Small Value Premium - How Do You View It?

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Alexa9
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Small Value Premium - How Do You View It?

Post by Alexa9 » Mon Jan 22, 2018 2:24 pm

How do you look at the Small Value Premium?

- Negative: It's just random luck or an anomaly that it outperformed in the past. Large cap companies are more proven and deserve their heavier market weight status in Total Stock Market Index Fund.

/ Neutral: Believe in it somewhat but I will just tilt to it a little. Too risky to go all in. It's not that big of a premium for the added risk. There aren't many good options to invest in small value anyways.

+ Positive: Fama-French is solid proof. All-in or heavy tilt to small value. Large caps like Total Stock Market Fund (mostly large cap) are overrated and not too big to fail. Larry Barbell Type Portfolio with bonds had less volatility with equal performance. Really like the DFA small value funds.

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Re: Small Value Premium - How Do You View It?

Post by MotoTrojan » Mon Jan 22, 2018 2:29 pm

Alexa9 wrote:
Mon Jan 22, 2018 2:24 pm
How do you look at the Small Value Premium?

- Negative: It's just random luck or an anomaly that it outperformed in the past. Large cap companies are more proven and deserve their heavier market weight status in Total Stock Market Index Fund.

/ Neutral: Believe in it somewhat but I will just tilt to it a little. Too risky to go all in. It's not that big of a premium for the added risk. There aren't many good options to invest in small value anyways.

+ Positive: Fama-French is solid proof. All-in or heavy tilt to small value. Large caps like Total Stock Market Fund (mostly large cap) are overrated and not too big to fail. Larry Barbell Type Portfolio with bonds had less volatility with equal performance. Really like the DFA small value funds.
Neutral. It satisfies my need to tinker. Hold 27% of US in SP600 Value, with rest in Total US. Idea of putting all my ex-US into small or small value is intriguing due to potentially lower correlation but currently only hold Total Int.

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iceport
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Re: Small Value Premium - How Do You View It?

Post by iceport » Mon Jan 22, 2018 2:37 pm

Alexa9 wrote:
Mon Jan 22, 2018 2:24 pm
How do you look at the Small Value Premium?
There seems to be no broad consensus on whether the value premium is based in risk or investor behavior. It seems to me the question could have significant ramifications for the (continued) persistence of the value premium.
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GibsonL6s
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Re: Small Value Premium - How Do You View It?

Post by GibsonL6s » Mon Jan 22, 2018 3:05 pm

I personally don't tilt by cap weighting it is not "analyzable" in my view. If I want to have "fun", I would make a sector or individual stock bet.

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Alexa9
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Re: Small Value Premium - How Do You View It?

Post by Alexa9 » Mon Jan 22, 2018 3:16 pm

MotoTrojan wrote:
Mon Jan 22, 2018 2:29 pm

Neutral. It satisfies my need to tinker. Hold 27% of US in SP600 Value, with rest in Total US. Idea of putting all my ex-US into small or small value is intriguing due to potentially lower correlation but currently only hold Total Int.
Even less correlated with TSM is international small value which there are few good offerings other than DFA.

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Re: Small Value Premium - How Do You View It?

Post by deltaneutral83 » Mon Jan 22, 2018 3:30 pm

MotoTrojan wrote:
Mon Jan 22, 2018 2:29 pm
Neutral. It satisfies my need to tinker. Hold 27% of US in SP600 Value, with rest in Total US. Idea of putting all my ex-US into small or small value is intriguing due to potentially lower correlation but currently only hold Total Int.
I'd consider that more than neutral but of course less than Fama/French. Cap weighted is 3%, you're almost ten times that when you consider 3% of VTI is SCV.

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privatefarmer
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Re: Small Value Premium - How Do You View It?

Post by privatefarmer » Mon Jan 22, 2018 3:46 pm

All in baby!! I’m 50% domestics scv and 50% international scv. That’s my entire portfolio. I’m 33yo so hope to let it ride for 30-40 years before I even start to tap it.

1) just as I believe equities will outperform FI, I believe the more volatile an asset the more it will outperform otherwise nobody would invest in them. The only reason to own a volatile asset is bc you expect it to outperform. In other words, you pay a “premium” to own “safe” companies like FAANG stocks. May or may not be very significant going forward but I think it’ll be greater than zero.

2) SCV premium has been seen globally not just domestically. The value premium is seen across asset classes, as well. For example, real estate investors who buy rentals look for a higher rent/value ratio. This is the exact same thing as looking for stocks with higher earnings/price. Being a smart investor in any asset is buying things on discount and selling at a premium, if possible. Easier said than done but if I’m going to buy a basket of securities might as well buy a basket of lower P/E or p/b etc stocks and hang on to them forever.

