Value premium harvestable?

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garlandwhizzer
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Value premium harvestable?

Post by garlandwhizzer » Fri Apr 06, 2018 9:38 pm

The Vanguard Value Index Fund and the Vanguard Growth Index Fund have both been in existence since 11//2/ 1992. That is over 25 years, both operating in the large cap space using opposite strategies, one using a value strategy, the other a growth strategy. Over that long time period the value factor premium has been significantly positive so the Value Index Fund would be expected to outperform. In point of fact the Growth Index has outperformed slightly (9.59% vs. 9.54%) over that 25.5 year span. Similar results with the Vanguard SCV fund versus their SCG fund since inception 19.9 years ago, slight outperformance by SCG. Most of us would agree that 20 - 25 years is long enough to wait for a payoff. So where is it?

Value true believers might argue that Vanguard isn't an optimal choice to harvest the premium. On the other hand, if that's the same group that chose the growth index which outperformed. They did seem to know how to harvest growth. It seems to me that the most reasonable conclusion to draw from this is that in the LC space the value premium seems not to have been readily harvestable over the last 25+ years in spite of the fact that the research on factors suggests it was significantly positive. The same is true in the SC space except the time period is 19.9 years.

I'm sure factor adherents can pick value funds that did outperform during these periods just as active management funds can always pick funds that outperformed comparable indexes over a given time span. The important question is not how the outliers performed, but how did the average fund using a given strategy do? If the factors are pervasive, reliable, and harvestable after costs for investors, we would not expect a high quality competently run firm (Vanguard) to miss the mark for decades. Factor backtesting research looks compelling and robust, but there's often a wide gulf between academic research based on backtesting optimized in the rear view mirror versus real fund results for investors.

Garland Whizzer

grok87
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Re: Value premium harvestable?

Post by grok87 » Fri Apr 06, 2018 9:43 pm

garlandwhizzer wrote:
Fri Apr 06, 2018 9:38 pm
The Vanguard Value Index Fund and the Vanguard Growth Index Fund have both been in existence since 11//2/ 1992. That is over 25 years, both operating in the large cap space using opposite strategies, one using a value strategy, the other a growth strategy. Over that long time period the value factor premium has been significantly positive so the Value Index Fund would be expected to outperform. In point of fact the Growth Index has outperformed slightly (9.59% vs. 9.54%) over that 25.5 year span. Similar results with the Vanguard SCV fund versus their SCG fund since inception 19.9 years ago, slight outperformance by SCG. Most of us would agree that 20 - 25 years is long enough to wait for a payoff. So where is it?

Value true believers might argue that Vanguard isn't an optimal choice to harvest the premium. On the other hand, if that's the same group that chose the growth index which outperformed. They did seem to know how to harvest growth. It seems to me that the most reasonable conclusion to draw from this is that in the LC space the value premium seems not to have been readily harvestable over the last 25+ years in spite of the fact that the research on factors suggests it was significantly positive. The same is true in the SC space except the time period is 19.9 years.

I'm sure factor adherents can pick value funds that did outperform during these periods just as active management funds can always pick funds that outperformed comparable indexes over a given time span. The important question is not how the outliers performed, but how did the average fund using a given strategy do? If the factors are pervasive, reliable, and harvestable after costs for investors, we would not expect a high quality competently run firm (Vanguard) to miss the mark for decades. Factor backtesting research looks compelling and robust, but there's often a wide gulf between academic research based on backtesting optimized in the rear view mirror versus real fund results for investors.

Garland Whizzer
good post.
will look at the data when i get a chance. i suspect it may have something to do with CAGR vs. average annual returns. In other words volatility drag. or in other words if you are 50% down one year, 50% up the next year does not get you back to even...
Keep calm and Boglehead on. KCBO.

heyyou
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Re: Value premium harvestable?

