Value Factor Investing is not Value Investing

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nedsaid
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Re: Value Factor Investing is not Value Investing

Post by nedsaid » Sun Sep 03, 2017 1:21 pm

avalpert wrote:
Sun Sep 03, 2017 12:36 pm
snarlyjack wrote:
Sun Sep 03, 2017 12:33 pm
Avalpert,

Ok...I get it.
Let's call it "Quality".
I like quality stocks that I've heard of.

I like "warm fuzzes" & sleep at night factors.
I like the phrase my portfolio "is spinning on a stick
spitting out cash" or "I can sit back in the weeds &
wait it out without losing any sleep".

Those are my "sleep well at night factors" ...
But there is little reason to expect a relationship between the quality of a company from an investment perspective and whether you happened to hear of the brand or not. So calling it 'quality' is just a way of misleading yourself into thinking it has something to do with the quality factor.

Your 'sleep well at night factors' may be doing you a huge disservice.
The Large Cap Blue Chip stocks do offer you a degree in safety in that they have a lot of resources and thus can most often work their way through problems. Such companies experiencing (hopefully) temporary problems can be a good investment.

Branding is another good thing and provides another degree of safety. Pretty much, an object in motion tends to stay in motion. A good brand means that there are a lot of loyal customers. Well established brands tend to have a momentum of their own and reputation alone can carry a company for a long time.

The thing is, you can have a great company but a poor stock. If perfection is priced into the stock price, future returns will tend to be disappointing. You can overpay for a great company. So buying in at a reasonable price is a big factor too. I learned this the hard way from my Four Horsemen of Underperformance: GE, Pfizer, Microsoft, and AIG. Great companies but I didn't buy them as cheap as I thought. The last 2-3 years, Microsoft has actually turned into a good investment but it was pretty much dead money for several years.

As we all know, nothing is forever. Even great companies can eventually fail. The economy is dynamic and pretty much it is adapt or die. The thought is, buy the great Blue Chips and just put them away and never sell. There is a certain amount of truth to this but even a portfolio like this needs to be monitored and evaluated from time to time.

I do not recommend picking individual stocks, the indexes are awfully hard to beat. I have done it myself, beating the market over 1, 3, and 5 year periods but trailing over 10 and 15 years. Mostly I have bought well known names that should be familiar to Bogleheads, bought them at (mostly) reasonable prices, and have had long holding periods. So I did a lot of things right but still could not beat the benchmarks over longer time periods. And yes, these tend to be mostly Large Value stocks.

If you try to pick stocks, you will have a number of criteria you will utilize. I wouldn't just buy a stock because the company is well known and has a great brand, though those things are important.
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Re: Value Factor Investing is not Value Investing

Post by avalpert » Sun Sep 03, 2017 1:52 pm

nedsaid wrote:
Sun Sep 03, 2017 1:21 pm
avalpert wrote:
Sun Sep 03, 2017 12:36 pm
snarlyjack wrote:
Sun Sep 03, 2017 12:33 pm
Avalpert,

Ok...I get it.
Let's call it "Quality".
I like quality stocks that I've heard of.

I like "warm fuzzes" & sleep at night factors.
I like the phrase my portfolio "is spinning on a stick
spitting out cash" or "I can sit back in the weeds &
wait it out without losing any sleep".

Those are my "sleep well at night factors" ...
But there is little reason to expect a relationship between the quality of a company from an investment perspective and whether you happened to hear of the brand or not. So calling it 'quality' is just a way of misleading yourself into thinking it has something to do with the quality factor.

Your 'sleep well at night factors' may be doing you a huge disservice.
The Large Cap Blue Chip stocks do offer you a degree in safety in that they have a lot of resources and thus can most often work their way through problems. Such companies experiencing (hopefully) temporary problems can be a good investment.

Branding is another good thing and provides another degree of safety. Pretty much, an object in motion tends to stay in motion. A good brand means that there are a lot of loyal customers. Well established brands tend to have a momentum of their own and reputation alone can carry a company for a long time.

The thing is, you can have a great company but a poor stock. If perfection is priced into the stock price, future returns will tend to be disappointing. You can overpay for a great company. So buying in at a reasonable price is a big factor too. I learned this the hard way from my Four Horsemen of Underperformance: GE, Pfizer, Microsoft, and AIG. Great companies but I didn't buy them as cheap as I thought. The last 2-3 years, Microsoft has actually turned into a good investment but it was pretty much dead money for several years.

As we all know, nothing is forever. Even great companies can eventually fail. The economy is dynamic and pretty much it is adapt or die. The thought is, buy the great Blue Chips and just put them away and never sell. There is a certain amount of truth to this but even a portfolio like this needs to be monitored and evaluated from time to time.

I do not recommend picking individual stocks, the indexes are awfully hard to beat. I have done it myself, beating the market over 1, 3, and 5 year periods but trailing over 10 and 15 years. Mostly I have bought well known names that should be familiar to Bogleheads, bought them at (mostly) reasonable prices, and have had long holding periods. So I did a lot of things right but still could not beat the benchmarks over longer time periods. And yes, these tend to be mostly Large Value stocks.

If you try to pick stocks, you will have a number of criteria you will utilize. I wouldn't just buy a stock because the company is well known and has a great brand, though those things are important.
Beyond the questionable assumption that branding translates into good returns, an individuals brand exposure is unlikely to reflect the aggregate markets exposure at all. While the current Dow components are probably widely known it was that long ago when the likes of Alcoa, Honeywell, Union Carbide, Bethlehem Steel, Venator and Inco Limited could easily be missed by someone basing investment choices on consumer brand awareness.

Personally, I don't think a company being well known broadly is important at all.

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Re: Value Factor Investing is not Value Investing

Post by packer16 » Sun Sep 03, 2017 2:07 pm

I understand the factor argument but I think many have been sold a story/narrative & have not pushed back. Factors are historical artifacts that describe the past but not the future. If these purveyors of factors found the Buffet's real secret sauce, they would be able to recreate in real-time his returns but they cannot. Why? Because the market is an adaptive systems and they have used tools to study constant or slowly changing phenomena like you see in science.

IMO factor investing is not science but speculation based upon the past. Graham defines investing as an operation which provides safety of principal & an adequate return. Since the return associated with SCV is so uncertain in its timing why take the risk? If people took this stuff seriously & some have it has some grave consequences that few speak of. The biggest issue is expectations of higher returns from SCV. If you implemented what folks described as the Larry Portfolio expecting higher returns after his NYT article in 2011, you would be in dire straights today. As a example, if you substituted a 50/50 SCV/LTB for a standard 60/40 TSM/LTB, you would have a shortfall of 23% cumulative between 2012 & today. If you were counting on that money that is a real effect of believing in a "scientific" approach investing. The rationalization is factors are cyclical & may not show up for years. If that is the case how do you know they will show up in the future when your basis for this is a timeframe when factor investing was not being used & thus not effecting the prices of securities? From the above we have established a difference between value investing, which has been practiced for 80 years, is not the same as value factor investing which has been around since 1993.