3) unless you own a global TSM fund you are tilted towards something. Either tilted towards domestic or large cap etc. the only true “passive” would be a global TSM fund but even then you are tilted towards equities and away from any other investable asset class (FI, real estate, commodities, currency, art, agriculture, private equity, etc etc). In all practical sense, it’s impossible to NOT be tilted towards something as owning a true passive portfolio of all available investments is not feasible. So you have to pick something (or somethings) to invest in and exclude everything else, might as well pick the best performing asset class over the last ~100 years IMO.

4) owning a basket of small companies is MORE diversified, ever so slightly, than large companies bc you are spread out across thousands of companies instead of maybe 500. We all know that like 20% of the s/p 500 is in the top 5 stocks I believe. This may or may not matter much but technically you’re more diversified in the small cap space vs large cap.

The only real downside I see is that 1) lots of people do it now so the premium is likely reduced and 2) it does cost slightly more to implement. DFA does a great job of keeping transaction costs low since they don’t track an outside index, they make their own index. So they patiently trade etc and use security lending to offset some costs. I paid ~$1500 to move ~600k into DFA funds a couple months ago, as a one-time fee, and im just going to let them ride for hopefully 40+ years.

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Re: Small Value Premium - How Do You View It?

Post by jhfenton » Mon Jan 22, 2018 3:53 pm

MotoTrojan wrote:
Mon Jan 22, 2018 2:29 pm
Neutral. It satisfies my need to tinker. Hold 27% of US in SP600 Value, with rest in Total US. Idea of putting all my ex-US into small or small value is intriguing due to potentially lower correlation but currently only hold Total Int.
That's what we did on the international side. We dropped large ex-US developed. It's now all VSS/VFSVX (ex-US small cap) and emerging markets.

We're heavily tilted to SCV on the U.S. side, but not 100%. (It's all value, though.)

So I'm closest to "Positive", though I don't consider it guaranteed.

MindTheGAAP
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Re: Small Value Premium - How Do You View It?

Post by MindTheGAAP » Mon Jan 22, 2018 5:15 pm

I would say I'm probably neutral - not a fanatic but tilt to it somewhat with my portfolio - I'm no jhfenton!

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Re: Small Value Premium - How Do You View It?

Post by alex_686 » Mon Jan 22, 2018 5:21 pm

Alexa9 wrote:
Mon Jan 22, 2018 2:24 pm
- Negative: It's just random luck or an anomaly that it outperformed in the past.
...
+ Positive: Fama-French is solid proof.
I am negative, sort of. I can believe that Fama-French found a historic anomaly. I can also believe that this anomaly has corrected. This often happens when anomalies are detected. Now that people know people have piled in. I can also belie that structural changes can occur. Large companies used to have diseconomies of scale. IT has let large companies become more nimble. It has also encouraged a "winner takes all". See Facebook, Google, etc. Apple and Samsung are a oligopoly. Fee small companies here.

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Re: Small Value Premium - How Do You View It?

Post by Trev H » Mon Jan 22, 2018 5:28 pm

25% US Large Market
25% US Small Value
25% Intl Large Value
25% Intl Small Market

Simplified Ultimate Buy and Hold.

I look at SV as the best possible other US Equity Style Box to hit to diversify a US Large Market holding.

The combination works very well when split equally... and the 4 way combo above is an excellent way to get Global 3 Factor Diversification with only 4 funds.

If there is a premium... Great... I will take it.

There is diversification and that is enough.

Trev H

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Alexa9
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Re: Small Value Premium - How Do You View It?

Post by Alexa9 » Mon Jan 22, 2018 6:22 pm

privatefarmer wrote:
Mon Jan 22, 2018 3:46 pm
All in baby!! I’m 50% domestics scv and 50% international scv. That’s my entire portfolio. I’m 33yo so hope to let it ride for 30-40 years before I even start to tap it.
This is a bold move. I like your style. I would hold at least 20% bonds for rebalancing bonus and bear markets but if you're funding it every year it shouldn't matter.

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Earl Lemongrab
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Re: Small Value Premium - How Do You View It?

Post by Earl Lemongrab » Mon Jan 22, 2018 6:39 pm

alex_686 wrote:
Mon Jan 22, 2018 5:21 pm
I am negative, sort of. I can believe that Fama-French found a historic anomaly. I can also believe that this anomaly has corrected.
Why do you believe this? If true, then that would indicate that the premiums were due entirely to behavior and not risk. Otherwise, if small and/or value is riskier but does not have higher expected return, then that would itself be an inefficiency. That is, you could get the same expected return for lower risk by underweighting those.
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Re: Small Value Premium - How Do You View It?

