Larry Swedroe: Don’t Write Off Value

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Random Walker
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Larry Swedroe: Don’t Write Off Value

Post by Random Walker » Mon Dec 11, 2017 10:25 am

http://www.etf.com/sections/index-inves ... nopaging=1

Excellent article. Although Larry focuses on the value premium, the article can be extrapolated to the behavior of all factors, including the market factor. They can all have very long periods of underperformance. Both the value factor and the market factor have standard deviations about 2.5X their size. He doesn’t mention it in this article, but this article serves as an excellent introduction to the rationale for diversifying across factors. He references one of the charts from his most recent book on factor investing. Hopefully this will wet reader’s appetites to read the book and his upcoming new edition of Reducing The Risk Of Black Swans. This article has a couple references to Warren Buffet and his behavior as well. I have particular belief in value myself because their are both good risk based and behavioral based explanations behind it.

From the article:


“Recency can lead even investors with well-developed plans to abandon them. And it can also lead to other mistakes, such as overconfidence and the penchant to treat unlikely outcomes as impossible. It’s one of the reasons studies have found that investors tend to underperform the very mutual funds in which they invest.”

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Re: Larry Swedroe: Don’t Write Off Value

Post by Random Walker » Mon Dec 11, 2017 5:46 pm

This article needs to get a bump. This is an excellent review of the value premium. Moreover it shows us how recently bias can really screw us up and set us up for other behavioral foibles.

Dave

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Re: Larry Swedroe: Don’t Write Off Value

Post by All Seasons » Mon Dec 11, 2017 6:53 pm

Great article. I think people intuitively tend to believe that factors will disappear when they get published, but being persistent and pervasive is a prerequisite to being a legitimate factor.

I guess I can continue to be satisfied with my holding in the Vanguard Value ETF... :beer
The market portfolio is always a legitimate portfolio.

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Re: Larry Swedroe: Don’t Write Off Value

Post by livesoft » Mon Dec 11, 2017 7:00 pm

It is unfair to invoke Warren Buffett since he has (using words of Statman): "exclusively and narrowly available information" that the retail investor does not have. He also has the "widely available information" that all of us have.
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Random Walker
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Re: Larry Swedroe: Don’t Write Off Value

Post by Random Walker » Mon Dec 11, 2017 7:05 pm

I think it’s very fair to bring up Buffett. He just uses Buffett to make the point of staying invested, stay the course, make more money asleep than when active, best holding time forever, etc.

Dave

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Re: Larry Swedroe: Don’t Write Off Value

Post by garlandwhizzer » Mon Dec 11, 2017 9:47 pm

It's been a rough decade for SCV, but I agree with Larry and Random Walker that at some point, impossible to say when, it will shine again. Persistent long term underperformance makes things cheaper and therefore it may actually improve the expectation (but not guarantee) of improved long term returns in the future. DFSVX has been more volatile than TSM as well as underperforming it during the last 12 years. This can induce some investors to sell into weakness after a long spell of underperformance. In order to be successful factor investors you need to know themselves quite well and keep rock-solid faith through thick or thin. The rewards of SCV investing often come sporadically, in spurts rather than consistently, over a given time frame. Multi-factor investing in theory should produce a smoother ride, but it is a very complex strategy, so many portfolio decisions to be made that seems akin to active management. Multi-factor also has a very short a track record for real funds, and to date, as I understand it (I'm the opposite of an expert on this), results on the whole have not been overly impressive. If the potential of multi-factor can be achieved after costs on a consistent basis, it will be an attractive strategy IMO. Presently I am on the sidelines on that one.

Garland Whizzer

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Re: Larry Swedroe: Don’t Write Off Value

Post by Dead Man Walking » Mon Dec 11, 2017 10:50 pm

garlandwhizzer wrote:
Mon Dec 11, 2017 9:47 pm
It's been a rough decade for SCV, but I agree with Larry and Random Walker that at some point, impossible to say when, it will shine again. Persistent long term underperformance makes things cheaper and therefore it may actually improve the expectation (but not guarantee) of improved long term returns in the future. DFSVX has been more volatile than TSM as well as underperforming it during the last 12 years. This can induce some investors to sell into weakness after a long spell of underperformance. In order to be successful factor investors you need to know themselves quite well and keep rock-solid faith through thick or thin. The rewards of SCV investing often come sporadically, in spurts rather than consistently, over a given time frame. Multi-factor investing in theory should produce a smoother ride, but it is a very complex strategy, so many portfolio decisions to be made that seems akin to active management. Multi-factor also has a very short a track record for real funds, and to date, as I understand it (I'm the opposite of an expert on this), results on the whole have not been overly impressive. If the potential of multi-factor can be achieved after costs on a consistent basis, it will be an attractive strategy IMO. Presently I am on the sidelines on that one.

