Goldman Sachs mulls the death of the value factor

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garlandwhizzer
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Goldman Sachs mulls the death of the value factor

Post by garlandwhizzer » Thu Nov 16, 2017 8:06 pm

An interesting article from from GS explaining the reasons why value has underperformed for a long spell:https://www.bloomberg.com/news/articles ... ing-decade.

GS believes a conjunction of macroeconomic factors and monetary policy are responsible. However, GS concludes that value is merely resting, not dead. When economic growth again becomes robust in the US, the seeds of which may be sprouting now, the value factor is expected once again to rise and outperform. A rising economic tide lifts all boats, even those barely seaworthy which begin to generate growing profits. In such circumstances, many investors may lose enthusiasm for paying AMZN $250 for one dollar of earnings. If our economic growth accelerates and inflation begins a slow steady move upward, the tide of investor sentiment may shift from growth and momentum to size and value. Time will tell.

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Re: Goldman Sachs mulls the death of the value factor

Post by whodidntante » Thu Nov 16, 2017 8:18 pm

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grok87
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Re: Goldman Sachs mulls the death of the value factor

Post by grok87 » Thu Nov 16, 2017 8:24 pm

garlandwhizzer wrote:
Thu Nov 16, 2017 8:06 pm
An interesting article from from GS explaining the reasons why value has underperformed for a long spell:https://www.bloomberg.com/news/articles ... ing-decade.

GS believes a conjunction of macroeconomic factors and monetary policy are responsible. However, GS concludes that value is merely resting, not dead. When economic growth again becomes robust in the US, the seeds of which may be sprouting now, the value factor is expected once again to rise and outperform. A rising economic tide lifts all boats, even those barely seaworthy which begin to generate growing profits. In such circumstances, many investors may lose enthusiasm for paying AMZN $250 for one dollar of earnings. If our economic growth accelerates and inflation begins a slow steady move upward, the tide of investor sentiment may shift from growth and momentum to size and value. Time will tell.

Garland Whizzer
Fama and french killed the value factor in 2014 when they replaced it with the profitability and investment factors.

https://www.google.com/amp/s/www.forbes ... tor-v/amp/
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: Goldman Sachs mulls the death of the value factor

Post by nedsaid » Thu Nov 16, 2017 8:57 pm

garlandwhizzer wrote:
Thu Nov 16, 2017 8:06 pm
An interesting article from from GS explaining the reasons why value has underperformed for a long spell:https://www.bloomberg.com/news/articles ... ing-decade.

GS believes a conjunction of macroeconomic factors and monetary policy are responsible. However, GS concludes that value is merely resting, not dead. When economic growth again becomes robust in the US, the seeds of which may be sprouting now, the value factor is expected once again to rise and outperform. A rising economic tide lifts all boats, even those barely seaworthy which begin to generate growing profits. In such circumstances, many investors may lose enthusiasm for paying AMZN $250 for one dollar of earnings. If our economic growth accelerates and inflation begins a slow steady move upward, the tide of investor sentiment may shift from growth and momentum to size and value. Time will tell.

Garland Whizzer
Garland, I have been pounding the table for plain old boring Large Cap Value for about three years now. So far, except for 2016, I have been wrong. Don't chase Low-Volatility or High Dividend, otherwise the Large Value space looks great to me. Always like buying cheap stuff.

When BusinessWeek comes out with a "Death of Value" cover, a huge rally in the Large Value stocks will be ahead. It took about 3-4 years after the infamous "Death of Equities" article for one of the greatest bull markets ever to ignite. I was pretty disappointed with a "Sleeping Value" article as Goldman Sachs had not given up. When Warren Buffett throws in the towel on Value investing, that will signal the rally. Or maybe Swedroe will write a new book pretty much saying that he was just kidding about factors. Rallies happen when the last optimist throws in the towel in utter disgust.
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Re: Goldman Sachs mulls the death of the value factor

Post by fennewaldaj » Fri Nov 17, 2017 1:45 am

In general shouldn't the underperformance of value for the last decade or so intuitively make one much more not less excited to invest in a value strategy? Or have there been a lot of people making the argument that growth outperforming value is the new normal (as opposed to value continuing to outperform or them having similar performance). I haven't really seen those arguments but most of my reading has been on bogleheads and bogleheads authors.