Post by whodidntante » Mon Jan 22, 2018 6:44 pm

This seems like a trolling topic but I'll bite. About half of my US stocks are in small value funds. Mostly in DFA though I use ETFs in taxable. I see small and value as sources of risk and return. The effect of overweighting small and value overall results in a riskier portfolio with higher expected return, similar to mild leverage. It is also useful in my opinion to diversify across factors.
Last edited by whodidntante on Mon Jan 22, 2018 6:48 pm, edited 1 time in total.

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Earl Lemongrab
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Re: Small Value Premium - How Do You View It?

Post by Earl Lemongrab » Mon Jan 22, 2018 6:44 pm

Trev H wrote:
Mon Jan 22, 2018 5:28 pm
Simplified Ultimate Buy and Hold.

I look at SV as the best possible other US Equity Style Box to hit to diversify a US Large Market holding.

The combination works very well when split equally... and the 4 way combo above is an excellent way to get Global 3 Factor Diversification with only 4 funds.

If there is a premium... Great... I will take it.
Hey, it's Trev! I really enjoyed the original thread that you started back when.

I have a more traditional Merriman-style slice-and-dice, but if I were starting fresh I'd look really hard at the four-fund version. One of things I might look at after 1/31 is what I can do with the portfolio to bring it closer. The kicker is the taxable, as everything got turned over in 2009. Lots of capital gains there.
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Re: Small Value Premium - How Do You View It?

Post by dbr » Mon Jan 22, 2018 7:04 pm

I look at it as interesting and valid research. I don't like the difficulty in finding causes why those differences in return exist. I think people should be sure that if they want to exploit such a premium that they have a firm understanding of associated risk. I am not sure I really understand the related risk.

In the real world I invest in the total market because I don't need to and don't want to do otherwise.

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Re: Small Value Premium - How Do You View I

Post by asif408 » Mon Jan 22, 2018 7:11 pm

I'm slightly negative. I do accept it existed and worked in the past. The problem now is its widely known and easily investable. So I imagine any premium will be reduced if it still exists, and the premium in the past probably wasn't as high because of greater transactional costs.

My belief is that the only strategies that outperform over the long haul have to have one of three things (or more than 1):

1) Difficult for the average investor to invest in
2) Has fallen out of favor and underperformed most other investments in recent years
3) Takes a long time to show up, so much that most of the big institutional investors, such as hedge funds and pension plans, can't stay in it long enough before they get fired or replaced

The 3rd one is the only one that might be a reason for small cap value to outperform in the future, but I have my doubts, especially with the small premium portion.

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Re: Small Value Premium - How Do You View It?

Post by golfCaddy » Mon Jan 22, 2018 7:15 pm

Value, in the broad sense, has a risk component. RZV lost 52% of its value over 2007-2008. Internationally, Russia may be the cheapest stock market(by P/E). Many people would view that as appropriate discounting for risk. Most factor proponents are moving away from the three-factor model and want to load on additional factors such as quality, profitability, and momentum.

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Re: Small Value Premium - How Do You View It?

Post by Noobvestor » Mon Jan 22, 2018 7:22 pm

Alexa9 wrote:
Mon Jan 22, 2018 2:24 pm
- Negative: It's just random luck or an anomaly that it outperformed in the past. Large cap companies are more proven and deserve their heavier market weight status in Total Stock Market Index Fund.
I tilt small/value but think this is a mis-characterization of total-market approaches. They don't 'deserve' a 'heavier' market weight status - they simply are more valuable companies, and represent more of the market. Market weight = neutral. Equal weight = tilted toward small.

And this is coming from someone who is 50/50 Total/Small Value in US stocks. As for me: I hope/think small and value may provide a benefit, but at worst they should presumably do as well as the broad market (if the small/value premium is a myth or gone).
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: Small Value Premium - How Do You View It?

Post by MotoTrojan » Mon Jan 22, 2018 8:11 pm

deltaneutral83 wrote:
Mon Jan 22, 2018 3:30 pm
MotoTrojan wrote:
Mon Jan 22, 2018 2:29 pm
Neutral. It satisfies my need to tinker. Hold 27% of US in SP600 Value, with rest in Total US. Idea of putting all my ex-US into small or small value is intriguing due to potentially lower correlation but currently only hold Total Int.
I'd consider that more than neutral but of course less than Fama/French. Cap weighted is 3%, you're almost ten times that when you consider 3% of VTI is SCV.
10x is overstated since S&P600 SCV also includes some portion of TSMs blend and mid exposure (and perhaps even growth, haven’t checked), so it’s not quite duplicating such a narrow portion. An approach worth looking at may be replacing TSM with S&P500 to reduce non-value small/mid exposure but I’m not treating it as so sensitive. Plus whenever I get access to a 401k I’ll likely hold S&P500 there for my Total US portion.

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Re: Small Value Premium - How Do You View It?