Garland Whizzer
+1 The proof will be in the long-term performance of retail funds. The risk management justification for buying and holding factor-based funds will be a difficult sell if they under perform for long periods of time. Show me the money is an argument that is hard to beat when selling investments.

DMW

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Re: Larry Swedroe: Don’t Write Off Value

Post by Random Walker » Mon Dec 11, 2017 11:11 pm

I agree with garlandwhizzer and deadmanwalking, there is a strong element of faith involved in factor investing. But perhaps less than most people appreciate. A factor investor will diversify across market, size, value, momentum, profitability/quality and probably seek a given expected return with more bonds than a TSM investor exposed only to the single factor market beta. The factor investor spreads his faith over multiple factors, while the TSM investor puts all his faith in one on the equity side. From a certain perspective, the TSM investor is the one who is really displaying faith! Of course he’s paying less in expense ratios to display his faith than is the factor guy. So in that regard the factor guy is really displaying conviction.

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Re: Larry Swedroe: Don’t Write Off Value

Post by Top99% » Tue Dec 12, 2017 8:20 am

This was indeed and interesting article and I agree dealing with tracking error is a real problem and an opportunity with the latter coming when others lose patience and drive down prices through selling. Whenever my patience get's tested I just look at the Callan Periodic Table Of Investment returns now linked on this very site https://www.bogleheads.org/w/images/d/d ... eturns.png Certainly Russell 2000 Value and S&P 500 value have had their days in the sun and darkness.
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Re: Larry Swedroe: Don’t Write Off Value

Post by Earl Lemongrab » Tue Dec 12, 2017 4:53 pm

garlandwhizzer wrote:
Mon Dec 11, 2017 9:47 pm
It's been a rough decade for SCV
It has? Over the past ten years, IJS and VBR have outperformed VTI on a total return basis. Even RZV has slightly beat it.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Larry Swedroe: Don’t Write Off Value

Post by larryslocum1982 » Tue Dec 12, 2017 5:06 pm

Less risk if market goes down.

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Re: Larry Swedroe: Don’t Write Off Value

Post by bikechuck » Tue Dec 12, 2017 5:50 pm

Earl Lemongrab wrote:
Tue Dec 12, 2017 4:53 pm
garlandwhizzer wrote:
Mon Dec 11, 2017 9:47 pm
It's been a rough decade for SCV
It has? Over the past ten years, IJS and VBR have outperformed VTI on a total return basis. Even RZV has slightly beat it.
My friend you are speaking in tongues, I have no idea what IJS, VBR, VTI and RZV stand for. I know that I and many other readers could look them up but if posters would just take the additional few seconds to type the fund names it would save so many readers the time to look them up. Of course most readers wont which means that you are diluting the value of your post. This is a shame because you took the time to post and you probably are worth listening to.

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Re: Larry Swedroe: Don’t Write Off Value

Post by Earl Lemongrab » Tue Dec 12, 2017 5:59 pm

bikechuck wrote:
Tue Dec 12, 2017 5:50 pm
My friend you are speaking in tongues, I have no idea what IJS, VBR, VTI and RZV stand for. I know that I and many other readers could look them up but if posters would just take the additional few seconds to type the fund names it would save so many readers the time to look them up.
Oh well. If I'm asking a question, then your point has validity as that affects the number and quality of responses. I'm answering a point, so it's up to you to decide if it's worth it to explore. I don't get anything more one way or the other.
This week's fortune cookie: "Your financial life will be secure and beneficial." So I got that going for me, which is nice.

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Re: Larry Swedroe: Don’t Write Off Value

Post by david1082b » Tue Dec 12, 2017 6:13 pm

bikechuck wrote:
Tue Dec 12, 2017 5:50 pm
Earl Lemongrab wrote:
Tue Dec 12, 2017 4:53 pm
garlandwhizzer wrote:
Mon Dec 11, 2017 9:47 pm
It's been a rough decade for SCV
It has? Over the past ten years, IJS and VBR have outperformed VTI on a total return basis. Even RZV has slightly beat it.
My friend you are speaking in tongues, I have no idea what IJS, VBR, VTI and RZV stand for. I know that I and many other readers could look them up but if posters would just take the additional few seconds to type the fund names it would save so many readers the time to look them up. Of course most readers wont which means that you are diluting the value of your post. This is a shame because you took the time to post and you probably are worth listening to.