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Re: Goldman Sachs mulls the death of the value factor

Post by tibbitts » Fri Nov 17, 2017 7:18 am

fennewaldaj wrote:
Fri Nov 17, 2017 1:45 am
In general shouldn't the underperformance of value for the last decade or so intuitively make one much more not less excited to invest in a value strategy? Or have there been a lot of people making the argument that growth outperforming value is the new normal (as opposed to value continuing to outperform or them having similar performance). I haven't really seen those arguments but most of my reading has been on bogleheads and bogleheads authors.
No, just ask all the people citing years of international underperformance - they're convinced it will persist, despite possible occasional signs of life.

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Re: Goldman Sachs mulls the death of the value factor

Post by grok87 » Fri Nov 17, 2017 7:21 am

fennewaldaj wrote:
Fri Nov 17, 2017 1:45 am
In general shouldn't the underperformance of value for the last decade or so intuitively make one much more not less excited to invest in a value strategy? Or have there been a lot of people making the argument that growth outperforming value is the new normal (as opposed to value continuing to outperform or them having similar performance). I haven't really seen those arguments but most of my reading has been on bogleheads and bogleheads authors.
the question is whether value, i.e. price to book (or Book-to-market as fama and french frame it) is still a rewarded risk metric. Fama and French's latest research suggests that after accounting for small-size, low-investment and high-profitability there is now explanatory power left in value (BTM).
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: Goldman Sachs mulls the death of the value factor

Post by Valuethinker » Fri Nov 17, 2017 7:36 am

nedsaid wrote:
Thu Nov 16, 2017 8:57 pm
garlandwhizzer wrote:
Thu Nov 16, 2017 8:06 pm
An interesting article from from GS explaining the reasons why value has underperformed for a long spell:https://www.bloomberg.com/news/articles ... ing-decade.

GS believes a conjunction of macroeconomic factors and monetary policy are responsible. However, GS concludes that value is merely resting, not dead. When economic growth again becomes robust in the US, the seeds of which may be sprouting now, the value factor is expected once again to rise and outperform. A rising economic tide lifts all boats, even those barely seaworthy which begin to generate growing profits. In such circumstances, many investors may lose enthusiasm for paying AMZN $250 for one dollar of earnings. If our economic growth accelerates and inflation begins a slow steady move upward, the tide of investor sentiment may shift from growth and momentum to size and value. Time will tell.

Garland Whizzer
Garland, I have been pounding the table for plain old boring Large Cap Value for about three years now. So far, except for 2016, I have been wrong. Don't chase Low-Volatility or High Dividend, otherwise the Large Value space looks great to me. Always like buying cheap stuff.

When BusinessWeek comes out with a "Death of Value" cover, a huge rally in the Large Value stocks will be ahead. It took about 3-4 years after the infamous "Death of Equities" article for one of the greatest bull markets ever to ignite. I was pretty disappointed with a "Sleeping Value" article as Goldman Sachs had not given up. When Warren Buffett throws in the towel on Value investing, that will signal the rally. Or maybe Swedroe will write a new book pretty much saying that he was just kidding about factors. Rallies happen when the last optimist throws in the towel in utter disgust.
Buffett's use of Value is so very different from F-F (bottom decile price to book or top decile book to market) that you really cannot compare the two.

Buffett buys good businesses, with high and stable margins, good return on capital. Does so when they are available at distressed prices.

Precision Castparts was not sold on a cheap multiple, but aerospace spares is a long cycle business- you make your money as the planes get older.

Regulated utilities have strong barriers to entry and a regulated return on capital that is higher than Buffett's very low cost of capital (he can borrow at 2-3%).

Railways are basically a utility model with cost cutting and, again, very high barriers to entry (really infinite; your actual competition is trucks).