Post by MotoTrojan » Mon Jan 22, 2018 8:15 pm

Noobvestor wrote:
Mon Jan 22, 2018 7:22 pm
Alexa9 wrote:
Mon Jan 22, 2018 2:24 pm
- Negative: It's just random luck or an anomaly that it outperformed in the past. Large cap companies are more proven and deserve their heavier market weight status in Total Stock Market Index Fund.
I tilt small/value but think this is a mis-characterization of total-market approaches. They don't 'deserve' a 'heavier' market weight status - they simply are more valuable companies, and represent more of the market. Market weight = neutral. Equal weight = tilted toward small.

And this is coming from someone who is 50/50 Total/Small Value in US stocks. As for me: I hope/think small and value may provide a benefit, but at worst they should presumably do as well as the broad market (if the small/value premium is a myth or gone).
My thought as well; I can’t imagine they’ll underperform enough to hurt me (but my 27% exposure is smaller) but if the outperformance continues, I’ll get a nice bonus. There also could be a rebalancing benefit. I know his “rebalancing” is far more extreme, but Livesoft (as a well known example) has benefited handily from short(er)-term oscillations between SCV and other asset classes, which I’ve been intrigued by.

MindTheGAAP
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Re: Small Value Premium - How Do You View It?

Post by MindTheGAAP » Mon Jan 22, 2018 8:20 pm

MotoTrojan wrote:
Mon Jan 22, 2018 8:15 pm
Noobvestor wrote:
Mon Jan 22, 2018 7:22 pm
Alexa9 wrote:
Mon Jan 22, 2018 2:24 pm
- Negative: It's just random luck or an anomaly that it outperformed in the past. Large cap companies are more proven and deserve their heavier market weight status in Total Stock Market Index Fund.
I tilt small/value but think this is a mis-characterization of total-market approaches. They don't 'deserve' a 'heavier' market weight status - they simply are more valuable companies, and represent more of the market. Market weight = neutral. Equal weight = tilted toward small.

And this is coming from someone who is 50/50 Total/Small Value in US stocks. As for me: I hope/think small and value may provide a benefit, but at worst they should presumably do as well as the broad market (if the small/value premium is a myth or gone).
My thought as well; I can’t imagine they’ll underperform enough to hurt me (but my 27% exposure is smaller) but if the outperformance continues, I’ll get a nice bonus. There also could be a rebalancing benefit. I know his “rebalancing” is far more extreme, but Livesoft (as a well known example) has benefited handily from short(er)-term oscillations between SCV and other asset classes, which I’ve been intrigued by.
Add me to the list of the intrigued voyeurs when it comes to Livesoft’s movements in/out of a class
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Re: Small Value Premium - How Do You View It?

Post by 1nv35t » Mon Jan 22, 2018 8:31 pm

alex_686 wrote:
Mon Jan 22, 2018 5:21 pm
Alexa9 wrote:
Mon Jan 22, 2018 2:24 pm
- Negative: It's just random luck or an anomaly that it outperformed in the past.
...
+ Positive: Fama-French is solid proof.
I am negative, sort of. I can believe that Fama-French found a historic anomaly. I can also believe that this anomaly has corrected. This often happens when anomalies are detected. Now that people know people have piled in. I can also belie that structural changes can occur. Large companies used to have diseconomies of scale. IT has let large companies become more nimble. It has also encouraged a "winner takes all". See Facebook, Google, etc. Apple and Samsung are a oligopoly. Fee small companies here.
I opine a element is down to index structure. The majority of stocks underperform the average as typically a few big winners uplift the whole. By tilting more into a few (largest market cap) stocks that leaves a higher probability of less invested in the few great performers. Mid/small indexes feed in/out of the top and bottom and are more inclined towards equal weighting than a large cap index where the single largest can devour 10% of the total allocation. Value = fears/concerns (price relatively down) such that the few biggest winners can be even larger gains (even higher volatility/bias towards upside potential).

100 stocks and drop 10% into one, 0.909% into the 99 others, versus 1% in each equally, and if any one of the 99 'others' pops 10x = 9.1% versus 10%.

Less a case of SCV out-performance, more a case of tilting LC causing a element of drag.

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Re: Small Value Premium - How Do You View It?

Post by cloppydogroll » Mon Jan 22, 2018 8:32 pm

I'm 50% VTI and 50% VBR. That's my entire portfolio. VBR includes a good dose of mid cap so I like it quite a bit. Basically I view small value as a way to diversify AND beat the market. If small value loses to the market I predict it will be fairly close, which doesn't really bother me. I was debating 100% VBR but I like VTI just as much as VBR hence 50/50.

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Re: Small Value Premium - How Do You View It?

Post by randomizer » Mon Jan 22, 2018 8:38 pm

I value simplicity over optimality. Especially when a simple plan, followed with discipline, is more likely to be successful than an optimal plan, followed poorly. No tilts for me. Even though I’ve read Swedroe’s book on factor-based investing.
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Re: Small Value Premium - How Do You View It?