Here's a ten-year chart with Total [US] Stock Market VTI versus those other tickers, Vanguard small value VBR and iShares Small-cap 600 value, as well as the problem child of the bunch, RZV, a "pure value" Small-Cap 600 index fund apparently:

http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

552BB
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Re: Larry Swedroe: Don’t Write Off Value

Post by 552BB » Wed Dec 13, 2017 9:19 am

Good morning BH,



Hello Random Walker,


Random Walker wrote:
Mon Dec 11, 2017 10:25 am
http://www.etf.com/sections/index-inves ... nopaging=1

Excellent article. Although Larry focuses on the value premium, the article can be extrapolated to the behavior of all factors, including the market factor. They can all have very long periods of underperformance. Both the value factor and the market factor have standard deviations about 2.5X their size. He doesn’t mention it in this article, but this article serves as an excellent introduction to the rationale for diversifying across factors. He references one of the charts from his most recent book on factor investing. Hopefully this will wet reader’s appetites to read the book and his upcoming new edition of Reducing The Risk Of Black Swans. This article has a couple references to Warren Buffet and his behavior as well. I have particular belief in value myself because their are both good risk based and behavioral based explanations behind it.

From the article:


“Recency can lead even investors with well-developed plans to abandon them. And it can also lead to other mistakes, such as overconfidence and the penchant to treat unlikely outcomes as impossible. It’s one of the reasons studies have found that investors tend to underperform the very mutual funds in which they invest.”


Thanks for posting this article.

I like reading Larrys articles, they are very insightful.

I will read it in more detail after my morning coffee, and I may some more comments on it later in the day.



Thanks again.



:sharebeer

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Re: Larry Swedroe: Don’t Write Off Value

Post by DaftInvestor » Wed Dec 13, 2017 9:45 am

Dead Man Walking wrote:
Mon Dec 11, 2017 10:50 pm
garlandwhizzer wrote:
Mon Dec 11, 2017 9:47 pm
It's been a rough decade for SCV, but I agree with Larry and Random Walker that at some point, impossible to say when, it will shine again. Persistent long term underperformance makes things cheaper and therefore it may actually improve the expectation (but not guarantee) of improved long term returns in the future. DFSVX has been more volatile than TSM as well as underperforming it during the last 12 years. This can induce some investors to sell into weakness after a long spell of underperformance. In order to be successful factor investors you need to know themselves quite well and keep rock-solid faith through thick or thin. The rewards of SCV investing often come sporadically, in spurts rather than consistently, over a given time frame. Multi-factor investing in theory should produce a smoother ride, but it is a very complex strategy, so many portfolio decisions to be made that seems akin to active management. Multi-factor also has a very short a track record for real funds, and to date, as I understand it (I'm the opposite of an expert on this), results on the whole have not been overly impressive. If the potential of multi-factor can be achieved after costs on a consistent basis, it will be an attractive strategy IMO. Presently I am on the sidelines on that one.

Garland Whizzer
+1 The proof will be in the long-term performance of retail funds. The risk management justification for buying and holding factor-based funds will be a difficult sell if they under perform for long periods of time. Show me the money is an argument that is hard to beat when selling investments.

DMW
Can you guys enlighten me on what you mean by its been a rough decade for SCV? Poster above was comparing VTI to some funds of which I'm not familiar (so the point was missed) - but if I'm looking at VTSAX (Vanguard Total Stock Market - Admiral) compared to VSIAX (Vanguard Small Cap Value Admiral shares) SCV still wins over the last decade. Larry's article is talking about Value-Factor - not just SCV - and indeed if I I look at performance of VVIAX (Vanguard Value Index - Admiral) as compared to VTSAX it is lagging.
(http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D)

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Re: Larry Swedroe: Don’t Write Off Value

Post by Random Walker » Wed Dec 13, 2017 10:28 am

Garlandwhizzer wrote
Multi-factor investing in theory should produce a smoother ride, but it is a very complex strategy, so many portfolio decisions to be made that seems akin to active management.
I agree on the smoother ride, but disagree on the complexity. For the funds, they can be passive, formulaic, rules based, agnostic to individual stocks, no market timing. For the individual investor, sticking to a multi factor plan is no different than a TSM plan: stay the course, rebalance, tax loss harvest.

Dave

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Re: Larry Swedroe: Don’t Write Off Value

Post by Random Walker » Wed Dec 13, 2017 10:45 am

DMW wrote
+1 The proof will be in the long-term performance of retail funds. The risk management justification for buying and holding factor-based funds will be a difficult sell if they under perform for long periods of time. Show me the money is an argument that is hard to beat when selling investments.
Agree that rubber meets the road at “show me the money”. But it is worthwhile to point out that we should all focus on the behavior of portfolios as a whole, not necessesarily any single factor. When Larry writes about factor investing, he frequently shows the behavior of individual factors and then shows the results when one diversifies across factors with a 1/N portfolio. The real rubber meets road at the portfolio level for us individual investors, and the goal of creating a sound portfolio is to put the odds of success in our favor. That necessarily involves diversifying across sources of return. Of course all this comes at increased cost compared to the TSM approach.