Post by heyyou » Fri Apr 06, 2018 10:37 pm

outperformed slightly (9.59% vs. 9.54%) over that 25.5 year span
(1) Large cap growth has done very well since the last big crash. Anyone think that will repeat starting now, without another crash?
(2) Some could say that .05% difference for 25 years is not statistically significant.
(3) Since the 2000 Crash, I've been tilting away from Large Cap Growth, so the near even returns are fine by me. I wish there was more emphasis here on performance that is expected to be good enough to meet your long term needs, instead of so much seeking optimal which is just being greedy.

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privatefarmer
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Re: Value premium harvestable?

Post by privatefarmer » Sat Apr 07, 2018 2:26 am

has there been a value premium over the last 25 years? according to portfoliovisualizer.com, large-value vs large-growth from '93 to present has resulted in nearly identical CAGR (which matches up w/ what we've seen with the two vanguard funds). however, if you go back to 1972 to present, there has been a strong value premium of >1%/year...

so I guess one could question whether the value premium is harvestable after cheap index funds entered the market. DFA obviously has done an excellent job at extracting any small and value premium, both domestically and internationally, over the last 20+ years.

To me, I always equate stock investing w/ real estate investing. If I were to buy a rental property, would I want the big, fancy but expensive house w/ a high price/rent ratio or would I want to buy the run-down, grungy home in the "bad neighborhood" that has a very low price/rent ratio? I would personally buy a basket of run down, cheaper homes to rent out. I think the same can be said for any investment. If you want a higher ROI you find the investments that are out-of-favor, maybe more volatile, seen as "less safe". If you own an investment that is seen as "safe" then you are paying a premium for that, just as you would if you bought insurance. Now you could argue that growth stocks are no safer than value stocks however they certainly are more in the news, more popular, and so I would think you would be paying some sort of premium.

anyhow, the market is very efficient. Maybe there will not be any sizable difference between "value" and "growth" going forward but even if you only get the return of the market you aren't harming your portfolio by tilting to value, if you hold for the long term you should be fine either way.

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Re: Value premium harvestable?

Post by fennewaldaj » Sat Apr 07, 2018 3:05 am

As you said although the academic research looks compelling it might not translate into real world results. The small value vs small growth thing is interesting. It seems like the bad actors that the academic research points to are mostly stocks that no funds active or passive really invest in as a significant part of their assets. I have decided to tilt my portfolio fairly significantly but would not be surprised if it doesn't end up delivering superior results (except perhaps some minor MPT type benefits from non perfect correlation). It doesn't really cost much to have a tilted portfolio now days so it seems unlikely to hurt much even if it doesn't help.

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Re: Value premium harvestable?

Post by AlohaJoe » Sat Apr 07, 2018 3:45 am

garlandwhizzer wrote:
Fri Apr 06, 2018 9:38 pm
If the factors are pervasive, reliable, and harvestable after costs for investors, we would not expect a high quality competently run firm (Vanguard) to miss the mark for decades.
Factor advocates were always clear that the value factor had underperformed for 20 years at a stretch in the past (1950s to 1970s IIRC). While that nuance may have been lost in many popular explanations about value, it has been made clear in nearly all of the more serious things I've seen.

That said, I agree with your broader point that the curious timing of the underperformance certainly raises the question about whether value -- like the small factor -- has either disappeared or never existed.

asif408
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Re: Value premium harvestable?

Post by asif408 » Sat Apr 07, 2018 6:30 am

garlandwhizzer wrote:
Fri Apr 06, 2018 9:38 pm
If the factors are pervasive, reliable, and harvestable after costs for investors, we would not expect a high quality competently run firm (Vanguard) to miss the mark for decades. Factor backtesting research looks compelling and robust, but there's often a wide gulf between academic research based on backtesting optimized in the rear view mirror versus real fund results for investors.
When I plot the funds I see similar patterns to other so-called premiums, in that you get 5-10 years of outperformance with one, followed by a similar pattern with the other, and this process repeats over time. I think the other consideration is that we are likely at the tail end of a period of value underperformance. I can only assume from the chart that the funds started during the tail end of a value period of outperformance and is ending with a period of value underperformance. Because if I shift the start date to 1994 it appears value has underperformed nearly the whole time. And if I start in 2000 it appears the value premium is robust and has outperformed the whole time.