Post by alex_686 » Mon Jan 22, 2018 9:54 pm

Earl Lemongrab wrote:
Mon Jan 22, 2018 6:39 pm
alex_686 wrote:
Mon Jan 22, 2018 5:21 pm
I am negative, sort of. I can believe that Fama-French found a historic anomaly. I can also believe that this anomaly has corrected.
Why do you believe this? If true, then that would indicate that the premiums were due entirely to behavior and not risk. Otherwise, if small and/or value is riskier but does not have higher expected return, then that would itself be an inefficiency. That is, you could get the same expected return for lower risk by underweighting those.
I thought I had made myself clear in my first post. Let me try again and you can pick it apart.

1. It could be risk. We only have 50 years of data which really is not sufficient to test something like the stock market which has fat tails.

2. It could be market structure. In the past it was expensive to invest in small cap or value stocks. Not just the size or the low trading volume. You also have to count the time. Back 40 years ago you would go to your local investment library and maybe find a single of date report of the stock. Pretty thin information to trade on. SEC''s Edger / Bloomberg has leveled the playing field. We are cranking out MBAs, CFAs, and other researchers by the bus full. Cost of overcoming lack of information is not an issue now. We all have read F&F and we know to look to value.

There is a slight behaviorist issue in this. Growth stocks tend to be sexy and people are interested in sexy things. FANG, Bitcoin, etc. But this is modest.

3. It could be economic structural change. Did we expect GM to double it's profits back in the day? They did hold 50% market share. Small companies grew into big companies, big companies developed a bureaucracy needed to run a big company, big company became a dinasour. Do we expect the FANG companies to. Double its profits? Yeah, we do. For Facebook to grow all they really have to do is throw a few more servers at the market. O.K. - it is not that simple, but you get the idea.

The is no magical reason why small and value companies should outperform. There were casual reasons. Just because there were casual reasons in the past does not mean that these casual reasons will hold tommorow.

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Re: Small Value Premium - How Do You View It?

Post by Blueskies123 » Mon Jan 22, 2018 10:07 pm

Trev H wrote:
Mon Jan 22, 2018 5:28 pm
25% US Large Market
25% US Small Value
25% Intl Large Value
25% Intl Small Market

Simplified Ultimate Buy and Hold.

I look at SV as the best possible other US Equity Style Box to hit to diversify a US Large Market holding.

The combination works very well when split equally... and the 4 way combo above is an excellent way to get Global 3 Factor Diversification with only 4 funds.

If there is a premium... Great... I will take it.

There is diversification and that is enough.

Trev H
This is what I set up too. After thinking about how much to tilt for a year I settled on 4 by 25% because it was simple to execute and simple to track. I was being paralyzed by much more complex models with complicated rebalancing. I use free I Share ETF’s with Fidelity.

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Re: Small Value Premium - How Do You View It?

Post by protagonist » Mon Jan 22, 2018 10:40 pm

Alexa9 wrote:
Mon Jan 22, 2018 2:24 pm
How do you look at the Small Value Premium?

- Negative: It's just random luck or an anomaly that it outperformed in the past. Large cap companies are more proven and deserve their heavier market weight status in Total Stock Market Index Fund.

/ Neutral: Believe in it somewhat but I will just tilt to it a little. Too risky to go all in. It's not that big of a premium for the added risk. There aren't many good options to invest in small value anyways.

+ Positive: Fama-French is solid proof. All-in or heavy tilt to small value. Large caps like Total Stock Market Fund (mostly large cap) are overrated and not too big to fail. Larry Barbell Type Portfolio with bonds had less volatility with equal performance. Really like the DFA small value funds.

Fourth choice: I don't have a crystal ball and have very little faith in the a posteriori "research".

Sorry if that is not the answer you want to hear.

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Re: Small Value Premium - How Do You View It?

Post by venkman » Mon Jan 22, 2018 11:05 pm

I don't know how much of the small value premium is due to risk vs. investor behavior, but the existence of a premium makes fundamental sense.

Given two companies that had the same share price and expected EPS, would you choose to invest in the one that was large and stable, or the one that was small and shaky? Obviously, every rational investor would choose the large, stable company. The share price of the small, shaky company would necessarily have to drop to a level where investors feel compensated enough to take the added risk.

It's pretty much the same reason why junk bonds yield more than investment-grade bonds. You have interest-rate risk with both; but with the junk bonds, you have a significantly higher chance that your investment will go all the way down to zero.

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Re: Small Value Premium - How Do You View It?

