Bogle: there is nothing special about value, so why bet on it?

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CULater
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Bogle: there is nothing special about value, so why bet on it?

Post by CULater » Tue Jan 23, 2018 7:35 pm

Interesting long interview with Jack Bogle by Laurence Siegel. Among other things Mr. Bogle argues that there is nothing special about the value premium, as it has been arbitraged away:
Investors should have no confidence at all that value will win in the long run, for the obvious reason. Once everybody “knows” that value does better than growth, the prices of value stocks consequently go up relative to growth, driving down the subsequent value return; and the prices of growth stocks go down relative to value, driving up the subsequent growth return. The market seems too often unaware of this pattern.

1928 to 1972 had a gradual upward slope in favor of value. Then the chart is all over the place, up, down, and sideways, big drops, small drops, uneven. Just as factor investing, by and large value investing, became popular a couple of years ago, value fell on its face. Last year growth was up 21%, and value 14%.

Value could be the right approach for the future, but why gamble? Nonetheless, back in 1993, I decided investors should be entitled to a choice between growth and value. It had nothing to do with factor investing.
https://www.advisorperspectives.com/art ... jack-bogle
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Re: Bogle: there is nothing special about value, so why bet on it?

Post by willthrill81 » Tue Jan 23, 2018 8:23 pm

The problem with Bogle's analysis, though, is that (1) most investors are not convinced that value will outperform in the long-run (just look around here for evidence of that) and (2) behavioral finance has found that investors' innate biases lean them toward growth over value, and that cannot easily, if ever, be overcome by most.

That's not to say that value will outperform growth over any period. But this line of reasoning is not adequate to dismiss value as a factor.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by Rowan Oak » Tue Jan 23, 2018 8:35 pm

CULater wrote:
Tue Jan 23, 2018 7:35 pm
Interesting long interview with Jack Bogle by Laurence Siegel. Among other things Mr. Bogle argues that there is nothing special about the value premium, as it has been arbitraged away:
Investors should have no confidence at all that value will win in the long run, for the obvious reason. Once everybody “knows” that value does better than growth, the prices of value stocks consequently go up relative to growth, driving down the subsequent value return; and the prices of growth stocks go down relative to value, driving up the subsequent growth return. The market seems too often unaware of this pattern.

1928 to 1972 had a gradual upward slope in favor of value. Then the chart is all over the place, up, down, and sideways, big drops, small drops, uneven. Just as factor investing, by and large value investing, became popular a couple of years ago, value fell on its face. Last year growth was up 21%, and value 14%.

Value could be the right approach for the future, but why gamble? Nonetheless, back in 1993, I decided investors should be entitled to a choice between growth and value. It had nothing to do with factor investing.
https://www.advisorperspectives.com/art ... jack-bogle
"Value could be the right approach for the future, but why gamble?"

Agreed. Prudent advice as always.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by iceport » Tue Jan 23, 2018 10:25 pm

Great interview. Thanks!

This part resonated with me:
What happened over those 25 years, since 1993? Both the growth and value funds themselves had a 9% return. These are the Vanguard growth and value index funds, which differ somewhat from the CRSP indexes in Figure 1. However, the average investor in our growth index fund earned 5%, and the average investor in our value index fund earned 5%. By comparison, if the two funds were used from the beginning to accumulate, you would have gotten a 9% return from either one. By switching back and forth you got a 5% return, and imagine what the difference is from compounding at 5% versus 9% is for 25 years.

To what do you attribute the terrible performance of investors versus the funds they own? How could investors be such bad market or factor timers?

The temptation to “do something” is one of the worst temptations that investors face. There is always some bluebird on the horizon.
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Re: Bogle: there is nothing special about value, so why bet on it?

Post by sambb » Wed Jan 24, 2018 2:48 am

sounds like bogle is using past performance to guide future results. i dont see how that is possible - i have always read that past performance does not indicate future results. hmmm

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by onourway » Wed Jan 24, 2018 5:49 am

sambb wrote:
Wed Jan 24, 2018 2:48 am
sounds like bogle is using past performance to guide future results. i dont see how that is possible - i have always read that past performance does not indicate future results. hmmm
I don’t read it that way at all. This is basic portfolio theory. In some periods in the past Value has outperformed Growth, but he is saying that new information has been now been processed by the market, so that advantage has likely gone away. It has already been priced in to Value stocks. He even says that it may or may not be a better choice for the future, “but why gamble?”