I am not saying factors are not interesting and is some cases relevant to investing but when you start to really invest with them it is a different story. This is akin to someone trying to pick stocks without the understanding of the risks they are taking. Most Boglelheads IMO opinion are what Graham referred to as defensive investors & the beauty of the index strategy is simplicity. Once you wade in the factor pool you move away from this into areas where some may be taking risks they have no idea they are taking (especially timing risk) for a reward that hasn't shown up since alot of money has been invested in factors. What surprises me is that this highly timing risk strategy appeals to those who are so risk averse in other areas. IMO given examples like the above, factor investing is as much speculation (due to the timing risk) as investing.

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Re: Value Factor Investing is not Value Investing

Post by betablocker » Sun Sep 03, 2017 2:11 pm

Think about the value of Coke's brand. Alcoa doesn't sell anything to consumers so that's a bit different. It's also a commodity. Michael Moubassin did a piece on economic moats and brand didn't rank very highly but it depends on the company and the product/service: http://csinvesting.org/wp-content/uploa ... ly2013.pdf

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Re: Value Factor Investing is not Value Investing

Post by avalpert » Sun Sep 03, 2017 2:19 pm

packer16 wrote:
Sun Sep 03, 2017 2:07 pm
As a example, if you substituted a 50/50 SCV/LTB for a standard 60/40 TSM/LTB, you would have a shortfall of 23% cumulative between 2012 & today. If you were counting on that money that is a real effect of believing in a "scientific" approach investing.
What dataset did you use to get that result - trying to replicate it in portfolio visualizer and while the 60/40 did do better it is nowhere near that dramatic

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Re: Value Factor Investing is not Value Investing

Post by packer16 » Sun Sep 03, 2017 2:21 pm

Pat Dorsey had a recent podcast that describes the difference between a positional and search cost brand & the value of a brand as being able to get a premium price. If you cannot get a premium price the brand is not worth much. Podcast: http://investorfieldguide.com/dorsey/

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Re: Value Factor Investing is not Value Investing

Post by nedsaid » Sun Sep 03, 2017 2:26 pm

packer16 wrote:
Sun Sep 03, 2017 2:07 pm
If these purveyors of factors found the Buffet's real secret sauce, they would be able to recreate in real-time his returns but they cannot.
Larry Swedroe wrote a book on Buffett and how he achieved his results. I remember a thread on this. My take on this is that Berkshire-Hathaway is a real life operating company and not just an investment portfolio. It really is a conglomerate and not a mutual fund. A big difference from a mutual fund is that B-H has wholly owned subsidiaries. In other words, Buffett will often buy the whole company and not just part of it. People treat B-H as a mutual fund. Another way of saying this is that Buffett is a true businessman as well as a great investor. Not to take a swipe at Larry but all the experts who told us how Buffett did it should have their own mini-Berkshire-Hathaway conglomerates but they don't. Certainly, Buffett knew about factors before academia did but that is only part of the story.

Pretty much I am saying that Buffett makes it look a lot easier than it really is. His aw shucks demeanor hides a very savvy investor and businessman. He is very good at "Buffetizing", that is explaining things in plain English. He explains the basics of what he does really, really well but there are important details in the "how" that we don't hear about. What he does takes a lot of skill.
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Re: Value Factor Investing is not Value Investing

Post by packer16 » Sun Sep 03, 2017 2:39 pm

I used the Vanguard 500 and Vanguard SCV from 2012 (Larry's article as published in late 2011) to date & Vanguard Total Bond for the bond portion. Here are the returns by year:

Year 50/50 LP 60/40 TSM
2012 11.1% 11.1%
2013 8.6% 18.4%
2014 8.2% 10.4%
2015 -2.2% 0.9%
2016 13.7% 8.1%
2017 (YTD) 2.7% 8.3%

Cum 49.1% 71.5%
Std Dev 6.0% 5.7%

Cum Difference is 22.4%.

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Re: Value Factor Investing is not Value Investing

Post by packer16 » Sun Sep 03, 2017 2:49 pm

What I am trying to convey with this thread that what Buffet did in stock selection had nothing to do with factors. To conflate the two is what good factor marketers have done and some have taken the whole thing hook, line & sinker. Factors are historical artifacts not a stock selection system although some would like to portray it that way. Value investing is as adaptive as the market itself is so to compare it to non-adaptive factors is IMO like comparing apples & oranges.

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Re: Value Factor Investing is not Value Investing

Post by avalpert » Sun Sep 03, 2017 2:51 pm

packer16 wrote:
Sun Sep 03, 2017 2:39 pm
I used the Vanguard 500 and Vanguard SCV from 2012 (Larry's article as published in late 2011) to date & Vanguard Total Bond for the bond portion. Here are the returns by year:

Year 50/50 LP 60/40 TSM
2012 11.1% 11.1%
2013 8.6% 18.4%
2014 8.2% 10.4%
2015 -2.2% 0.9%
2016 13.7% 8.1%
2017 (YTD) 2.7% 8.3%

Cum 49.1% 71.5%
Std Dev 6.0% 5.7%

Cum Difference is 22.4%.

Packer
I'm just not getting the same results - if I compare growth of $10k from 2012-8/2017 for 60/40 VTI/BND and 50/50 VBR/BND I get $17,184 to $16,112. So the 60/40 numbers are in line with yours and the VBR numbers are significantly off. The standard deviations are 6.24 and 6.17 respectively.

Still a difference, but not one that would dramatically change the outcome.

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Re: Value Factor Investing is not Value Investing

Post by avalpert » Sun Sep 03, 2017 2:55 pm

packer16 wrote:
Sun Sep 03, 2017 2:49 pm
What I am trying to convey with this thread that what Buffet did in stock selection had nothing to do with factors.
Agreed. And I also agree that the language often leads to misunderstanding on forums like this and in the financial press.
To conflate the two is what good factor marketers have done and some have taken the whole thing hook, line & sinker.
Disagree. I don't think the people selling smart-beta are trying to piggy-back on Buffet-style value branding - I thin they are proposing that they have a sound quantitative approach rooted in academic research (rightly or wrongly can be argued).

I think there are a lot of other funds out there that attach the word 'value' to their name to piggyback on the Graham-Dodd/Buffet brand despite doing nothing similar to them, but I don't think that is true of the factor-based fund and fund families.

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Re: Value Factor Investing is not Value Investing

Post by packer16 » Sun Sep 03, 2017 3:06 pm

It is a matter of opinion but when guys like AQR have papers claiming that have found the reasons for why Buffet outperformed and happen to have funds that use the same factors, I would call it piggy backing. Maybe others do not do the same but I think it is telling in the Fama interview referenced above the interviewer was confusing discount to intrinsic value & the value factor and Fama did not make the distinction we are here. Also whenever something is handed over the marketers their objective is sales not to point out the truth.

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Jack Bogle discusses "factor" and "smart beta" investing.

Post by Taylor Larimore » Sun Sep 03, 2017 3:10 pm

Bogleheads:

Our mentor, Jack Bogle, gives his opinion of "factor" investing and "smart beta" investing in this January interview for MarketWatch:

Jack Bogle tells you the secret to becoming a winning investor.

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

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Re: Value Factor Investing is not Value Investing

Post by Robert T » Sun Sep 03, 2017 3:34 pm

packer16 wrote:
Sun Sep 03, 2017 9:47 am
In 1993, DFA opened a fund that invested in the value (aka returned challenged) factor. If we look at performance since 1993, IMO your impression of SCV will change materially. Since 1993, SCV has outperformed the S&P 500 by 0.8% per year but the swings are very large thus leading to a large timing risk. Also the pattern of returns imply that the factor may be arbed away as the returns early on to 2005 are positive but have been negative every since. So why take so much timing risk to gain 0.8% (& falling) per year of additional return?