3G partners (Kraft & Heinz) buys businesses with the protection of branded consumer products, then slashes costs. Generic/ store brand product makers are already operating on a lean model with far lower costs-- nothing there to slash, and as retailers take pain, they push it back up the supply chain.

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Re: Goldman Sachs mulls the death of the value factor

Post by nedsaid » Fri Nov 17, 2017 10:13 am

Yes, we have discussed the difference between Buffett and the academics when it comes to Value. I think I will go with Buffett on this one, as he has his billions and the academics do not. We have to keep in mind that Charlie Munger taught Buffett about Quality so Buffett has modified the Benjamin Graham approach. This is why I say that Buffett is value oriented not strictly a Value investor.
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Re: Goldman Sachs mulls the death of the value factor

Post by White Coat Investor » Fri Nov 17, 2017 6:03 pm

It's a good demonstration of the importance of really believing in your tilts. They could take decades to pay off, and might not pay off at all. That's the risk you're theoretically going to get paid for taking.

If you don't REALLY BELIEVE you probably ought to stick with a total market portfolio because the worst thing you can do is bail out of a plan at the worst possible moment.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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Re: Goldman Sachs mulls the death of the value factor

Post by abuss368 » Fri Nov 17, 2017 7:11 pm

Thank you for sharing.
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Re: Goldman Sachs mulls the death of the value factor

Post by nisiprius » Fri Nov 17, 2017 7:29 pm

nedsaid wrote:
Thu Nov 16, 2017 8:57 pm
...When BusinessWeek comes out with a "Death of Value" cover, a huge rally in the Large Value stocks will be ahead. It took about 3-4 years after the infamous "Death of Equities" article for one of the greatest bull markets ever to ignite...
The "Death of Equities" article is fine. It is constantly being misrepresented as an example of foolish pessimism, and as a ludicrous failed prediction. It was neither.

You can find the text online here. The most important thing to note is the full title: The Death of Equities: How Inflation is Destroying the Stock Market.

The gist of the article is that in 1979, inflation had made stocks unattractive, therefore investors were fleeing to other assets, and this would not stop until inflation had been wrung out of the economy. The article is entirely about the past and present, entirely about what is (or was, in 1979).

The article says "Inflation is killing equities," and in 1979 it was. That's a simple fact.

The article says that, as a result, "at least 7 million shareholders have defected from the stock market since 1970." A good deal of the article is about individual and institutional investors fleeing to other assets, because of inflation.
The one rule whose demise did the stock market in could be summed up thus: By buying stocks, investors could beat inflation. Stocks were a reasonable hedge when inflation was low. But they proved helpless against the awesome inflation of the past decade. "People no longer think of stocks as an inflation hedge, and based on experience, that's a reasonable conclusion for them to have reached," says Richard Cohn, an associate professor of finance at the University of Illinois.
As for forward-looking statements, the article is closest to a pessimistic prediction here:
this "death of equity" can no longer be seen as something a stock market rally—however strong—will check... To bring equities back to life now, secular inflation would have to be wrung out of the economy, and then accounting policies would have to be made more realistic and tax laws rewritten. But these steps may not be enough. "It will take two or three years of confidence building, of testing, before the market can seriously act like it did in the 1950s and early '60s," says William J. Fellner, a professor of Economics Advisers.
And that is exactly what happened.
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Re: Goldman Sachs mulls the death of the value factor

Post by grok87 » Fri Nov 17, 2017 7:32 pm

nisiprius wrote:
Fri Nov 17, 2017 7:29 pm
nedsaid wrote:
Thu Nov 16, 2017 8:57 pm
...When BusinessWeek comes out with a "Death of Value" cover, a huge rally in the Large Value stocks will be ahead. It took about 3-4 years after the infamous "Death of Equities" article for one of the greatest bull markets ever to ignite...
The "Death of Equities" article is fine. It is constantly being misrepresented as an example of foolish pessimism, and as a ludicrous failed prediction. It was neither.

You can find the text online here. The most important thing to note is the full title: The Death of Equities: How Inflation is Destroying the Stock Market.