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by Call_Me_Op » Wed Jan 24, 2018 6:45 am

How does Mr, Bogle explain that fact that from 1972-present (during the period he claims things have been all over the place) the CAGR or small value stocks is a full 4.5% higher than for small growth stocks?
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Re: Bogle: there is nothing special about value, so why bet on it?

Post by Rowan Oak » Wed Jan 24, 2018 7:28 am

Call_Me_Op wrote:
Wed Jan 24, 2018 6:45 am
How does Mr, Bogle explain that fact that from 1972-present (during the period he claims things have been all over the place) the CAGR or small value stocks is a full 4.5% higher than for small growth stocks?
He doesn't try to.

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

The higher a portfolio's expected return, the greater is the likelihood that it will disappoint!
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by Call_Me_Op » Wed Jan 24, 2018 7:31 am

I also disagree with Mr. Bogle's claim that "once everybody knows" that one asset class does better than another, that higher return will be arbitraged away. He is ignoring risk. After all, everyone has known for a long time that stocks have much higher returns than bonds, but that relationship still persists because stocks are much riskier. He is also ignoring certain behavioral factors in humans, such as the tendency to follow the crowd.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by Call_Me_Op » Wed Jan 24, 2018 7:38 am

Rowan Oak wrote:
Wed Jan 24, 2018 7:28 am
Call_Me_Op wrote:
Wed Jan 24, 2018 6:45 am
How does Mr, Bogle explain that fact that from 1972-present (during the period he claims things have been all over the place) the CAGR or small value stocks is a full 4.5% higher than for small growth stocks?
He doesn't try to.
Right, because it refutes his argument.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by Rowan Oak » Wed Jan 24, 2018 8:02 am

Call_Me_Op wrote:
Wed Jan 24, 2018 7:38 am
Rowan Oak wrote:
Wed Jan 24, 2018 7:28 am
Call_Me_Op wrote:
Wed Jan 24, 2018 6:45 am
How does Mr, Bogle explain that fact that from 1972-present (during the period he claims things have been all over the place) the CAGR or small value stocks is a full 4.5% higher than for small growth stocks?
He doesn't try to.
Right, because it refutes his argument.
Small value stocks may or may not win in the long-term. It's a gamble either way. I respect your opinion that they will.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by Call_Me_Op » Wed Jan 24, 2018 8:08 am

Rowan Oak wrote:
Wed Jan 24, 2018 8:02 am
Call_Me_Op wrote:
Wed Jan 24, 2018 7:38 am
Rowan Oak wrote:
Wed Jan 24, 2018 7:28 am
Call_Me_Op wrote:
Wed Jan 24, 2018 6:45 am
How does Mr, Bogle explain that fact that from 1972-present (during the period he claims things have been all over the place) the CAGR or small value stocks is a full 4.5% higher than for small growth stocks?
He doesn't try to.
Right, because it refutes his argument.
Small value stocks may or may not win in the long-term. It's a gamble either way. I respect your opinion that they will.
I actually agree with you that it is a gamble. Nothing is certain with investing. And even though I do tilt toward value, it is not a strong tilt because I am fundamentally a believer in very broad diversification.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by jadd806 » Wed Jan 24, 2018 8:41 am

Call_Me_Op wrote:
Wed Jan 24, 2018 6:45 am
How does Mr, Bogle explain that fact that from 1972-present (during the period he claims things have been all over the place) the CAGR or small value stocks is a full 4.5% higher than for small growth stocks?
Isn't this easily explained by simply recognizing "value" as a proxy for increased risk?

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by tibbitts » Wed Jan 24, 2018 8:46 am

Call_Me_Op wrote:
Wed Jan 24, 2018 6:45 am
How does Mr, Bogle explain that fact that from 1972-present (during the period he claims things have been all over the place) the CAGR or small value stocks is a full 4.5% higher than for small growth stocks?
I'm guessing he would say that it's possible to select stocks on some other basis that would also have a 4.5% higher return over a similar period. Like stocks with names starting with the middle 6 letters of the alphabet or something.