Since 1993 the DFA small value fund has outperformed Vanguard 500 by 2.3% per year annualized (11.6% vs. 9.3%).

Growth in $1000

DFA Small Value = $147,581
Vanguard 500 = $88,590

As per portfolio visualizer. https://www.portfoliovisualizer.com/bac ... ion2_2=100

There will likely always be periods of underperformance of SCV (Value vs. growth, large vs small), just as there will likley be periods of underperformance of stocks versus bonds - the 'timing risk' you mention (e.g. for the 17 year period 2000-2016 Vanguard TBM outperformed Vanguard 500 by 0.56% annualized https://www.portfoliovisualizer.com/bac ... ion2_2=100 - what are we to conclude from this?)

It reminds me of the following article (https://www.aqr.com/cliffs-perspective/ ... e-long-run)

Obviously no guarantees.

Robert
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Re: Value Factor Investing is not Value Investing

Post by betablocker » Sun Sep 03, 2017 4:03 pm

packer16 wrote:
Sun Sep 03, 2017 2:49 pm
What I am trying to convey with this thread that what Buffet did in stock selection had nothing to do with factors. To conflate the two is what good factor marketers have done and some have taken the whole thing hook, line & sinker. Factors are historical artifacts not a stock selection system although some would like to portray it that way. Value investing is as adaptive as the market itself is so to compare it to non-adaptive factors is IMO like comparing apples & oranges.

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The evidence indicates that your assertion on the thread isn't the case. Buffett (and Fisher and Graham before him) figured out that those factors work. Their individual stock selection skill came almost solely from that. Ad hominem criticism of people as "marketers" seems beside the point. What evidence would convince you?

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Re: Value Factor Investing is not Value Investing

Post by betablocker » Sun Sep 03, 2017 4:21 pm

packer16 wrote:
Sun Sep 03, 2017 3:06 pm
It is a matter of opinion but when guys like AQR have papers claiming that have found the reasons for why Buffet outperformed and happen to have funds that use the same factors, I would call it piggy backing. Maybe others do not do the same but I think it is telling in the Fama interview referenced above the interviewer was confusing discount to intrinsic value & the value factor and Fama did not make the distinction we are here. Also whenever something is handed over the marketers their objective is sales not to point out the truth.

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AQR is totally piggybacking. They'd admit as much. Graham and Buffett figured out that the factors worked. That's why they are geniuses but it's a systematic factor. They just built a more efficient way to exploit it. Also Fama knows exactly what the value factor is. He's not confused. Discount to intrinsic value of a good business is subjective. Isolating the cheapest stocks on something like an enterprise multiple that have high scores on quality is not subjective. But the evidence shows that when Buffett selects such a stock almost all of its performance can be explained by the non subjective enterprise multiple. So fine for Buffett to keep doing what he is doing but why not try to understand why it works in way that might make the process more efficient and less subjective.

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Re: Value Factor Investing is not Value Investing

Post by packer16 » Sun Sep 03, 2017 4:27 pm

The difference is the time period where there has been material investment in each of the index strategy (since the 1960 or before) and the SCV strategy (1993). For the index strategy we have gone through a few cycles with cash invested in the strategy for the SCV we have not. The pre-2005 SCV performance shows an outperformance, the post-2005 an underperformance. This could be the value factor getting arbed away or it could be part of a cycle, we cannot tell from the data so I would think the prudent thing to do would be to wait to see. If you invest, you risk a good amount of underperformance versus the index if you are wrong.

If you compare the value premium to the stock-bond premium over the same period (1993-2017) the stock-bond premium is about 2x the value-S&P 500 premium. Also the period of underperformance for the stock-bond premium was 8 years from 2000 to 2008, it outperformed before & after. You may be right but I think a rationale view of the data to date is inconclusive.

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Re: Value Factor Investing is not Value Investing

Post by snarlyjack » Sun Sep 03, 2017 4:29 pm

Thank you Taylor, that was a interesting article
on growth & value stocks by Jack Bogle.

When I look at 3 funds. The Total Stock Market, The
S & P 500 & High Dividend Yield Index Fund they are a
hair apart from each other on the charts (3 year, 5 year &
10 year charts). They are all index funds that are buying
the "whole haystack" within their index & they all have
super low ER's (expense ratio's).

I' am thinking they are all related. They are all
brothers & sisters in the same Vanguard Family. One
tilts toward growth stocks, one tilts toward value stocks
& one has them all (growth & value). All of these funds
I' am sure are approved by Jack Bogle. They are all long
term buy & hold investments. Jack would be proud. All
three of these funds belong in Boglehead land...

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Re: Value Factor Investing is not Value Investing

Post by nedsaid » Sun Sep 03, 2017 5:59 pm

packer16 wrote:
Sun Sep 03, 2017 2:49 pm
What I am trying to convey with this thread that what Buffet did in stock selection had nothing to do with factors. To conflate the two is what good factor marketers have done and some have taken the whole thing hook, line & sinker. Factors are historical artifacts not a stock selection system although some would like to portray it that way. Value investing is as adaptive as the market itself is so to compare it to non-adaptive factors is IMO like comparing apples & oranges.

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Certainly there were certain characteristics that Buffett was looking for in a business or a stock. His picks did tend to tilt towards Value and Munger taught him about Quality. You can say this wasn't factor investing but I disagree. Buffett really doesn't think in academic terms. You do have a point in that Buffett and Munger have a disdain for academic research, could be they didn't like their secret sauce being revealed. Not sure I would call factors non-adaptive.
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Re: Value Factor Investing is not Value Investing

Post by nisiprius » Sun Sep 03, 2017 6:25 pm

stlutz wrote:
Fri Sep 01, 2017 4:48 pm
...SCV is generally categorized as something in the range of 3-7% of the market. So let's just assume 5% for now...
????? The Morningstar style box for Vanguard Total Stock Market Index Fund classifies only 2% of it as "small-cap value."

It doesn't matter much, although it does point up something that bothers me. People keep talking about categories like "small value" or "emerging markets" as if these were perfectly clear, totally objective concepts, when in reality they are quite subjective and vary a lot from one authority to another.
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Re: Value Factor Investing is not Value Investing

Post by packer16 » Mon Sep 04, 2017 7:18 am

The biggest difference between Buffet/Value investing & factor investing, is value investing is the basis for the causation of changes in value and factor investing is based upon just the correlation between the changes of value and some factor. Correlation does not equal causation and thus factor investing will never generate the returns of value investing. You can clearly see this when you see the portfolios generated by factor screens versus value investors who have developed a more nuanced understanding of value (which more reflects the market) than any screen can. This is also seen in the performance of factor funds versus the historical data they are based upon. I think the factor promoters also do no address the issue of correlation versus causation.

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Re: Value Factor Investing is not Value Investing

Post by nedsaid » Mon Sep 04, 2017 10:26 am

packer16 wrote:
Mon Sep 04, 2017 7:18 am
The biggest difference between Buffet/Value investing & factor investing, is value investing is the basis for the causation of changes in value and factor investing is based upon just the correlation between the changes of value and some factor. Correlation does not equal causation and thus factor investing will never generate the returns of value investing. You can clearly see this when you see the portfolios generated by factor screens versus value investors who have developed a more nuanced understanding of value (which more reflects the market) than any screen can. This is also seen in the performance of factor funds versus the historical data they are based upon. I think the factor promoters also do no address the issue of correlation versus causation.

