Larry talks about being prepared for each factor displaying long periods of underperformance. I was wondering "underperformance compared to what?". I think I remember him explaining that it is underperformance of each factor relative to its own historical return. Really take note of the 1/n portfolios. Everyone on this board seems to think of Factor investing as an effort to beat the market. Really it's about building more efficient portfolios by diversifying across factors, and thus maximizing likelihood of meeting one's goals. While any one factor can do poorly for a long time, a portfolio diversified across factors looks very robust. Larry chooses the 1/n example I think to remove any bias from his inputs and for simplicity. But it is a step towards something that I believe he is really a fan of, risk parity portfolios. I'm going to go give a hard look for my copy of the book. :-)

Dave
Dave, the investing across factors is also an attempt to reduce the overall volatility of a portfolio while (hopefully) boosting returns at the same time. In another thread, we discussed in great detail the concept of volatility drag, which ironically I believe in a practical sense but not a theoretical sense. In other words, I questioned the concept of volatility drag but in real life I tried to do something about it. So pretty much, if factor tilting doesn't boost returns in itself (by the factors outperforming the market) perhaps by smoothing out the ride in portfolio performance and perhaps reducing that elusive portfolio drag that returns might be boosted over time after all. Didn't express that well but I think you will know what I am driving at.
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Re: Review with Me - Larry Swedroe's new book

Post by digarei » Sun Aug 27, 2017 9:56 am

saltycaper wrote:
Sun Aug 27, 2017 9:25 am
digarei wrote:
Sun Aug 27, 2017 6:35 am

Having read a few of these interlopers' 55,000 previous posts I can attest to an exchange of ideas between them and the estimable Larry Swedroe in years past. Does one need to respond at length to each new work or utterance of Mr. Swedroe as qualification to comment upon its latest iteration?
When some posters (not all whom I quoted), in my opinion, have demonstrated not only a failure to understand what Mr. Swedroe is saying but also an indication that they have no interest in understanding, then yes, reading their detailed response to a book-length iteration of Mr. Swedroe's ideas would be informative. :happy
Right. But not the same thing.

Anyway, I prefer your deliciously clever to the proscriptive. 😊
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Re: Review with Me - Larry Swedroe's new book

Post by nedsaid » Sun Aug 27, 2017 9:57 am

Johnnie wrote:
Sun Aug 27, 2017 9:27 am
nedsaid wrote:
Sat Aug 26, 2017 11:54 pm
It seems that Value has the smallest premium in the Large-Cap space and a larger premium in the Mid-Cap and Small-Cap space.
I'm not finding it but didn't Larry write recently that in the international realm small and value are preferred because they provide better exposure to their home country markets, vs. big firms that are more closely integrated into the world economy?

Nedsaid: Yes, Larry and others have said this. Pretty much, the very large companies tend to be the large multi-nationals and so this makes sense. But in my view, while this is true in a broad sense it is a bit of an oversimplification. As I have interviewed for jobs, I have found that smaller companies have international presence as well.
nedsaid wrote:
Sun Aug 27, 2017 12:19 am
Well, anti-factors would involve those stock characteristics you want to avoid. I have identified two: lottery stocks on the growth side of things and value traps on the value side.
I think I see a new ETF style in our future... (TM)

Nedsaid: I would say that the S&P 500, the S&P 400 Mid-Cap Index, and the S&P 600 Small-Cap Index would be good places to start and they are all represented by Index Funds and ETFs. The ETFs that screen out the "anti-factors" are already in existence.

A few things got me thinking about the "anti-factors." First, were Taylor Larimore's posts where he noted that the performance of Vanguard Small Value Index and of Vanguard Small Growth Index were remarkably similar. I remember Larry's discussion of the "lottery stocks" and concluded that the Vanguard Growth Index screened those out. Second, I read about how well the S&P 600 Small Cap Index performed during the 2000-2002 bear market. Because companies had to have actual earnings to be included in that index, the really junky, flakey companies just were not there. Third, was the discussion of Value traps and also how Larry mentioned that DFA would set momentum to neutral in its Value funds and how that would improve performance.