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by azanon » Wed Jan 24, 2018 8:58 am

I prefer value stock because I'm more comfortable with value stock. Stocks take enough risk tolerance as it is to own them, so anything you can do to increase your comfort level is probably a good thing. I'm less comfortable paying any price, regardless of how it relates to earnings, sales, book value, etc. for a company than I am paying a lower price for a company again with respect to those values. Just in general, I buy what's on sale rather than what's hot.

In fact, maybe I'm on to something here. Risk tolerance and staying the course is so important, that maybe it's a better idea to buy the kind of stock that fits your personality, rather than which one back tests better. I know "aggressive growth" kind of people and "value" people. I'm the latter type.

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by wolf359 » Wed Jan 24, 2018 9:14 am

The time to bet on something is when nobody wants to bet on it. If everybody "knows" value is better, and more people tilt to value, the value stocks will go up. Future returns, consequently, will be lower. Right now factor investing is popular, and so are the messages beating the drum for value, and small cap value. Bogle is arguing that the value investors are being and will be disappointed with their future returns.

When growth is beating value, isn't that the time to start invest in value? If you don't have a large value stake already, and you invest a little over time due to paycheck investing, then it sounds like a good time to start building up a position. You ride value from its highs into its lows, and use the enforced dollar cost averaging effect to buy more shares over time.

Yes, simply buying the total stock market is a safer bet. But if you have a long timeframe, it actually sounds like a good time to start building a value position gradually.

That's how I justified a slight value tilt in my mind. At least for Roth accounts, which I'm not planning to touch for a long, long time (and may be my legacy funds for the next generation.)

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by thx1138 » Wed Jan 24, 2018 9:20 am

tibbitts wrote:
Wed Jan 24, 2018 8:46 am
Call_Me_Op wrote:
Wed Jan 24, 2018 6:45 am
How does Mr, Bogle explain that fact that from 1972-present (during the period he claims things have been all over the place) the CAGR or small value stocks is a full 4.5% higher than for small growth stocks?
I'm guessing he would say that it's possible to select stocks on some other basis that would also have a 4.5% higher return over a similar period. Like stocks with names starting with the middle 6 letters of the alphabet or something.
The difference though is that FF factors persist across a variety of time frames, a variety of definitions of "small" or "value" and exist in multiple different markets. So if he honestly thought SV was the same as "Dogs of the Dow" or any other random backtested selection metric then he missed some pretty basic finance math somewhere. I suspect that's not what he actually believes.

None of that means future returns will match past returns but nothing promises beta will persist either. So saying you must have stocks in a portfolio because you need the increased return is just as faith based as saying tilting SV increase return more. Both are dependent on the presumption of a continued risk premium. One is more riskier than the other and hence returns a higher premium. You don't "arbitrage" away risk premia. Measuring something is more risky and thus returns more doesn't make it go away nor is it a "free lunch".

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by freebeer » Wed Jan 24, 2018 9:21 am

CULater wrote:
Tue Jan 23, 2018 7:35 pm
...Mr. Bogle argues ...:
...back in 1993, I decided investors should be entitled to a choice between growth and value. It had nothing to do with factor investing.
https://www.advisorperspectives.com/art ... jack-bogle
I'm confused by that part of Mr. Bogle's comments. If the decision had nothing to do with factor investing, then what *was* the motivation? And given that the Fama & French paper supporting a value premium was in 1992, is it really credible that Vanguard's 1993 move had nothing to do with factor investing? I mean, even if the reason was being responsive to customers, aka "give the Wookie what he wants", the underlying reason that customers were asking had to do with factor investing, right?

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by Da5id » Wed Jan 24, 2018 9:37 am

freebeer wrote:
Wed Jan 24, 2018 9:21 am
CULater wrote:
Tue Jan 23, 2018 7:35 pm
...Mr. Bogle argues ...:
...back in 1993, I decided investors should be entitled to a choice between growth and value. It had nothing to do with factor investing.
https://www.advisorperspectives.com/art ... jack-bogle
I'm confused by that part of Mr. Bogle's comments. If the decision had nothing to do with factor investing, then what *was* the motivation? And given that the Fama & French paper supporting a value premium was in 1992, is it really credible that Vanguard's 1993 move had nothing to do with factor investing? I mean, even if the reason was being responsive to customers, aka "give the Wookie what he wants", the underlying reason that customers were asking had to do with factor investing, right?
Growth and Value were known areas of stock investing long before Fama/French. And I'd bet most purchasing them in 1993 didn't know about Fama/French, academic research doesn't necessarily percolate out to investors all that fast. I'd take him at his word there.