I think this provide a good lesson to those who invest based on factors. And that is that starting and ending points matter, even over long periods. And I would compare that to those who eschew international stocks because of comparisons such as the performance from the start of Vanguard's Total International Stock fund vs their Total Stock Market fund. 1996 was near the start of international stocks (particularly EM) lagging the US market, and we're likely at the tail end (if it hasn't ended already) of international underperformance from 2011-2016. So it appears international stocks have not been of any benefit since inception.

If you start investing when anything is popular and has had recent outperformance, you may have to hold the fund a very long time to get a premium, if you get one at all. And starting or ending at a high or low point for one will distort the picture.

The only strategy I see that is pervasive, reliable, and harvestable is a mean reversion strategy. That is, you invest in or tilt towards the something (which could include a factor) when it becomes more unpopular or out of favor, and sell out of or tilt away from it as it becomes more popular and in favor. I think this strategy is about the only one that can actually provide a risk premium over time, and you still have to endure years of time where you will look dumb.

snarlyjack
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Re: Value premium harvestable?

Post by snarlyjack » Sat Apr 07, 2018 6:35 am

Garlandwhizzer.

As you know I' am a young guy who never plans on selling...

Buy low & sell high...doesn't work for me.

But what I can do is invest in value stocks & collect the
dividends forever. I don't care what the value of the
portfolio is (because I' am never going to sell). I much
prefer income portfolios. When I look at a portfolio I
look for dividend growth, dividend appreciation, dividend
yield.

If value & growth are approximately the same over time why
not go for dividend growth. What am I going to do with
Facebook or Gopro? Imho, value stocks are where it's at...

Growth stocks = buy low sell high.
Value stocks = income forever.
Income forever = I can pay my bills in a flat or down market
or a rising market. It has better/more opportunities.

WWWBD = What Would Warren Buffett Do?

rkhusky
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Re: Value premium harvestable?

Post by rkhusky » Sat Apr 07, 2018 7:29 am

asif408 wrote:
Sat Apr 07, 2018 6:30 am
And that is that starting and ending points matter, even over long periods.
+1

Marketman
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Re: Value premium harvestable?

Post by Marketman » Sat Apr 07, 2018 10:14 am

I believe value stocks are riskier in a bad economy. Look at the '08 meltdown. In this age of easy investing in any slice of the market you want, it's really hard for me to believe any factor will make money going forward unless the factor identifies something that is just plain old riskier. If you can buy SCV stocks for example with a click of a button, I would really think any premium in risk-adjusted returns would be arbitraged out.

When you look at past data going way back, I bet there was a SCV premium because it was so expensive and difficult to buy SCV stocks. There were no cheap index SCV funds available. There was no way to own a huge basket of them to diversify away the risk of individual stocks. I for one am skeptical about factors finding higher risk adjusted returns going forward.

garlandwhizzer
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Re: Value premium harvestable?

Post by garlandwhizzer » Sat Apr 07, 2018 11:57 am

Although my post questions whether funds seeking SCV or V for example are destined to outperform in the long run, I must admit that I tilt my own portfolio, modestly in the US, substantially in EM and DM. I do that in the US not because I'm certain of factor outperformance but rather because TSM, my large core holding, is itself tilted to LCG and technology. SCV tilts differently, less tech, more industrials, plenty of small banks that don't play in credit card issuance or international finance. An argument can be made that including both increases diversification whether or not SCV outperforms long run. When market bubbles form, they usually do so in G, especially LCG. Bubbles end only one way. Having small ugly ducklings along with mega-cap high flyers has reduced recent returns but will come in handy if and when LCG tech hits a wall.