The gist of the article is that in 1979, inflation had made stocks unattractive, therefore investors were fleeing to other assets, and this would not stop until inflation had been wrung out of the economy. The article is entirely about the past and present, entirely about what is (or was, in 1979).

The article says "Inflation is killing equities," and in 1979 it was. That's a simple fact.

The article says that, as a result, "at least 7 million shareholders have defected from the stock market since 1970." A good deal of the article is about individual and institutional investors fleeing to other assets, because of inflation.
The one rule whose demise did the stock market in could be summed up thus: By buying stocks, investors could beat inflation. Stocks were a reasonable hedge when inflation was low. But they proved helpless against the awesome inflation of the past decade. "People no longer think of stocks as an inflation hedge, and based on experience, that's a reasonable conclusion for them to have reached," says Richard Cohn, an associate professor of finance at the University of Illinois.
As for forward-looking statements, the article is closest to a pessimistic prediction here:
this "death of equity" can no longer be seen as something a stock market rally—however strong—will check... To bring equities back to life now, secular inflation would have to be wrung out of the economy, and then accounting policies would have to be made more realistic and tax laws rewritten. But these steps may not be enough. "It will take two or three years of confidence building, of testing, before the market can seriously act like it did in the 1950s and early '60s," says William J. Fellner, a professor of Economics Advisers.
And that is exactly what happened.
Interesting....

A lot of folks on this forum seem to have faith that stocks will be a good hedge against inflation.
"...people always live for ever when there is any annuity to be paid them"- Jane Austen

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Re: Goldman Sachs mulls the death of the value factor

Post by triceratop » Fri Nov 17, 2017 8:00 pm

nisiprius wrote:
Fri Nov 17, 2017 7:29 pm
As for forward-looking statements, the article is closest to a pessimistic prediction here:
this "death of equity" can no longer be seen as something a stock market rally—however strong—will check... To bring equities back to life now, secular inflation would have to be wrung out of the economy, and then accounting policies would have to be made more realistic and tax laws rewritten. But these steps may not be enough. "It will take two or three years of confidence building, of testing, before the market can seriously act like it did in the 1950s and early '60s," says William J. Fellner, a professor of Economics Advisers.
And that is exactly what happened.
On the other hand, I would say it was explicitly pessimistic in a forward-looking manner very close to the beginning (emphasis mine):
Before inflation took hold in the late 1960s, the total return on stocks had averaged 9% a year for more than 40 years, while AAA bonds—infinitely safer—rarely paid more than 4%. Today the situation has reversed, with bonds yielding up to 11% and stocks averaging a return of less than 3% throughout the decade.
Note the tenses in all of those statements. Recall, of course, that bond yields are indicative of future return while conversely historical stock returns are not necessarily so. Not to mention, it's comparing apples to oranges in the sense of current yield to past total return.
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Re: Goldman Sachs mulls the death of the value factor

Post by Grt2bOutdoors » Fri Nov 17, 2017 8:42 pm

Value is most profitable when pessimism is greatest. We saw that with the e&p’s in the oil business, financially strong companies were thrown out with the bath water, saw that with the banks - trading at fractions of tangible book value (Warren Buffett did not pass up on that bargain) neither did Charlie Munger. Plenty of examples out there, each and every day.
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Re: Goldman Sachs mulls the death of the value factor

Post by nedsaid » Fri Nov 17, 2017 8:53 pm

nisiprius wrote:
Fri Nov 17, 2017 7:29 pm
nedsaid wrote:
Thu Nov 16, 2017 8:57 pm
...When BusinessWeek comes out with a "Death of Value" cover, a huge rally in the Large Value stocks will be ahead. It took about 3-4 years after the infamous "Death of Equities" article for one of the greatest bull markets ever to ignite...
The "Death of Equities" article is fine. It is constantly being misrepresented as an example of foolish pessimism, and as a ludicrous failed prediction. It was neither.