Post by Noobvestor » Mon Jan 22, 2018 11:12 pm

alex_686 wrote:
Mon Jan 22, 2018 9:54 pm
The is no magical reason why small and value companies should outperform. There were casual reasons. Just because there were casual reasons in the past does not mean that these casual reasons will hold tommorow.
No magical reason, that's true. But either you believe small and value companies are riskier, and therefore should have more expected return, or you believe they aren't, in which case they should have the same return as the rest of the market. I suppose the third and fourth possibility would be that you believe they are either safer or that the market will remain perpetually irrational - seems unlikely, but anything's possible.
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Earl Lemongrab
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Re: Small Value Premium - How Do You View It?

Post by Earl Lemongrab » Mon Jan 22, 2018 11:59 pm

alex_686 wrote:
Mon Jan 22, 2018 9:54 pm
The is no magical reason why small and value companies should outperform. There were casual reasons. Just because there were casual reasons in the past does not mean that these casual reasons will hold tommorow.
But you're just waving away what has been a pretty significant premium (or really set of independent premiums) without any real reason other than, "I think it's going away."
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: Small Value Premium - How Do You View It?

Post by Longtermgrowth » Tue Jan 23, 2018 1:27 am

I'm somewhere between neutral and positive for domestic small value. There have been some fairly low cost ways to gain access for a while now, but listening to Paul Merriman's podcasts, mentioning the future should look similar to the past for small value, has me hopeful.

Definitely positive for international developed and emerging small value. I don't think they have seen near as much inflow due to availability of ETFs focused on it, along with added costs. Expense ratios are very important to me, I couldn't call myself a Boglehead if they weren't, but the fact that a few of my favorite funds are DLS (WisdomTree Intl. SmallCap Div Fd.) and DGS (WisdomTree Emerging Mkts Small Cp Div Fd) should say something after checking their ER's, along with seeing they are among, if not the best ETFs for accessing their respective asset class.

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Re: Small Value Premium - How Do You View It?

Post by Top99% » Tue Jan 23, 2018 8:36 am

I am highly positive on it with strong tilts to domestic and international small value and a Larry-ish overall portfolio. My objective isn't to maximize returns but to reduce volatility hence a Larry-ish portfolio. The risk and behavioral arguments have convinced me even though I think the premiums will be lower going forward. I own a healthy dollop of TSM too.
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Re: Small Value Premium - How Do You View It?

Post by nisiprius » Tue Jan 23, 2018 8:49 am

None of the stated reasons apply. Alexa9 has not succeeded in enumerating all points of view.

I am neutral for investors in general, and negative for me. I believe that:

a) the small value premium is just compensation for the extra risk. It's no more than that. There's no higher risk-adjusted reward. If you want to take more risk, it's one way to take it, and unlike some other ways, you have been compensated for it.

b) stocks are stocks, and no big categories of stocks have truly low correlation. In the time it's existed, DFA US Small Cap Value Portfolio, DFSTX, and Vanguard Total Stock Market, VTSMX, have had an 0.89 correlation. Small-cap value is not a powerful diversifier and a small-cap value tilt is not likely to produce any visibly noticeably improvement through MPT magic.

c) The benefits of small-cap value, whatever they are, are capricious and fickle, and it is a crapshoot whether or not I would personally ever see them in my own portfolio, going forward.

d) Small-cap value stocks are exactly the kinds of stocks I am personally least interested in, and would be least likely to choose if I were picking individual stocks for a portfolio.

To put it another way, I am influenced by what Eugene Fama's own words, once easily heard in a video on the Dimensional website, a video which is for some reason no longer available. They were powerful, powerful confirmation bias :) for what I had already come to believe.
Interviewer: Some people cite your research showing that value and small firms have higher average returns over time and they assume that you would recommend most investors have a big helping of small and value stocks in their portfolios. Is that a fair representation of your views?

Fama: Um, no. (Laughs) Basically this a risk story the way we tell it, so there is no optimal portfolio. The way I like to talk about it when I give presentations for DFA or other people is, in every asset pricing model, the market portfolio is always an efficient portfolio. It's always a relevant portfolio for an investor to hold. And investors can decide to tilt away from that based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either. So there's a whole multi-dimensional continuum here of efficient portfolios that anybody can decide to buy that I can't quarrel with. And I have no recommendations about because I think it's totally a matter of taste. If you eat oranges and I eat apples I can't really quarrel very much with that.
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Re: Small Value Premium - How Do You View It?

Post by Jack FFR1846 » Tue Jan 23, 2018 9:00 am

Nobody knows nothin'

I am a firm believer in that and so buy the entire haystack.

I would no sooner tilt to small value than I would tilt to stocks that happen to begin with the letter "L".
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Re: Small Value Premium - How Do You View It?