Packer
I wouldn't put it quite that way. For one thing, I don't get the correlation vs. causation argument. Where I do agree is there is a big difference in approach to Value investing between the more traditional Benjamin Graham approach and the academic approach. The Graham approach is a bottoms up, stock by stock analysis with a calculation of intrinsic value taking into account intangible factors like quality of management. The academic approach is screening for such things as price/book, price/earnings, price/sales, and price/cash flow. Everything that passes the screens and is investable is purchased, sort of like a Costco approach buying in bulk. A Graham disciple might use a screen to come up with a list of candidate stocks for purchase and to weed out stocks that clearly are not Value stocks. The difference with the Graham approach is the careful company by company analysis, the calculation of intrinsic value, the calculation of a margin of safety, and the selection of the "best" stocks.

Buffett isn't really a Value investor anymore, he is looking for Quality at a good price. It is fair to say he is Value oriented as he has modified his original approach. Charlie Munger taught him about quality. We can see that the most famous Graham practitioner of all time modified his approach. The assumption is made here that the academic version of Value investing is static and set in stone. I know DFA used to screen for just value, now they screen to get momentum from negative to neutral, and now are also looking for Profitability/Quality. My understanding is that the academics have changed somewhat their criteria for Value, it looks to my untrained eye that the two approaches are converging. What DFA is now doing looks more and more like Buffett. I would argue that both the Graham approach and the academic approach are both dynamic. It seems like there has been fine tuning on the definitions of the various factors.

Really factors relate to stock characteristics. By the academic definition Value stocks have lower than market ratios of such things as Price/Book, Price/Earnings, Price/Sales, and Price/Cash Flow. In addition, this companies tend to have more volatile earnings and higher leverage than let's say Growth stocks. Value, at least in the academic sense relates to negative momentum. In addition, Value is defined as 30% of the market whereas Vanguards indexes do a 50/50 split between Value and Growth. Academics have found that Value companies outperform the market over long periods of time.

It seems like a Graham disciple would take into account the academic criteria but they dig deeper. My take is that a Graham disciple would want companies with stronger balance sheets and with good earnings history. It is really buying a set of cash flows at the best price possible. If a company had volatile earnings, a Graham disciple might really be interested if there were really attractive assets on the balance sheet. Also a company with not so great earnings but a terrific balance sheet would merit a very close look. So you are looking for cheaper cash flows (income statement) and/or cheaper assets (balance sheet). But again they look at intangible factors like quality of management. I know Buffett focuses on cash flows.

So yes, I can see where a DFA Value portfolio might have differences from a Graham Value portfolio. For one thing, a Graham portfolio would have fewer stocks. My guess is that a Graham portfolio would have a smaller proportion of the more leveraged companies. My other guess is that the earnings of a Graham Value portfolio would be less volatile than the aggregate earnings of an Academic Value portfolio. I would like to see Packer elaborate on this point. Again, I think these two approaches are converging. The difference is that the academics would never do the rigorous bottoms up company by company analysis or take into consideration intangible factors.
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Re: Value Factor Investing is not Value Investing

Post by packer16 » Mon Sep 04, 2017 11:18 am

By causation, I mean that a value investor determines an intrinsic value & the market price should in theory should be in some band around intrinsic value. When it is significantly below the band then a purchase is made. Over time the values should converge if the assumptions in the apprasial are correct. The mispricing identified by value investing & subsequently re-valued by the market is the cause of the better than market returns.

The factor model examines the correlation of returns & factors. The causation may or may not be related to the correlation. We know these correlations change over time because a portfolio of value stocks does not always outperform the market basket. So while if there is causation there will be a correlation if there is a correlation there may not be a causation. The other more obvious difference is the type & level of analysis. IMO the market is very adaptive & becoming more efficient & will price the value stocks correctly so that the simple screens performed by the factor investors become less useful over time as more & more money is invested in this way. So a deeper understanding of value beyond screens is required to obtain market beating returns. I believe that inefficiencies at the micro level, and thus market beating returns, are more likely than at the macro level as is required for factors to work.

Packer
Buy cheap and something good might happen

snarlyjack
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Re: Value Factor Investing is not Value Investing

Post by snarlyjack » Mon Sep 04, 2017 12:54 pm

It is best to use myself (me) as an example.
I think people can identify with me better than academic studies.

I' am a young guy (23 years old) that inherited quite a bit of money.
My plan is to develop a "income stream" that I can eventually retire on
and use in emergency situations without liquidating the portfolio.
Their is no reason for me to use the "Trinity Study" or the 4% SWR.
Age 100 - age 23 = 77 mortality years of the portfolio.

From all of the studies that I have read value stocks & growth stocks
have the same value over a long period of time. If a person has the time
& the money a dividend strategy makes a lot of sense. I' am not worried
about "factors" although I do like "quality companies".

I consider myself a "income investor". Value stocks in my situation
are more income orientated. My goal isn't to maximize growth or market
beating returns. I think I can do quite well with just average growth.
Can you imagine a 8% growth (average growth) over a 77 year time frame.
Put $225,000. into your financial calculator at 8% growth for 77 years &
tell me what you get. (Put in 6% average growth or 10%)...

Not all people are looking to maximize growth or get market beating
returns by taking undue risk. Their are some people who like value stocks
(Coke, Pepsi, Microsoft, etc) plus the income stream.

Stepping off my soap box now...you guy's need to think differently &
open your minds up to different possibilities...

avalpert
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Re: Value Factor Investing is not Value Investing

Post by avalpert » Mon Sep 04, 2017 1:09 pm

snarlyjack wrote:
Mon Sep 04, 2017 12:54 pm
It is best to use myself (me) as an example.
I think people can identify with me better than academic studies.

I' am a young guy (23 years old) that inherited quite a bit of money.
My plan is to develop a "income stream" that I can eventually retire on
and use in emergency situations without liquidating the portfolio.
Their is no reason for me to use the "Trinity Study" or the 4% SWR.
Age 100 - age 23 = 77 mortality years of the portfolio.

From all of the studies that I have read value stocks & growth stocks
have the same value over a long period of time.
So you haven't read any of the actual academic studies then - the ones that show a value premium over long periods of time?
If a person has the time
& the money a dividend strategy makes a lot of sense.
No, it doesn't. A 'dividend strategy' is a distraction from total returns, ignores other (now more in vogue) ways that companies return money to shareholders and leads to chasing yield.
I consider myself a "income investor". Value stocks in my situation
are more income orientated. My goal isn't to maximize growth or market
beating returns.
Great, then take less risk. The answer isn't dividend stocks, the answer is increasing your allocation to safe fixed income.

betablocker
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Re: Value Factor Investing is not Value Investing

Post by betablocker » Mon Sep 04, 2017 1:16 pm

snarlyjack wrote:
Mon Sep 04, 2017 12:54 pm
It is best to use myself (me) as an example.
I think people can identify with me better than academic studies.

I' am a young guy (23 years old) that inherited quite a bit of money.
My plan is to develop a "income stream" that I can eventually retire on
and use in emergency situations without liquidating the portfolio.
Their is no reason for me to use the "Trinity Study" or the 4% SWR.
Age 100 - age 23 = 77 mortality years of the portfolio.