Nedsaid: I saw the cover when it came out and I have read the article online a couple times in recent years. It is sort of like the Sports Illustrated cover curse. Bad things often happened to teams or individuals that got featured on the cover. The public was pretty pessimistic about stocks in 1979 as the market peaked about 1968 and saw the awful 1973-74 bear market and stagflation. With stagflation, there was no place to hide because not only did stocks perform poorly but also bonds weren't doing at all well either. The Nadir of the Bond Market was 1982. The public was progressively getting more and more discouraged about the stock market. And yes, inflation was killing the stock market, just as it was killing the bond market.

You can find the text online here. The most important thing to note is the full title: The Death of Equities: How Inflation is Destroying the Stock Market.

The gist of the article is that in 1979, inflation had made stocks unattractive, therefore investors were fleeing to other assets, and this would not stop until inflation had been wrung out of the economy. The article is entirely about the past and present, entirely about what is (or was, in 1979).

The article says "Inflation is killing equities," and in 1979 it was. That's a simple fact.

The article says that, as a result, "at least 7 million shareholders have defected from the stock market since 1970." A good deal of the article is about individual and institutional investors fleeing to other assets, because of inflation.
The one rule whose demise did the stock market in could be summed up thus: By buying stocks, investors could beat inflation. Stocks were a reasonable hedge when inflation was low. But they proved helpless against the awesome inflation of the past decade. "People no longer think of stocks as an inflation hedge, and based on experience, that's a reasonable conclusion for them to have reached," says Richard Cohn, an associate professor of finance at the University of Illinois.
As for forward-looking statements, the article is closest to a pessimistic prediction here:
this "death of equity" can no longer be seen as something a stock market rally—however strong—will check... To bring equities back to life now, secular inflation would have to be wrung out of the economy, and then accounting policies would have to be made more realistic and tax laws rewritten. But these steps may not be enough. "It will take two or three years of confidence building, of testing, before the market can seriously act like it did in the 1950s and early '60s," says William J. Fellner, a professor of Economics Advisers.
And that is exactly what happened.

Nedsaid: This is why I have posted many times that stocks long term protect you from inflation, but in the case of the 1970's stagflation you had to wait a decade or more to get your inflation adjustment. Inflation spikes are bad for stocks and they are bad for bonds. As I recall, dividend yields were relatively high during those years and that helped cushion the awful stock market, so returns weren't quite as bad as we think now.

The thing is, there are always good reasons for bear markets. There is always bad news and lots of it and the news seems to get worse by the day. That is the way things happen in bear markets. The fallacy in investor's minds is the pessimism that those bad things will never change. Bear markets are really where you make your money though it doesn't seem that way at the time. It takes courage to stick with your stocks during such times, it takes even more courage to be in there buying when others are selling.

A fool and his money are good for business.

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nedsaid
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Re: Goldman Sachs mulls the death of the value factor

Post by nedsaid » Fri Nov 17, 2017 8:57 pm

I will say it again, there are always good reasons for excessive pessimism.
A fool and his money are good for business.

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Re: Goldman Sachs mulls the death of the value factor

Post by snarlyjack » Fri Nov 17, 2017 9:03 pm

Nedsaid,

I think it was "Rip Van Winkle" that slept for 100 years.

Make your investments & let it ride & don't open
your statements until you retire...J.B.

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Re: Goldman Sachs mulls the death of the value factor

Post by Boglegrappler » Fri Nov 17, 2017 10:26 pm

And that is exactly what happened.
Actually the market took off when the Fed decided that the cure was worse than the disease, and dropped rates several times in August 1982. It unleashed a housing inflation and other price increases that were truly impressive. It took imo, another 25 years or more before there were any signs of the secular inflation subsiding and going negative. Oil prices were falling at that point, and bottomed around 1985 or so, but the overall inflation certainly continued far beyond that point.

Oil aside, I always felt that the inflationary pressures that were manifesting themselves were actually signs that the economy was trying to grow, and the fed dammed the growth up for about ten year or so, before they gave up and let loose the past decade of deferred growth. One of the things that worries me sometimes is that we've now had nearly ten years of the fed attempting to prop up the economy, and they are essentially out of wherewithal now. I truly hope there is not a law of symmetry out there in economics.

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