If one was inherently lazy, it would be logical to ask if it would just be easier to screen out the "bad" stocks rather than screening for all the "good stocks", particularly if you believe the markets are reasonable efficient. The well constructed indexes, like the S&P indexes, seem to do just that.

Again, I think this accounts for most of the difference between factor performance in real life and the factor performance that the academics find. My suspicion is that the universe that the academics use for research is broader than the actual stocks Bogleheads invest in through the index funds. In other words, every stock that exists and has some trading volume is researched and this is the baseline that the academics use. The baseline that Bogleheads use when evaluating the market are the indexes, which have by definition have already been screened. The universe of stocks that academics look at include the lottery stocks that the indexes screen out.

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Re: Review with Me - Larry Swedroe's new book

Post by nedsaid » Sun Aug 27, 2017 10:30 am

A bit of feedback to those who send personal messages. I do try to answer any questions that I get the very best I can and I spend a lot of time doing that. Last night, I spent probably two hours on a detailed response, which is one reason that I also posted it here on this thread. It takes time to think through and to edit. It would be nice to know if my response answered the question or at least clarified some issues. Thank you.
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Re: Review with Me - Larry Swedroe's new book

Post by Random Walker » Sun Aug 27, 2017 11:00 am

This is a review of the book that I wrote on Amazon just after I finished it.
This is an outstanding addition to anyone's investing library. It is a must read for any individual investor or financial advisor interested in understanding modern investing. Over the last two decades there has been a huge shift in popular investing from active management to passive index funds. Modern investing has now moved beyond a single market factor world though. Market beta explains perhaps 60-70% of a portfolio's returns. Fama and French introduced the size and value factors, and the three factor model explained greater than 90% of a portfolio's returns. Now there are about five or six factors that explain about 95% of a portfolio's performance. These few factors stand out among the hundreds of factors that have been described in the literature.
Larry and Andrew explain these factors and the data supporting them. They describe five criteria that a potential factor must meet to be real and meaningful. The equity factors described are the market factor, size, value, momentum, profitability/quality. Although learning these factors is important and potentially profitable to the investor, there is an even bigger and more important lesson in the book. The authors teach us how to evaluate any new potential factor or potential portfolio addition. They describe the five criteria that we can apply to these five equity factors and any potential factor we may come across in the future: persistent over time, pervasive across markets, robust to different definitions, intuitive to common sense, and investable at reasonable access and expense to us common folks. Understanding these criteria are vitally important to the investor. They emphasize that an investment plan is worthless if an investor can't stick to his plan. All factors will underperform for long periods. Understanding and believing the criteria will give the investor the fortitude to stick to his well thought out plan. Moreover, by looking at correlations, they build a powerful case for diversifying across factors.
The book is very readable, but it is meant for the highly interested do it yourself investor or advisor, who already understands concepts of efficient markets, asset allocation, diversification. A serious investor will read this book and place it on his investment shelf. He will return to it periodically over the years to look at a few of the tables and some of the data as the various factors perform and underperform over the years.
An important question arises. When these factors become well known, especially the behavioral (as opposed to risk based) factors, are they still worthy of investment? The authors address this in one of the last chapters. I strongly recommend this book for anyone interested in a serious look at modern investing in language someone without a finance degree can understand.
Dave

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Re: Review with Me - Larry Swedroe's new book

Post by Random Walker » Sun Aug 27, 2017 11:07 am

Selters,
Long-Short portfolios are portfolios where one is focusing on a given factor and isolating it away from the market factor. For example, the small factor is a portfolio long small stocks and short large stocks. By selling large stocks and buying small stocks, the portfolio is net neutral "stocks" and the effect of size alone separate from the market is being measured. This is a huge point of Factor investing. We are looking at drivers of returns that are unique and independent from the dominant market factor. Take a look at my review of the book above. These 5 or 6 factors explain about 95% of portfolio behavior. The single market factor only about 60-70% I believe.

Dave

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Re: Review with Me - Larry Swedroe's new book

Post by Random Walker » Sun Aug 27, 2017 11:27 am

Another comment on the book. Certainly learning about the factors themselves is important. But I believe it is at least equally important to learn and understand the criteria the authors use to screen for real drivers of returns: persistent, pervasive, robust, intuitive, investable. Understanding these criteria allow us to apply these standards to any potential new portfolio addition. Moreover, understanding these criteria help us maintain fortitude to stick with the plan once we've incorporated a new independent source of return into our portfolios.