I'm not a factor investor, but think the evidence for small/value seems pretty widespread in lots of markets around the world. I'd expect the premium to somewhat diminish to the extent that their out-performance is behavioral and can be exploited by hedge funds etc. But I'd not expect the premium to totally vanish. Still, I think Bogle's advice is good. Most people shouldn't be factor investors -- to succeed at it you need an iron clad belief that will survive reasonably longish periods of under performance. I don't think most people have the temperament for that.

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by Rowan Oak » Wed Jan 24, 2018 9:38 am

freebeer wrote:
Wed Jan 24, 2018 9:21 am
CULater wrote:
Tue Jan 23, 2018 7:35 pm
...Mr. Bogle argues ...:
...back in 1993, I decided investors should be entitled to a choice between growth and value. It had nothing to do with factor investing.
https://www.advisorperspectives.com/art ... jack-bogle
I'm confused by that part of Mr. Bogle's comments. If the decision had nothing to do with factor investing, then what *was* the motivation? And given that the Fama & French paper supporting a value premium was in 1992, is it really credible that Vanguard's 1993 move had nothing to do with factor investing? I mean, even if the reason was being responsive to customers, aka "give the Wookie what he wants", the underlying reason that customers were asking had to do with factor investing, right?
I had the same thought. Maybe "choice" was the only reason.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by AtlasShrugged? » Wed Jan 24, 2018 9:46 am

Bogleheads....I actually thought these portions of the interview were intriguing: ETF vs. TIF, and 'Uneasy lies the head that wears the crown'.

Re: Growth vs Value. What I took away from that portion of the interview, rightly or wrongly, is that the distinction between the two may no longer really matter all that much anymore. They have similar returns now. Is he right? I don't know. But I'll tell you what - I place great weight on what he says, with ~60 years in the business. A lot of experience there.

Here is my question: Who is the next Jack Bogle?
“If you don't know, the thing to do is not to get scared, but to learn.”

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by dziuniek » Wed Jan 24, 2018 10:08 am

Da5id wrote:
Wed Jan 24, 2018 9:37 am
freebeer wrote:
Wed Jan 24, 2018 9:21 am
CULater wrote:
Tue Jan 23, 2018 7:35 pm
...Mr. Bogle argues ...:
...back in 1993, I decided investors should be entitled to a choice between growth and value. It had nothing to do with factor investing.
https://www.advisorperspectives.com/art ... jack-bogle
I'm confused by that part of Mr. Bogle's comments. If the decision had nothing to do with factor investing, then what *was* the motivation? And given that the Fama & French paper supporting a value premium was in 1992, is it really credible that Vanguard's 1993 move had nothing to do with factor investing? I mean, even if the reason was being responsive to customers, aka "give the Wookie what he wants", the underlying reason that customers were asking had to do with factor investing, right?
Growth and Value were known areas of stock investing long before Fama/French. And I'd bet most purchasing them in 1993 didn't know about Fama/French, academic research doesn't necessarily percolate out to investors all that fast. I'd take him at his word there.

I'm not a factor investor, but think the evidence for small/value seems pretty widespread in lots of markets around the world. I'd expect the premium to somewhat diminish to the extent that their out-performance is behavioral and can be exploited by hedge funds etc. But I'd not expect the premium to totally vanish. Still, I think Bogle's advice is good. Most people shouldn't be factor investors -- to succeed at it you need an iron clad belief that will survive reasonably longish periods of under performance. I don't think most people have the temperament for that.
Temperament or long enough time horizon... aka - life expectancy.

Some of the underperformance periods are really really really long.

But we need value investors and any factor investors. The more passive investing takes over, the more sector, size, etc bets people need to take to make the market efficient. It's over my head, but my understanding is that we need active folks.

I would argue that these bets* are a form of active investing.

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by dziuniek » Wed Jan 24, 2018 10:10 am

wolf359 wrote:
Wed Jan 24, 2018 9:14 am
The time to bet on something is when nobody wants to bet on it. If everybody "knows" value is better, and more people tilt to value, the value stocks will go up. Future returns, consequently, will be lower. Right now factor investing is popular, and so are the messages beating the drum for value, and small cap value. Bogle is arguing that the value investors are being and will be disappointed with their future returns.