Dave

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Re: Larry Swedroe: Don’t Write Off Value

Post by Earl Lemongrab » Wed Dec 13, 2017 12:18 pm

I disagree with it being akin to active management. That implies that people would be shifting their allocations. At least in my case, that's not how I do it. I started ten years ago. In developing a portfolio, I digested a number of books and articles by Swedroe, Bernstein, IFA, etc. I looked at the model portfolios and used the ideas to create my own that had a significant small and value tilt.

Since that point the only changes to the stock allocations have been to reduce large value and small cap, while increasing large cap and small value. This had to do with changes to my 401(k) and the goal was to keep the same factor allocation. Other than that, the only changes have been to reduce the overall stock amount (70/30->65/35->60/40) as progress towards goals was made. Factor tilting does not mean fiddling with your allocation.
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Re: Larry Swedroe: Don’t Write Off Value

Post by Dead Man Walking » Wed Dec 13, 2017 9:37 pm

DaftInvestor wrote:
Wed Dec 13, 2017 9:45 am
Dead Man Walking wrote:
Mon Dec 11, 2017 10:50 pm
garlandwhizzer wrote:
Mon Dec 11, 2017 9:47 pm
It's been a rough decade for SCV, but I agree with Larry and Random Walker that at some point, impossible to say when, it will shine again. Persistent long term underperformance makes things cheaper and therefore it may actually improve the expectation (but not guarantee) of improved long term returns in the future. DFSVX has been more volatile than TSM as well as underperforming it during the last 12 years. This can induce some investors to sell into weakness after a long spell of underperformance. In order to be successful factor investors you need to know themselves quite well and keep rock-solid faith through thick or thin. The rewards of SCV investing often come sporadically, in spurts rather than consistently, over a given time frame. Multi-factor investing in theory should produce a smoother ride, but it is a very complex strategy, so many portfolio decisions to be made that seems akin to active management. Multi-factor also has a very short a track record for real funds, and to date, as I understand it (I'm the opposite of an expert on this), results on the whole have not been overly impressive. If the potential of multi-factor can be achieved after costs on a consistent basis, it will be an attractive strategy IMO. Presently I am on the sidelines on that one.

Garland Whizzer
+1 The proof will be in the long-term performance of retail funds. The risk management justification for buying and holding factor-based funds will be a difficult sell if they under perform for long periods of time. Show me the money is an argument that is hard to beat when selling investments.

DMW
Can you guys enlighten me on what you mean by its been a rough decade for SCV? Poster above was comparing VTI to some funds of which I'm not familiar (so the point was missed) - but if I'm looking at VTSAX (Vanguard Total Stock Market - Admiral) compared to VSIAX (Vanguard Small Cap Value Admiral shares) SCV still wins over the last decade. Larry's article is talking about Value-Factor - not just SCV - and indeed if I I look at performance of VVIAX (Vanguard Value Index - Admiral) as compared to VTSAX it is lagging.
(http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D)
My remarks were about other factor-based funds, which have a very short history. Larry Swedroe has frequently stated that Vanguard's value funds are not pure value funds. DFA Small Cap Value Fund (DFSVX) is a purer fund in both the size factor and the value factor. Its 10 year returns average 8.52%. VTSMX averaged 8.41%. If the time period is stretched to 15 years, DFSVX averages 11.80%; VTSMX, 10.19%. The disparity of returns between the two time periods can be explained by whether growth or value was in vogue during majority of the period.

When the newer factor-based retail funds have a 15 year history, we will be able to draw better conclusions. If growth continues to dominate the market for the next 5 years, any conclusions drawn after 15 years may not be indicative of the long term.

DMW

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Re: Larry Swedroe: Don’t Write Off Value

Post by abuss368 » Wed Dec 13, 2017 9:59 pm

Thank you for sharing.
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Re: Larry Swedroe: Don’t Write Off Value

Post by john4546 » Tue Apr 03, 2018 6:50 pm

Here are 15 Common Data Fallacies to Avoid:

http://www.visualcapitalist.com/here-ar ... -to-avoid/

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Re: Larry Swedroe: Don’t Write Off Value

Post by snarlyjack » Tue Apr 03, 2018 10:03 pm

Having had numerous conversations with Larry Swedroe on value/dividend
investing I' am glad he is seeing the light.

As Kevin O'Leary would say " My portfolio is like a chicken
on a spit throwing off cash/dividends". That is how I view
my portfolio of value/dividend paying funds. Every quarterly
dividend payment I reinvest & receive more & more shares.
Market goes up I get less shares, market goes down I get more shares.
This last dividend payment at the end of March was a perfect
reinvestment date...

Warren Buffett is right. "Our hold time is forever..." & "hold tight..."

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