Post by harvestbook » Tue Jan 23, 2018 9:09 am

I use a modified Merriman portfolio because his breakdown of 10-, 15-, and 20-year periods make sense to me. Even if "everybody knows" small value will outperform, many people won't use it for any number of reasons. Most investors probably don't even know what "small value" means yet they plunk money into 401ks every two weeks. I accept it's just a risk/reward story and I can take the risk, but I also don't think it will make a huge difference over the long run compared to AA and savings rate. But if it turns out to be a percent or two over 20 years, that's real money.
Last edited by harvestbook on Tue Jan 23, 2018 9:13 am, edited 1 time in total.
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Re: Small Value Premium - How Do You View It?

Post by bottlecap » Tue Jan 23, 2018 9:11 am

I view it as not worth my time. Investing is simple.

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Re: Small Value Premium - How Do You View It?

Post by jhfenton » Tue Jan 23, 2018 9:27 am

nisiprius wrote:
Tue Jan 23, 2018 8:49 am
d) Small-cap value stocks are exactly the kinds of stocks I am personally least interested in, and would be least likely to choose if I were picking individual stocks for a portfolio.
I am very much the opposite. If I were an active investor, my instincts would lead me very much toward highly leveraged small cap companies. They are risky and very unattractive to most people, which is why I believe there is the possibility of a persistent premium.

If not, I believe they are unlikely to fair much worse than the broader market, so I view it as an attractive tilt.

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Re: Small Value Premium - How Do You View It?

Post by alex_686 » Tue Jan 23, 2018 4:38 pm

Earl Lemongrab wrote:
Mon Jan 22, 2018 11:59 pm
alex_686 wrote:
Mon Jan 22, 2018 9:54 pm
The is no magical reason why small and value companies should outperform. There were casual reasons. Just because there were casual reasons in the past does not mean that these casual reasons will hold tommorow.
But you're just waving away what has been a pretty significant premium (or really set of independent premiums) without any real reason other than, "I think it's going away."
My last post had both market and economic structural changes. What more are you asking for? Let me ask a counter question - why do you think these premiums will remain? What was the casual reason and why will it not be exploited now that people know about it??

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Re: Small Value Premium - How Do You View It?

Post by Earl Lemongrab » Tue Jan 23, 2018 5:00 pm

alex_686 wrote:
Tue Jan 23, 2018 4:38 pm
My last post had both market and economic structural changes. What more are you asking for? Let me ask a counter question - why do you think these premiums will remain? What was the casual reason and why will it not be exploited now that people know about it??
No, you really haven't. It doesn't amount to more than, "everybody knows now so it doesn't work". That's a behavior-only explanation and no basis for it. The "big companies are more nimble" doesn't make any particular sense. The small premium didn't have much to do with "nimbleness" and value not at all.

Do you think that small and value stocks are riskier or not? It seems like you don't. If that is the case, then it doesn't matter which you choose. You should get the same result minus a bit for costs.

If you do think they are riskier but with no expected excess return, then that is an inefficiency itself. And exploitable.
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Re: Small Value Premium - How Do You View It?

Post by thangngo » Tue Jan 23, 2018 5:58 pm

Alexa9 wrote:
Mon Jan 22, 2018 2:24 pm
How do you look at the Small Value Premium?

- Negative: It's just random luck or an anomaly that it outperformed in the past. Large cap companies are more proven and deserve their heavier market weight status in Total Stock Market Index Fund.

/ Neutral: Believe in it somewhat but I will just tilt to it a little. Too risky to go all in. It's not that big of a premium for the added risk. There aren't many good options to invest in small value anyways.

+ Positive: Fama-French is solid proof. All-in or heavy tilt to small value. Large caps like Total Stock Market Fund (mostly large cap) are overrated and not too big to fail. Larry Barbell Type Portfolio with bonds had less volatility with equal performance. Really like the DFA small value funds.
+ Positive: large cap companies who are more proven are more expensive and therefore will give me lower return.

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Re: Small Value Premium - How Do You View It?

Post by Johnnie » Tue Jan 23, 2018 10:27 pm

I lean positive, and am reinforced by Larry Swedroe's writing on this.

My over-sized allocation to SCV goes back to reading Jeremy Seigel in the late 1990s. I got this large SCV portfolio the old fashioned way, buying-in and just sitting on it for years.

But I'm dialing-back my tilt as I get closer to retirement, because SCV can lag the market for long periods and I no longer have that many "long periods" ahead of me.
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Re: Small Value Premium - How Do You View It?

Post by patrick013 » Tue Jan 23, 2018 10:57 pm

Well don't think it's random luck but a market observation.
Towards the end of a bull market investors look for underpriced
stocks to buy and start buying value. Growth stocks right
now are expensive and the value stocks making money, it's
takes a full time analyst to find them but they're there.

If I buy small cap it's 50-50 growth and value in the index so
when market prices peak all the stocks are getting priced up.

FamaFrench is a stat report, the total return column is what I look at.
With new products and technology SC's can be very efficient
operationally and profit wise. Then inch ahead of LC in total return.
There's more companies to choose from also for index selection,
picking the companies with strong business activity and lower prices.