From all of the studies that I have read value stocks & growth stocks
have the same value over a long period of time. If a person has the time
& the money a dividend strategy makes a lot of sense. I' am not worried
about "factors" although I do like "quality companies".

I consider myself a "income investor". Value stocks in my situation
are more income orientated. My goal isn't to maximize growth or market
beating returns. I think I can do quite well with just average growth.
Can you imagine a 8% growth (average growth) over a 77 year time frame.
Put $225,000. into your financial calculator at 8% growth for 77 years &
tell me what you get. (Put in 6% average growth or 10%)...

Not all people are looking to maximize growth or get market beating
returns by taking undue risk. Their are some people who like value stocks
(Coke, Pepsi, Microsoft, etc) plus the income stream.

Stepping off my soap box now...you guy's need to think differently &
open your minds up to different possibilities...
You need to read more studies. Value has outperformed growth over the long run and dividends aren't meaningful. They aren't income either. Unless you choose to use them that way. Alternatively you could sell a small portion of stocks that don't pay dividends and use that as income. It's 6 of one. There are about 1000 threads here about that topic. Do some more reading. You don't not have your facts straight.

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Re: Value Factor Investing is not Value Investing

Post by nedsaid » Mon Sep 04, 2017 1:21 pm

snarlyjack wrote:
Mon Sep 04, 2017 12:54 pm
It is best to use myself (me) as an example.
I think people can identify with me better than academic studies.

I' am a young guy (23 years old) that inherited quite a bit of money.
My plan is to develop a "income stream" that I can eventually retire on
and use in emergency situations without liquidating the portfolio.
Their is no reason for me to use the "Trinity Study" or the 4% SWR.
Age 100 - age 23 = 77 mortality years of the portfolio.

From all of the studies that I have read value stocks & growth stocks
have the same value over a long period of time. If a person has the time
& the money a dividend strategy makes a lot of sense. I' am not worried
about "factors" although I do like "quality companies".

I consider myself a "income investor". Value stocks in my situation
are more income orientated. My goal isn't to maximize growth or market
beating returns. I think I can do quite well with just average growth.
Can you imagine a 8% growth (average growth) over a 77 year time frame.
Put $225,000. into your financial calculator at 8% growth for 77 years &
tell me what you get. (Put in 6% average growth or 10%)...

Not all people are looking to maximize growth or get market beating
returns by taking undue risk. Their are some people who like value stocks
(Coke, Pepsi, Microsoft, etc) plus the income stream.

Stepping off my soap box now...you guy's need to think differently &
open your minds up to different possibilities...
If you are going to do this, focus on Dividend Growth rather than High Dividend. Also check the payout ratio of dividends compared to earnings, a lower ratio of payouts is better than a higher ratio because you want room for a company to boost its dividend. I would also want companies with earnings growth too. You want both earnings and dividend growth. In addition, I would put your stocks on dividend reinvestment. The market yields about 2%, so you want to look for yields that are above that, probably in the neighborhood of 3% or so.

Stocks that pay excessively high dividends can be a big sign of trouble. I would not buy publicly traded Master Limited Partnerships, at tax time these can be a big nightmare. Maybe throw in a REIT or two but don't go too heavy on these. With REITs, a portion of your yield is in effect a return of capital. Pretty much you want to buy quality stocks, don't chase dividends for dividends sake.

Another thing is to focus on quality, you want to own quality companies. I define quality as companies with strong balance sheets and with consistent earnings growth. To Wall Street, consistency is everything. Nirvana is achieved when earnings growth is steady, consistent, and reliable. In this situation, your dividends will grow at a steady, consistent, and reliable fashion. Keep in mind that the market puts a premium on Quality, the very best quality stocks are seldom cheap, hence my advice for a watch list.

Make sure you don't overpay for your stocks. Keep a watch list of stocks you would like to own but maybe seem too expensive right now. If you see a big market drop, that is your opportunity to swoop in and buy those stocks at a discount. I can't make my point strong enough, don't overpay for your stocks. One hint is to look at historical valuation ranges for the stock and for its industry. If your stock is way above historical valuation ranges, it is a possible signal to wait.

Make certain that you diversify across industry groups and keep a balance between those groups. In other words, you don't want your stocks concentrated in 2-3 industry groups. Pretty much, you are creating a Large Cap Blue Chip Index. You could just buy a Dow 30 Index ETF and get pretty close to what I am recommending.

I would also subscribe to a service like Morningstar or ValueLine. Analyst reports are helpful. The idea is to buy quality stocks at reasonable prices and hold them forever. The reality is, that the markets and economy are dynamic. Great companies sometimes become not so great and that is why even such a portfolio needs a certain amount of monitoring. Your portfolio will need a certain amount of maintenance. If a stock is in a dying industry, you might want to think about selling that stock.

Pretty much, you have appointed yourself to be a stock analyst. If you aren't working with an experienced stock broker, you are on your own. Hence my recommendation for a reputable service to facilitate access to summarized data and to analyst reports. Being a member of an organization like the National Association of Investment Clubs will teach you a lot. I warn you, this could be time consuming.

I would keep your portfolio to a maximum of 25 stocks and at the very most 30 stocks. You won't be doing this full time, so you need a limited universe so that you can monitor and maintain. At some point, you get back strain hauling all those annual reports to the recycle bin!

I don't recommend that you do this, but follow these common sense guidelines if you are really committed to doing this. My guess is that by doing this, you will trail the market averages by maybe 0.50% a year or so. That has been my experience. It is very difficult to beat the indexes. You might match the indexes or even beat them a little. So pretty much, over long periods of time, your range will be underperformance of 0.50% a year to outperformance of 0.50% a year. That would be my realistic expectation, and that is an assumption that you are taking this seriously and making a conscientious effort not to overpay for your stocks. Valuations matter and they matter a lot.
A fool and his money are good for business.

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Re: Value Factor Investing is not Value Investing

Post by snarlyjack » Mon Sep 04, 2017 1:33 pm

Thank you Betablocker & Nedsaid.

I use 100% Vanguard Index Funds. I do not have a single
individual stock but I do look at the stocks in the funds.

Right now I have 50% invested in High Dividend Yield Index Fund.
I really like the stocks in the fund & their sector percent's.
I have 50% in the Dividend Appreciation Index Fund. For the
dividend growth.

I see no reason to ever sell a share unless their is a Hugh emergency.
And yes value investing is very profitable. I' am very comfortable
with the strategy. The big secret is like Jack Bogle say's is to let
it ride be a long term buy & hold investor with low expense ratio's.
The rest of all these factors are a distraction to what we are really
trying to do. Which is to have a nice life...

betablocker
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Re: Value Factor Investing is not Value Investing

Post by betablocker » Mon Sep 04, 2017 1:37 pm

packer16 wrote:
Mon Sep 04, 2017 11:18 am
By causation, I mean that a value investor determines an intrinsic value & the market price should in theory should be in some band around intrinsic value. When it is significantly below the band then a purchase is made. Over time the values should converge if the assumptions in the apprasial are correct. The mispricing identified by value investing & subsequently re-valued by the market is the cause of the better than market returns.