Garland Whizzer

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SimpleGift
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Re: Value premium harvestable?

Post by SimpleGift » Sat Apr 07, 2018 11:58 am

garlandwhizzer wrote:
Fri Apr 06, 2018 9:38 pm
If the factors are pervasive, reliable, and harvestable after costs for investors, we would not expect a high quality competently run firm (Vanguard) to miss the mark for decades. Factor backtesting research looks compelling and robust, but there's often a wide gulf between academic research based on backtesting optimized in the rear view mirror versus real fund results for investors.
Good point, Garland, about the disconnect between backtest results and real world fund performance.

In the case of the value premium, my sense is most of the backtest results came from periods with much higher inflation rates than we've had over the past 20 years (chart below) — and as William Bernstein has observed, inflation and the value premium have been strongly correlated historically.
The reasoning, as I understand it, is that value companies tend to have much higher debt levels than growth companies — and thus benefit more from high inflation, due to the lower real (inflation-adjusted) costs of their debt. So it's possible the value premium has been arbitraged away — but it's also possible that it's just sleeping, and waiting for times with higher rates of inflation.
Last edited by SimpleGift on Sat Apr 07, 2018 12:00 pm, edited 1 time in total.
Cordially, Todd

grok87
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Re: Value premium harvestable?

Post by grok87 » Sat Apr 07, 2018 12:00 pm

SimpleGift wrote:
Sat Apr 07, 2018 11:58 am
garlandwhizzer wrote:
Fri Apr 06, 2018 9:38 pm
If the factors are pervasive, reliable, and harvestable after costs for investors, we would not expect a high quality competently run firm (Vanguard) to miss the mark for decades. Factor backtesting research looks compelling and robust, but there's often a wide gulf between academic research based on backtesting optimized in the rear view mirror versus real fund results for investors.
Good point, Garland, about the disconnect between backtest results and real world fund performance.

In the case of the value premium, my sense is most of the backtest results came from periods with much higher inflation rates than we've had over the past 20 years (chart below) — and as William Bernstein has observed, inflation and the value premium have been strongly correlated historically.
The reasoning, as I understand it, is that value companies tend to have much higher debt levels than growth companies — and thus benefit more from high inflation, due to the lower real costs of their debt. So it's possible the value premium has been arbitraged away — but it's also possible that it's just sleeping, and waiting for times with higher rates of inflation.
Agree
Keep calm and Boglehead on. KCBO.

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triceratop
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Re: Value premium harvestable?

Post by triceratop » Sat Apr 07, 2018 12:44 pm

snarlyjack wrote:
Sat Apr 07, 2018 6:35 am
Garlandwhizzer.

As you know I' am a young guy who never plans on selling...

Buy low & sell high...doesn't work for me.

But what I can do is invest in value stocks & collect the
dividends forever. I don't care what the value of the
portfolio is (because I' am never going to sell). I much
prefer income portfolios. When I look at a portfolio I
look for dividend growth, dividend appreciation, dividend
yield.

If value & growth are approximately the same over time why
not go for dividend growth. What am I going to do with
Facebook or Gopro? Imho, value stocks are where it's at...

Growth stocks = buy low sell high.
Value stocks = income forever.
Income forever = I can pay my bills in a flat or down market
or a rising market. It has better/more opportunities.

WWWBD = What Would Warren Buffett Do?
He would utilize his own stated advice that dividends are equivalent to share buybacks for purposes of returning cash to shareholders. Then he would realize that holding tax inefficient stock funds in taxable accounts is wasting money.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

stlutz
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Re: Value premium harvestable?

Post by stlutz » Sat Apr 07, 2018 12:56 pm

The reasoning, as I understand it, is that value companies tend to have much higher debt levels than growth companies — and thus benefit more from high inflation, due to the lower real costs of their debt. So it's possible the value premium has been arbitraged away — but it's also possible that it's just sleeping, and waiting for times with higher rates of inflation.
So, is the argument that there is a value premium or a leverage premium? If the key is more leverage, then why not target that directly?

