Larry Swedroe: The Returns To Value Strategies WhenValuation Spreads Are Wide (Deep Value)

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Random Walker
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Larry Swedroe: The Returns To Value Strategies WhenValuation Spreads Are Wide (Deep Value)

Post by Random Walker » Thu Dec 21, 2017 8:03 pm

https://alphaarchitect.com/2017/12/21/t ... -are-wide/

One can not effectively time factors, but when the spreads between value and growth are largest is when the returns to value are greatest. “Long-short value portfolios have average market betas close to zero. However, their betas are negative during deep-value episodes. Deep-value investing in stocks appears to hedge market risk, a puzzle for the CAPM model. Thus, value is not compensation for market risk. Instead, it reflects another unique/independent risk factor.” These findings hold across equities, equity index futures, bonds, currencies.

Dave

lazyday
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Re: Larry Swedroe: The Returns To Value Strategies WhenValuation Spreads Are Wide (Deep Value)

Post by lazyday » Wed Jan 03, 2018 12:52 am

Thanks for the link. And a bump for those who missed it over the holiday season.

hilink73
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Re: Larry Swedroe: The Returns To Value Strategies WhenValuation Spreads Are Wide (Deep Value)

Post by hilink73 » Wed Jan 03, 2018 3:11 pm

Random Walker wrote:
Thu Dec 21, 2017 8:03 pm
https://alphaarchitect.com/2017/12/21/t ... -are-wide/

One can not effectively time factors, but when the spreads between value and growth are largest is when the returns to value are greatest. “Long-short value portfolios have average market betas close to zero. However, their betas are negative during deep-value episodes. Deep-value investing in stocks appears to hedge market risk, a puzzle for the CAPM model. Thus, value is not compensation for market risk. Instead, it reflects another unique/independent risk factor.” These findings hold across equities, equity index futures, bonds, currencies.

Dave
Thanks for the link.
Do I understand correctly that the spread is the difference between a high PE and a low PE?
What is the definition of deep value?
We define “deep value” as episodes where the valuation spread between cheap and expensive securities is wide relative to its history. Examining deep value across global individual equities, equity index futures, currencies, and global bonds provides new evidence on competing theories for the value premium. (from the referenced Asness paper)

And from the summary in Larrys article:
For investors, the important message is that value strategies require great patience and discipline, as the greatest returns are earned only by those willing and able to hold value assets after periods of relatively poor performance and through difficult economic times.


I'm not sure what other advice I can take from that except you need to believe in your strategy and follow your plan.
A point Larry made numerous times, also here on the forums.

Dave, any other points you take from this?

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SimpleGift
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Re: Larry Swedroe: The Returns To Value Strategies WhenValuation Spreads Are Wide (Deep Value)

Post by SimpleGift » Wed Jan 03, 2018 4:05 pm

Not sure if we are close to a "deep value episode" as defined by the study's authors, but the performance spread between value and growth stocks, relative to the S&P 500, is as large as it's been since the peak of the 2000 Tech Bubble (chart below).
  • Image
    Source: Yardeni, as of January 2, 2018
Though they may continue to go unrewarded, I have high hopes for my modest value tilt in the years ahead!
Cordially, Todd

Random Walker
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Re: Larry Swedroe: The Returns To Value Strategies WhenValuation Spreads Are Wide (Deep Value)

Post by Random Walker » Wed Jan 03, 2018 4:46 pm

Didn’t go back and reread the article, but for me big points regarding value investing are
1. Takes patience and discipline
2. Can’t time factors
3. Value is truly independent, unique, uncorrelated risk factor
4. I really like the idea that there are BOTH risk and behavioral explanations behind value; gives me more forward looking conviction.

Dave

fennewaldaj
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Re: Larry Swedroe: The Returns To Value Strategies WhenValuation Spreads Are Wide (Deep Value)

Post by fennewaldaj » Wed Jan 03, 2018 5:24 pm

What do the decimals in the chart indicate?

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Dale_G
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Re: Larry Swedroe: The Returns To Value Strategies WhenValuation Spreads Are Wide (Deep Value)

Post by Dale_G » Wed Jan 03, 2018 5:54 pm

Random Walker wrote:
Thu Dec 21, 2017 8:03 pm
https://alphaarchitect.com/2017/12/21/t ... -are-wide/

One can not effectively time factors, but when the spreads between value and growth are largest is when the returns to value are greatest. “Long-short value portfolios have average market betas close to zero. However, their betas are negative during deep-value episodes. Deep-value investing in stocks appears to hedge market risk, a puzzle for the CAPM model. Thus, value is not compensation for market risk. Instead, it reflects another unique/independent risk factor.” These findings hold across equities, equity index futures, bonds, currencies.

Dave
And based on the chart, the converse appears to be true. When the spread between growth and value is negative, sell value and buy growth. I am sure the "momentum" funds will try to capture this. Market timing works - or does it? :D :D

Dale
Volatility is my friend

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SimpleGift
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Re: Larry Swedroe: The Returns To Value Strategies WhenValuation Spreads Are Wide (Deep Value)

Post by SimpleGift » Wed Jan 03, 2018 6:05 pm

fennewaldaj wrote:
Wed Jan 03, 2018 5:24 pm
What do the decimals in the chart indicate?
The vertical scale is simply the value and growth price indexes, respectively, divided by the S&P 500 price index. By definition, these two values should always add up to 100% on this chart.
Cordially, Todd

lazyday
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Re: Larry Swedroe: The Returns To Value Strategies WhenValuation Spreads Are Wide (Deep Value)

Post by lazyday » Sun Jan 07, 2018 2:47 pm

From the paper linked in the article, my bold:
Changing the dependent variable to be the future return, we find that past fundamentals
predict returns positively while past returns beyond 1 year predict returns negatively. This
evidence is also consistent with over-extrapolation of past returns and inconsistent with
over-reaction to fundamentals on average.
If a stock has below average performance over the first 11 of the last 12 months, we say it has negative cross-sectional momentum and expect below average return in the near future; the poor performance is expected to continue.

But if a stock has below average performance over the last 13 months, then people will over-extrapolate this poor performance, and we can expect good performance in the future?

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