Dave

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Re: Review with Me - Larry Swedroe's new book

Post by dbr » Sun Aug 27, 2017 11:29 am

Random Walker wrote:
Sun Aug 27, 2017 11:07 am
Selters,
Long-Short portfolios are portfolios where one is focusing on a given factor and isolating it away from the market factor. For example, the small factor is a portfolio long small stocks and short large stocks. By selling large stocks and buying small stocks, the portfolio is net neutral "stocks" and the effect of size alone separate from the market is being measured. This is a huge point of Factor investing. We are looking at drivers of returns that are unique and independent from the dominant market factor. Take a look at my review of the book above. These 5 or 6 factors explain about 95% of portfolio behavior. The single market factor only about 60-70% I believe.

Dave
Yes, that was my understanding also; not just understanding; that is what it is. This is also an example where some of the writing in this discussion uses terminology that often means one very familiar thing to mean something similar but different when talking about factor investing. It would probably be more helpful to refer to such a long-short portfolio as being one that is more concentrated in a certain selection of stocks than is the total market, obviously at the cost of being less concentrated in those stocks of the opposite characteristic. It is a classic case of trying to find a short expression to refer to a longer description. It is an expression that is intuitively logical and not contradictory to common use. However, it does not refer to actually shorting stocks.

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Re: Review with Me - Larry Swedroe's new book

Post by dbr » Sun Aug 27, 2017 11:37 am

I need to re-read the book to decide if I would recommend that the book establishes that factor investing is actually an investing methodology that most investors should implement. Within that I would also have to reread the book to decide if it clearly establishes what advantages and disadvantages there are to selecting an investment portfolio that is loaded to greater or lesser degrees on various factors or that even pays attention to factors distinct from buying a total market investment.

I do not hesitate to recommend that anyone who wants to know what factor investing is should at least read the book before moving farther with the concept.

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Re: Two books to review

Post by selters » Sun Aug 27, 2017 11:42 am

nedsaid wrote:
Sun Aug 27, 2017 9:01 am
Taylor, note also my discussion of the "anti-factors". I am very surprised nobody ever comments on this though I have brought this up several times. My belief is that the well constructed indexes for the most part screen out the "anti-factors" and that is one reason that indexing works so well. It might also account for much of the difference between the factor premiums that the academics find and what is achieved in real life. I also believe that since the best and most successful companies tend to have the largest market caps, that the broad US Indexes like US Total Stock Market and the S&P 500 have a bit of a Quality tilt. I suspect Larry hasn't commented on my assertions because it is a counter argument to factor investing.

This is a very healthy discussion to have and I do not consider this to be a thread hijack.
I posted a question about which factors underperform last year:
selters wrote:
Mon Sep 05, 2016 5:59 am
It seems like all factors outperform the market. Which are the ones that underperform?
And Larry replied
larryswedroe wrote:
Mon Sep 05, 2016 8:03 am
selters
Factors are LONG/SHORT portfolios so the factors that underperform are the SHORT side, so large, growth, low profitability, high investment, negative momentum, and so on.
Larry
Which I guess addresses my question earlier in this thread. I hadn't purchased the book at that time, Larry's mention of long/short portfolios didn't stick back then. But thanks for the clarification, guys and gals! :)
Last edited by selters on Sun Aug 27, 2017 11:51 am, edited 1 time in total.

Random Walker
Posts: 2126
Joined: Fri Feb 23, 2007 8:21 pm

Re: Review with Me - Larry Swedroe's new book

Post by Random Walker » Sun Aug 27, 2017 11:44 am

Most of us invest in long only portfolios, so our maximum exposure to any academic factor is only about half the factor. The other half is on the short side. This is why some of us are willing to pay the outrageous by Boglehead standards expense ratios for some of the AQR funds. We are willing to pay to get the pure concentrated factor exposure provided by the long-short portfolio. Larry has said in the past that one way to rationalize (make it more palatable) the high ER is to divide it in two: half for the long exposure and half for the short.

Dave

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