Another possibility is that both inflation and value outperformance are the dependent variables and that something else was the real "cause".

MotoTrojan
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Re: Value premium harvestable?

Post by MotoTrojan » Sat Apr 07, 2018 1:03 pm

snarlyjack wrote:
Sat Apr 07, 2018 6:35 am
Garlandwhizzer.

As you know I' am a young guy who never plans on selling...

Buy low & sell high...doesn't work for me.

But what I can do is invest in value stocks & collect the
dividends forever. I don't care what the value of the
portfolio is (because I' am never going to sell). I much
prefer income portfolios. When I look at a portfolio I
look for dividend growth, dividend appreciation, dividend
yield.

If value & growth are approximately the same over time why
not go for dividend growth. What am I going to do with
Facebook or Gopro? Imho, value stocks are where it's at...

Growth stocks = buy low sell high.
Value stocks = income forever.
Income forever = I can pay my bills in a flat or down market
or a rising market. It has better/more opportunities.

WWWBD = What Would Warren Buffett Do?
I bet Buffett understands total return and doesn’t rely on or gauge dividends. Your thinking is frankly flawed.

Marketman
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Re: Value premium harvestable?

Post by Marketman » Sat Apr 07, 2018 1:32 pm

garlandwhizzer wrote:
Sat Apr 07, 2018 11:57 am
Although my post questions whether funds seeking SCV or V for example are destined to outperform in the long run, I must admit that I tilt my own portfolio, modestly in the US, substantially in EM and DM. I do that in the US not because I'm certain of factor outperformance but rather because TSM, my large core holding, is itself tilted to LCG and technology. SCV tilts differently, less tech, more industrials, plenty of small banks that don't play in credit card issuance or international finance. An argument can be made that including both increases diversification whether or not SCV outperforms long run. When market bubbles form, they usually do so in G, especially LCG. Bubbles end only one way. Having small ugly ducklings along with mega-cap high flyers has reduced recent returns but will come in handy if and when LCG tech hits a wall.

Garland Whizzer
Interesting point. If this is true, it would change with market conditions, for example, before or after 2000 .com crash.

rkhusky
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Re: Value premium harvestable?

Post by rkhusky » Sat Apr 07, 2018 2:29 pm

garlandwhizzer wrote:
Sat Apr 07, 2018 11:57 am
I do that in the US not because I'm certain of factor outperformance but rather because TSM, my large core holding, is itself tilted to LCG and technology.
The cap-weighted total stock market is the baseline and, as such, has no tilts.

snarlyjack
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Re: Value premium harvestable?

Post by snarlyjack » Sat Apr 07, 2018 3:33 pm

Ok...

If you look at a long term chart of VHDYX & VDADX & VTSMX they
are within "hairs" of each other for total return. I'm not getting blown out
by any main stream fund.

I just finished up my taxes & have yet to pay 1 dime out of my pocket for taxes.
I have over $300,000. in my account & I received approx. $9,000. in dividends
last year. That $9,000 in dividends bought more shares each quarter and that
is not counting my personal contributions. I think my taxes will be even better
in 2018.

What I see is a big disconnect here. From my actual real life experience
the snowball is growing each & every quarter. I think in a down market (or flat)
it will grow even faster. From my perspective I don't see what the problem is.
The snowball is rolling down the mountain & picking up speed...

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SimpleGift
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Re: Value premium harvestable?