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Re: Small Value Premium - How Do You View It?

Post by woof755 » Wed Jan 24, 2018 1:03 am

I tilt to small value domestically, and small blend internationally due to lack of access to Int'l small value. I do so not because I want to kill the market, but because it allows me to carry a 40% treasury bond allocation and maintain my same *expected* return as though I had an asset allocation more heavily weighted towards stocks.

Basically, I've read Swedroe (a lot of Swedroe) and it makes sense.
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Re: Small Value Premium - How Do You View It?

Post by privatefarmer » Wed Jan 24, 2018 2:46 am

Earl Lemongrab wrote:
Mon Jan 22, 2018 6:39 pm
alex_686 wrote:
Mon Jan 22, 2018 5:21 pm
I am negative, sort of. I can believe that Fama-French found a historic anomaly. I can also believe that this anomaly has corrected.
Why do you believe this? If true, then that would indicate that the premiums were due entirely to behavior and not risk. Otherwise, if small and/or value is riskier but does not have higher expected return, then that would itself be an inefficiency. That is, you could get the same expected return for lower risk by underweighting those.
I would also point out that the SCV funds have high turnover, for example VIOV is 46%. So every couple years you're essentially holding all new companies. So even if there were a "rush" into SCV after the publication of fama/French (back in the 90s), that money flowed into stocks that are long gone from the index. If you look back over the data we have, you can see that there have been multiple "groups" of SCV stocks that were within the index that outperformed the total market, it wasn't the same group of stocks that outperformed the entire 87-year period. The S/P also has turnover, obviously, but not as much but even so what I am getting at is that multiple groups of SCV companies beat out multiple groups of large cap stocks over the last ~100 years which, to me, adds to the validity of the premium.

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Re: Small Value Premium - How Do You View It?

Post by privatefarmer » Wed Jan 24, 2018 2:49 am

whodidntante wrote:
Mon Jan 22, 2018 6:44 pm
This seems like a trolling topic but I'll bite. About half of my US stocks are in small value funds. Mostly in DFA though I use ETFs in taxable. I see small and value as sources of risk and return. The effect of overweighting small and value overall results in a riskier portfolio with higher expected return, similar to mild leverage. It is also useful in my opinion to diversify across factors.
I completely agree. If you look at the charts, you can see that in nearly every bull market SCV outperforms and then in nearly every bear market it underperforms the total market. It's very similar to adding a tad of leverage to a total market fund but w/o the risk of a margin call, and likely much cheaper.

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Re: Small Value Premium - How Do You View It?

Post by privatefarmer » Wed Jan 24, 2018 3:08 am

Jack FFR1846 wrote:
Tue Jan 23, 2018 9:00 am
Nobody knows nothin'

I am a firm believer in that and so buy the entire haystack.

I would no sooner tilt to small value than I would tilt to stocks that happen to begin with the letter "L".
okay but then why own stocks over bonds (or commodities or real estate etc etc)?

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Re: Small Value Premium - How Do You View It?

Post by privatefarmer » Wed Jan 24, 2018 3:10 am

Earl Lemongrab wrote:
Tue Jan 23, 2018 5:00 pm
alex_686 wrote:
Tue Jan 23, 2018 4:38 pm
My last post had both market and economic structural changes. What more are you asking for? Let me ask a counter question - why do you think these premiums will remain? What was the casual reason and why will it not be exploited now that people know about it??
No, you really haven't. It doesn't amount to more than, "everybody knows now so it doesn't work". That's a behavior-only explanation and no basis for it. The "big companies are more nimble" doesn't make any particular sense. The small premium didn't have much to do with "nimbleness" and value not at all.

Do you think that small and value stocks are riskier or not? It seems like you don't. If that is the case, then it doesn't matter which you choose. You should get the same result minus a bit for costs.

If you do think they are riskier but with no expected excess return, then that is an inefficiency itself. And exploitable.
Bingo.

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Re: Small Value Premium - How Do You View It?

Post by privatefarmer » Wed Jan 24, 2018 3:13 am

woof755 wrote:
Wed Jan 24, 2018 1:03 am
I tilt to small value domestically, and small blend internationally due to lack of access to Int'l small value. I do so not because I want to kill the market, but because it allows me to carry a 40% treasury bond allocation and maintain my same *expected* return as though I had an asset allocation more heavily weighted towards stocks.

Basically, I've read Swedroe (a lot of Swedroe) and it makes sense.
DLS is an okay international SCV option, if you don't have DFA access.

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Re: Small Value Premium - How Do You View It?

Post by aegis965 » Wed Jan 24, 2018 4:11 am

Somebody should start an "Equity Risk Premium - How Do You View It?" thread.
I may be biased.

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