The factor model examines the correlation of returns & factors. The causation may or may not be related to the correlation. We know these correlations change over time because a portfolio of value stocks does not always outperform the market basket. So while if there is causation there will be a correlation if there is a correlation there may not be a causation. The other more obvious difference is the type & level of analysis. IMO the market is very adaptive & becoming more efficient & will price the value stocks correctly so that the simple screens performed by the factor investors become less useful over time as more & more money is invested in this way. So a deeper understanding of value beyond screens is required to obtain market beating returns. I believe that inefficiencies at the micro level, and thus market beating returns, are more likely than at the macro level as is required for factors to work.

Packer
So as I understand it your belief is that fundamental analysis uncovers causation and categorizing stocks by financial ratios and measures only establishes correlation. What if value investors use financial ratios as part of their fundamental analysis but still read all the 10k documents? At what point do their conclusions move from correlation to causation? After they read the 10k, a certain number of articles, etc. Assuming there is some real distinction between correlation and causation in this context, where is the evidence of better results?

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Re: Value Factor Investing is not Value Investing

Post by snarlyjack » Mon Sep 04, 2017 3:26 pm

Sorry Avalpert, I didn't see your response.

I've read "ton's" of research reports, at least 100 different
academic, plus different articles, plus different web sites.

I do not chase yield. The High Dividend Income Fund is approx.
2.9% & Dividend Appreciation Fund is approx. 1.9% For a split yield
of approx. 2.4%. But they do pay a quarterly dividend. I' am interested
in the quarterly dividend. That is the distribution that I'll eventually
live on.

As far as bonds at my age I really don't feel a need for them. However,
I do have 10% in 1 year cd's at my local credit union. I have no debt.
All of my student loans and car debt have been paid off. I have a good
job that has a matching 401K + health insurance. Plus I' am very frugal.

I think I' am being pretty conservative. I could be more conservative
in the balanced fund. But why... at age 23 I have lot's of time. It's
all a work in process. I really do appreciate all of your comments.
Your a pretty smart & good investor. Thank you for all your help!

Dead Man Walking
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Re: Value Factor Investing is not Value Investing

Post by Dead Man Walking » Mon Sep 04, 2017 4:05 pm

A few thoughts based on several of the above posts:

Factor-based funds available to retail investors have a very short history; therefore, it may be too soon to draw realistic conclusions about their performance and risk.

Value is a term that has many meanings when applied to investing in stocks. Some think that buying quality stocks at a reasonable price is "value" investing. The product summaries of Vanguard's value funds define value stocks as temporarily out of favor, underappreciated, misunderstood, or reasonably priced. Others use a quantitatively driven investment approach.

The cumulative returns for Vanguard's Growth Index Fund (843.49%) and Value Index Fund (841.27%) since their inception on 11/02/1992 is nearly the same.

The cumulative return for Vanguard's Small-cap Value Index Fund (389.82%) is significantly greater than the cumulative return for Small-cap Growth Index Fund (373.93%) since their inception on 05/21/1998.

DMW

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Re: Value Factor Investing is not Value Investing

Post by betablocker » Mon Sep 04, 2017 4:37 pm

Dead Man, as to the definition, I think you're right that people define things differently and at the same time Buffett's outperformance in the past can be almost entirely explained by qualitatively derived value and quality factors. So what he calls intrinsic value (which is subjective) seems to line up really well with the value and quality factors. So are they all that different? I don't think so. The academics went looking at investors who outperformed and figured out the system behind it and then they tested it on all sorts of assets across multiple time periods. So graham and Buffett discovered a truth and then the academics refine and explicated it.

Your return data has issues. Large cap growth has just had a huge run so you are comparing the data at the later part of one outperforming. No one disagrees that growth outperforms at times but when you compare rolling time periods, value wins in the end. It has been that way for hundreds of years.

Dead Man Walking
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Re: Value Factor Investing is not Value Investing

Post by Dead Man Walking » Mon Sep 04, 2017 8:16 pm

betablocker wrote:
Mon Sep 04, 2017 4:37 pm

Your return data has issues. Large cap growth has just had a huge run so you are comparing the data at the later part of one outperforming. No one disagrees that growth outperforms at times but when you compare rolling time periods, value wins in the end. It has been that way for hundreds of years.
Are you saying that large cap value did not experience a period of high-performance in the 24 years and 10 months the funds have been in existence?

DMW

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Taylor Larimore
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Re: Value Factor Investing is not Value Investing

Post by Taylor Larimore » Mon Sep 04, 2017 9:09 pm

Value Factor Investing is not Value Investing

Bogleheads:

Despite a confusing topic, this much is clear:

15-YEAR RETURNS (Morningstar maximum):

Vanguard Growth Index (VIGAX) 9.46% before tax. 9.16% after-tax
Vanguard Value Index (VVIAX) 9.12% before tax. 8.52% after-tax

Why not own BOTH growth and value to avoid having all investments in a losing category?

The Three-Fund Portfolio

Past performance does not forecast future performance.

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

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Re: Value Factor Investing is not Value Investing

Post by snarlyjack » Mon Sep 04, 2017 9:14 pm

I' am getting to be like Nedsaid.

We keep getting drawn into these value/dividend blogs
(like a moth to the flame) and keep getting tarred & feathered.

I have to admit they are fun & interesting. I have learned
a lot from you guy's...Thanks for the insightful conservation.

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nedsaid
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Re: Value Factor Investing is not Value Investing

Post by nedsaid » Mon Sep 04, 2017 11:38 pm

betablocker wrote:
Mon Sep 04, 2017 4:37 pm
Dead Man, as to the definition, I think you're right that people define things differently and at the same time Buffett's outperformance in the past can be almost entirely explained by qualitatively derived value and quality factors. So what he calls intrinsic value (which is subjective) seems to line up really well with the value and quality factors. So are they all that different? I don't think so. The academics went looking at investors who outperformed and figured out the system behind it and then they tested it on all sorts of assets across multiple time periods. So graham and Buffett discovered a truth and then the academics refine and explicated it.

Your return data has issues. Large cap growth has just had a huge run so you are comparing the data at the later part of one outperforming. No one disagrees that growth outperforms at times but when you compare rolling time periods, value wins in the end. It has been that way for hundreds of years.
Well, Benjamin Graham was an academic and he was published. His books are investment classics. Graham knew about Value way back when. Then there was the Cowles Commission which started in 1932 and it was made up of by academics. Cowles created an index that later was the basis for the S&P 500 and also did important work on stock forecasting. He also compiled a database of old stock market data back to 1871. The famed economist John Maynard Keynes successfully ran investments for himself and an endowment fund. When we talk about academic research, we seem to think it all started with Fama and French.
A fool and his money are good for business.

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nedsaid
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Re: Value Factor Investing is not Value Investing

Post by nedsaid » Tue Sep 05, 2017 12:11 am

snarlyjack wrote:
Mon Sep 04, 2017 9:14 pm
I' am getting to be like Nedsaid.

We keep getting drawn into these value/dividend blogs
(like a moth to the flame) and keep getting tarred & feathered.

I have to admit they are fun & interesting. I have learned
a lot from you guy's...Thanks for the insightful conservation.
Well, I feel a little more brave. Larry Swedroe doesn't post here anymore so it feels safe to actually talk about dividends. Sort of like the Casablanca movie, you keep seeing the usual suspects. JoMoney hasn't weighed in yet, I am kind of disappointed.
A fool and his money are good for business.