When growth is beating value, isn't that the time to start invest in value? If you don't have a large value stake already, and you invest a little over time due to paycheck investing, then it sounds like a good time to start building up a position. You ride value from its highs into its lows, and use the enforced dollar cost averaging effect to buy more shares over time.

Yes, simply buying the total stock market is a safer bet. But if you have a long timeframe, it actually sounds like a good time to start building a value position gradually.

That's how I justified a slight value tilt in my mind. At least for Roth accounts, which I'm not planning to touch for a long, long time (and may be my legacy funds for the next generation.)
Is that really the time to buy value?

What about momentum? What about trend is your friend? :)

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by wolf359 » Wed Jan 24, 2018 10:42 am

dziuniek wrote:
Wed Jan 24, 2018 10:10 am
wolf359 wrote:
Wed Jan 24, 2018 9:14 am
The time to bet on something is when nobody wants to bet on it. If everybody "knows" value is better, and more people tilt to value, the value stocks will go up. Future returns, consequently, will be lower. Right now factor investing is popular, and so are the messages beating the drum for value, and small cap value. Bogle is arguing that the value investors are being and will be disappointed with their future returns.

When growth is beating value, isn't that the time to start invest in value? If you don't have a large value stake already, and you invest a little over time due to paycheck investing, then it sounds like a good time to start building up a position. You ride value from its highs into its lows, and use the enforced dollar cost averaging effect to buy more shares over time.

Yes, simply buying the total stock market is a safer bet. But if you have a long timeframe, it actually sounds like a good time to start building a value position gradually.

That's how I justified a slight value tilt in my mind. At least for Roth accounts, which I'm not planning to touch for a long, long time (and may be my legacy funds for the next generation.)
Is that really the time to buy value?

What about momentum? What about trend is your friend? :)
Ha. Using momentum to justify buying value would be the ultimate in irony.

I do think the market shifts between value and growth, but it may take decades to play out. If I'm wrong, I think I'll still do just fine. The real strategy is buy and hold, sticking with whatever plan you chose. Keep costs down and don't keep shifting strategies.

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by Nowizard » Wed Jan 24, 2018 10:49 am

As with most all complex issues, there are conceptual formulations that can be shown to be factual such as focusing on expenses, rebalancing, not buying and selling, etc. However, it becomes more controversial when substantial nuance is added. Even Mr. Bogle fails to have all the answers, though he has many more than most.

Tim

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Re: Bogle: there is nothing special about value, so why bet on it?

Post by White Coat Investor » Wed Jan 24, 2018 10:54 am

CULater wrote:
Tue Jan 23, 2018 7:35 pm
Interesting long interview with Jack Bogle by Laurence Siegel. Among other things Mr. Bogle argues that there is nothing special about the value premium, as it has been arbitraged away:
Investors should have no confidence at all that value will win in the long run, for the obvious reason. Once everybody “knows” that value does better than growth, the prices of value stocks consequently go up relative to growth, driving down the subsequent value return; and the prices of growth stocks go down relative to value, driving up the subsequent growth return. The market seems too often unaware of this pattern.

1928 to 1972 had a gradual upward slope in favor of value. Then the chart is all over the place, up, down, and sideways, big drops, small drops, uneven. Just as factor investing, by and large value investing, became popular a couple of years ago, value fell on its face. Last year growth was up 21%, and value 14%.

Value could be the right approach for the future, but why gamble? Nonetheless, back in 1993, I decided investors should be entitled to a choice between growth and value. It had nothing to do with factor investing.
https://www.advisorperspectives.com/art ... jack-bogle
This isn't a new perspective for Bogle. As noted, he sees value and growth as fairly equal ways to invest and has for at least a couple of decades.
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: Bogle: there is nothing special about value, so why bet on it?

Post by Random Walker » Wed Jan 24, 2018 11:20 am

I really like the cost of capital perspective: the expected return on a stock is the cost of the company’s capital. It intuitively makes sense to me that a riskier value company should have a higher cost of capital and this a higher expected return. The market prices risk. It doesn’t price stocks to make expected returns equal.
The fact that, in addition to the risk explanation, there is also potential behavioral explanation for value premium, makes me a believer.

Dave

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