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Re: Value Factor Investing is not Value Investing

Post by nedsaid » Tue Sep 05, 2017 12:13 am

bertilak wrote:
Thu Aug 31, 2017 10:46 am
Packer,

You are 100% correct.

Charlie Munger (of Berkshire Hathaway fame) has a lot to say about this and is quoted and paraphrased in Tren Griffin's book Charlie Munger: The Complete Investor. The difference between the two is clearly distinguished. There is a whole chapter called "Value Investing vs, Factor Investing." A quote:
  • "It is important to draw a clear and simple definitional distinction between value as a statistical factor (Fama/French) and value as an analytical style or goal (Ben Graham)."
It is further pointed out that the two are not simply two ways (top down vs bottom up) to answer the same question but are looking to answer different questions.

Griffin makes an analogy, about how to build a better basketball team. One way is to hire the tallest people available (the Fama/French way). Another way is to hold tryouts and evaluate each prospect's performance (the Ben Graham way). Both methods may result in good teams, but for different reasons.

My take: One way is easy and anyone can do it. The other way is hard and takes both rare skill and lots of work. You can decide for yourself which is more effective or, at least, is more appropriate for you but do not get confused by the terminology.
Wow. That was a very good post. I also like Charlie Munger quotes.
A fool and his money are good for business.

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Re: Value Factor Investing is not Value Investing

Post by Robert T » Tue Sep 05, 2017 9:55 am

packer16 wrote:
Mon Sep 04, 2017 7:18 am
... factor investing will never generate the returns of value investing.
Here’s the performance of two ‘value’ funds since the start of 2003, the year I set up my personal ‘factor-tilted’ portfolio. The two ‘value’ investors/funds highlighted below – Sequoia and Tweedy Browne - were both mentioned in Warren Buffet’s article on the “The Superinvestors of Graham-and-Doddsville” http://www.grahamanddoddsville.net/word ... Hermes.pdf .

2003–2016: Annualized return (%) / 2008 (downside) return (%)

Sequoia = 6.9% / -27.0%
Tweedy Browne Value = 6.7% / -24.4%
Personal ‘factor-tilted’ portfolio* = 9.3% / -28.7%
75% Global stock (MSCI ACWI):25% US total bond = 7.5% / -30.4%

* ‘Factor-tilted’ portfolio = 75:25 stock:bond portfolio with global value and smaller cap tilt in stocks.

$1 invested in the ‘factor-titled’ portfolio had accumulated into 36% and 40% more respectively than if invested in the Sequoia Fund or Tweedy Browne Value (‘value investors’ or as Buffet calls them – ‘Superinvestors of Graham-and-Doddsville’).

Obviously no guarantees.

We each have to decide on an investment approach that makes sense to us, and that we can stick with over the long-term.

Robert
.

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Re: Value Factor Investing is not Value Investing

Post by betablocker » Tue Sep 05, 2017 4:16 pm

Dead Man Walking wrote:
Mon Sep 04, 2017 8:16 pm
betablocker wrote:
Mon Sep 04, 2017 4:37 pm

Your return data has issues. Large cap growth has just had a huge run so you are comparing the data at the later part of one outperforming. No one disagrees that growth outperforms at times but when you compare rolling time periods, value wins in the end. It has been that way for hundreds of years.
Are you saying that large cap value did not experience a period of high-performance in the 24 years and 10 months the funds have been in existence?

DMW
Returns are highly dependent on start and end dates. That's why you use rolling periods. If you hold over long periods of time they will be much more accurate. If you'd looked at the Nasdaq in 2000 and said, wow growth out performs, you were in for a brutal perspective change.

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Re: Value Factor Investing is not Value Investing

Post by betablocker » Tue Sep 05, 2017 6:49 pm

nedsaid wrote:
Mon Sep 04, 2017 11:38 pm
betablocker wrote:
Mon Sep 04, 2017 4:37 pm
Dead Man, as to the definition, I think you're right that people define things differently and at the same time Buffett's outperformance in the past can be almost entirely explained by qualitatively derived value and quality factors. So what he calls intrinsic value (which is subjective) seems to line up really well with the value and quality factors. So are they all that different? I don't think so. The academics went looking at investors who outperformed and figured out the system behind it and then they tested it on all sorts of assets across multiple time periods. So graham and Buffett discovered a truth and then the academics refine and explicated it.

Your return data has issues. Large cap growth has just had a huge run so you are comparing the data at the later part of one outperforming. No one disagrees that growth outperforms at times but when you compare rolling time periods, value wins in the end. It has been that way for hundreds of years.
Well, Benjamin Graham was an academic and he was published. His books are investment classics. Graham knew about Value way back when. Then there was the Cowles Commission which started in 1932 and it was made up of by academics. Cowles created an index that later was the basis for the S&P 500 and also did important work on stock forecasting. He also compiled a database of old stock market data back to 1871. The famed economist John Maynard Keynes successfully ran investments for himself and an endowment fund. When we talk about academic research, we seem to think it all started with Fama and French.
I don't disagree and other academics have built on their work and advanced the field.

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Re: Value Factor Investing is not Value Investing

Post by analogsavior » Tue Sep 05, 2017 7:37 pm

packer16 wrote:
Mon Sep 04, 2017 7:18 am
... thus factor investing will never generate the returns of value investing ...
Bold and underline is mine and added for emphasis.

Speaking in absolutes like that is never a good idea, and frankly, its asking for factors to outperform in the future. :twisted:

I've have not looked at returns personally, but even if it were true in the past, who is to say it will be true in the future? Also, how does one compare value investor? Who's returns should would use in the comparison? Same with factors. It appears to me like there are simply too many confounders and far too much variability to make a reasonable assessment.

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Re: Value Factor Investing is not Value Investing

Post by rkhusky » Tue Sep 05, 2017 8:01 pm

The value factor is applied to a portfolio of stocks and is actually based on the difference between value and growth attributes, not just value. Value investing is applied to individual companies. Has anyone tried to apply the F-F analysis to the returns of a single stock? It doesn't work all that well.

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Re: Value Factor Investing is not Value Investing

Post by snarlyjack » Tue Sep 05, 2017 8:23 pm

There are a couple more value/dividend funds that have been exceptional.

Wellington manages the dividend growth fund that
was closed to new investors, when Vanguard came out with
the Dividend Appreciation Index Fund. Vanguards is a medium cap.
dividend fund that invest in dividend growing companies.
Both of these funds are kind of the same but different. Wellington
dividend growth fund is a managed fund. Vanguards dividend
appreciation fund is a index fund.

What these dividend growth funds try to do is buy companies
that are growing their dividends. One of the "factors" of dividend
growing companies is "quality".

The High Dividend Yield index fund is a value/dividend, large cap fund.
The Dividend Appreciation Index Fund is a dividend/quality, medium cap fund.

By using both Vanguard Funds a investor can get the large blue cap.
dividend paying companies & the medium cap. dividend growing companies.
Both of these funds have done exceptionally well.

This is why Siamond was updating the Simba spreadsheet for us. By
the way Siamond did a excellent job & now we can get into some
real number crunching.

Dead Man Walking
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Re: Value Factor Investing is not Value Investing

Post by Dead Man Walking » Tue Sep 05, 2017 9:13 pm

betablocker wrote:
Tue Sep 05, 2017 4:16 pm
Dead Man Walking wrote:
Mon Sep 04, 2017 8:16 pm
betablocker wrote:
Mon Sep 04, 2017 4:37 pm

Your return data has issues. Large cap growth has just had a huge run so you are comparing the data at the later part of one outperforming. No one disagrees that growth outperforms at times but when you compare rolling time periods, value wins in the end. It has been that way for hundreds of years.
Are you saying that large cap value did not experience a period of high-performance in the 24 years and 10 months the funds have been in existence?

DMW
Returns are highly dependent on start and end dates. That's why you use rolling periods. If you hold over long periods of time they will be much more accurate. If you'd looked at the Nasdaq in 2000 and said, wow growth out performs, you were in for a brutal perspective change.
For academic research, rolling periods are much more accurate. Retail diy investors can use research as a guide for making investment decisions. However, they are limited to funds in which they can actually invest. I chose to use the entire period of existence for the funds because that is the only real world rolling period that exists for the cited funds. I chose the large cap funds and small cap funds to illustrate that the value factor seems to be more significant with small caps. My examples are actually an apples to oranges comparison due to the difference in inception dates. Your comment about starting and ending dates is very accurate. Furthermore, an argument can be made that Vanguard's value index funds are not that "valuey."

DMW

snarlyjack
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Joined: Fri Aug 28, 2015 12:44 pm
Location: Montana

Re: Value Factor Investing is not Value Investing

Post by snarlyjack » Tue Sep 05, 2017 10:09 pm

Another series of funds that might be interesting is:

1). High Dividend Yield Index Fund (large blue cap value companies, 2.9 or 3.0% dividend yield).
2). Dividend Appreciation Index Fund (medium cap growing dividend companies, 1.8 or 1.9% dividend yield).
3). Small Cap. Value Index Fund (small value companies, 1.8 or 1.9% dividend yield).

This is another series of value/dividend paying funds that would hit on large, medium & small
companies. The blended dividend rate would be 2.16% and could have good long term
growth potential.

***disclaimer, past performance does not indicate future performance, their are
no guaranties in investing***

Longtermgrowth
Posts: 368
Joined: Thu Nov 26, 2015 1:59 pm

Re: Value Factor Investing is not Value Investing

Post by Longtermgrowth » Tue Sep 05, 2017 11:28 pm

snarlyjack wrote:
Tue Sep 05, 2017 10:09 pm
Another series of funds that might be interesting is:

1). High Dividend Yield Index Fund (large blue cap value companies, 2.9 or 3.0% dividend yield).
2). Dividend Appreciation Index Fund (medium cap growing dividend companies, 1.8 or 1.9% dividend yield).
3). Small Cap. Value Index Fund (small value companies, 1.8 or 1.9% dividend yield).

This is another series of value/dividend paying funds that would hit on large, medium & small
companies. The blended dividend rate would be 2.16% and could have good long term
growth potential.

***disclaimer, past performance does not indicate future performance, their are
no guaranties in investing***
snarlyjack, observing your past posts, I think the best thing you can do now is stay the course. Your asset allocation has changed from 100% Vanguard High Dividend Index, to Vanguard Total Stock Index, then back to High Dividend, now to High Dividend mixed with Dividend Appreciation. Those two are fine and should serve you well. We are probably talking a few percentage one way or the other between all of the funds, and switching back and forth will probably hurt you more in taxes in a rising market or losses between different index valuations than anything else.

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Lauretta
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Location: Italy

Re: Value Factor Investing is not Value Investing

Post by Lauretta » Wed Sep 06, 2017 1:49 am

Park wrote:
Thu Aug 31, 2017 8:47 am

However, I think I may be able to value factor invest. Why be interested in this inferior form of investing? My greatest fear as an investor is a secular bear market. The data I"ve seen is consistent with value factor investing being able to mitigate that risk.
Hi, that's an interesting point, can you point out which data you refer to? I thought the opposite, since for example the MSCI US value index had max DD of 59% versus a 55% for MSCI US index; and MSCI US Small cap value index had a max DD of 66% versus 59% for MSCI US Small cap index. So in case of a recession value seems to suffer more.
When everyone is thinking the same, no one is thinking at all

snarlyjack
Posts: 424
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Location: Montana

Re: Value Factor Investing is not Value Investing

Post by snarlyjack » Wed Sep 06, 2017 8:32 am

Longtermgrowth,

Thank you that is very good advice.

I was 20 years old when my Mom died (I' am now 23 years old).
When I started out I knew I didn't want to pay any commissions
so that left me with Fidelity or Vanguard. After studying the difference
between companies I picked Vanguard. One of the best decisions
of my life.

I picked the High Dividend Yield Index Fund because of the
big blue chip stocks in the fund that pay a dividend. Larry Swedkie
talked me into the Total Stock Market Fund for about a month
then I switched back to High Dividend Yield Index due to the stocks
in the fund. After further research I ended up 50% in High Dividend
Index & 50% in Dividend Appreciation Index. That is where I' am at now.
The stocks in those 2 funds are excellent. By adding Small Cap. Value
would increase the risk. Smaller stocks are way more volatile than larger
stocks. It was just a thought. I know some people like the SCV fund.

In my time of need the Bogleheads have been great. I have received
numerous e-mails from Taylor Larimore helping me. Plus, other
individuals at Bogleheads have e-mailed me. Plus, lot's
of conversations in the blogs. I consider finding the Bogleheads a
"God send from my Mom". As far as I' am concerned the Bogleheads is
the best financial forum out there & my part time home.

Longtermgrowth, once again thank you for your excellent advice!

garlandwhizzer
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Joined: Fri Aug 06, 2010 3:42 pm

Re: Value Factor Investing is not Value Investing

Post by garlandwhizzer » Wed Sep 06, 2017 8:20 pm

Robert T wrote:

2003–2016: Annualized return (%) / 2008 (downside) return (%)

Sequoia = 6.9% / -27.0%
Tweedy Browne Value = 6.7% / -24.4%
Personal ‘factor-tilted’ portfolio* = 9.3% / -28.7%
75% Global stock (MSCI ACWI):25% US total bond = 7.5% / -30.4%

* ‘Factor-tilted’ portfolio = 75:25 stock:bond portfolio with global value and smaller cap tilt in stocks.
IMO Robert T is a very sophisticated and very knowledgeable factor investor with sound judgement, a guy who can construct a multi-factor state of the art portfolio. Clearly he has selected a winning portfolio. Does this imply that the average investor can perform likewise pursuing a factor based strategy? Perhaps not.

Let's take my favorite fund company, Vanguard, for example. They have a SCV fund, VISVX, which presumably attempts to harvest the SCV premium, a premium which historically has been robust over long time frames. They also have a SCG fund, VISGX, which operates in what some academics term "the black hole of investment results," SCG. Both funds originated over 19 years ago, which seems like a long time frame, long enough to show the superiority of SCV over SCG, everyone's favorite factor combo over the black hole for investors. In fact, the SCG fund has actually outperformed the SCV fund since their inceptions on the same day 5/21/1998. 19 years is long time to wait for a payoff. Some of us will be dead in 19 years. Perhaps the rational thing to do at this point for those who have been sufficiently patient with VISVX is to give up and switch to another approach, admitting that harvesting factor premiums after costs can have its challenges.

Garland Whizzer

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