Post by SimpleGift » Sat Apr 07, 2018 3:55 pm

rkhusky wrote:
Sat Apr 07, 2018 2:29 pm
garlandwhizzer wrote:
Sat Apr 07, 2018 11:57 am
I do that in the US not because I'm certain of factor outperformance but rather because TSM, my large core holding, is itself tilted to LCG and technology.
The cap-weighted total stock market is the baseline and, as such, has no tilts.
The point, I believe, is that if you break down the U.S. total stock market fund according to the Fama-French six-bucket size and value factors, it's historically been predominately a large-cap growth fund (in purple, chart below).
For the same reason as Garland, I've maintained a modest tilt toward value stocks in my own equity portfolio for many years.
Last edited by SimpleGift on Sat Apr 07, 2018 3:57 pm, edited 1 time in total.
Cordially, Todd

Random Walker
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Re: Value premium harvestable?

Post by Random Walker » Sat Apr 07, 2018 3:57 pm

asif408 wrote:
Sat Apr 07, 2018 6:30 am
garlandwhizzer wrote:
Fri Apr 06, 2018 9:38 pm
Factor backtesting research looks compelling and robust, but there's often a wide gulf between academic research based on backtesting optimized in the rear view mirror versus real fund results for investors.

I think this provide a good lesson to those who invest based on factors. And that is that starting and ending points matter, even over long periods.
I think this brings up an important point. We can only invest looking forward. We can’t earn past returns. Of Larry’s criteria for a factor, persistent, pervasive, robust are all backward looking: depend on historical data. Intuitive looks forward. It is intuitive belief that a factor represents real risk or behavioral anomaly that can’t be arbitraged away that will really keep a factor investor committed to his plan after bad periods. Otherwise the nagging concern that the data no longer applies can take over.

Dave

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Re: Value premium harvestable?

Post by rkhusky » Sat Apr 07, 2018 5:07 pm

SimpleGift wrote:
Sat Apr 07, 2018 3:55 pm
rkhusky wrote:
Sat Apr 07, 2018 2:29 pm
garlandwhizzer wrote:
Sat Apr 07, 2018 11:57 am
I do that in the US not because I'm certain of factor outperformance but rather because TSM, my large core holding, is itself tilted to LCG and technology.
The cap-weighted total stock market is the baseline and, as such, has no tilts.
The point, I believe, is that if you break down the U.S. total stock market fund according to the Fama-French six-bucket size and value factors, it's historically been predominately a large-cap growth fund (in purple, chart below).
For the same reason as Garland, I've maintained a modest tilt toward value stocks in my own equity portfolio for many years.
I don't see how it could be any other way, although I suppose it depends on how you define large cap and value. The largest percent of total market cap should be large cap, i.e. the collection of companies with the largest market cap. Although, I suppose if you raised the dividing line high enough, you could make it so the large caps total market share could be less than half or a quarter. And if you divide value on a per company basis, then the growth companies should have larger market cap than the value companies, by definition, since growth companies are valued higher than value companies.

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Re: Value premium harvestable?

Post by gquogue » Sat Apr 07, 2018 7:52 pm

Is it possible that a potentially significant variable to consider when looking at the history of the vanguard value index the fact that I believe they take the lowest 50% TSM book to market value, as opposed to a more aggressive (and more common from what I thought) definition of value to only include the lowest 30% TSM book to market value? A 50% figure would seem to be a significantly diluted value factor loading compared to 30%... would be very curious if anyone has another value vs growth twin set of funds to compare to versus the OP's results that instead uses only 30% of TSM for each fund.

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Re: Value premium harvestable?

Post by Alexa9 » Sat Apr 07, 2018 8:03 pm

1. SCV
2. SCG

Image

I show a much different picture going back further. SCV requires rebalancing through thick and thin to capture the premium.

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Re: Value premium harvestable?

Post by snarlyjack » Sat Apr 07, 2018 9:40 pm

Here is a fun little video for your entertainment.

It talks about value stocks & growth stocks and the
two different strategies.

I hope you enjoy this video...

https://www.youtube.com/watch?v=v4nd8Ik8DTU

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Re: Value premium harvestable?

Post by garlandwhizzer » Sat Apr 07, 2018 10:00 pm

Alexa9 wrote:
I show a much different picture going back further. SCV requires rebalancing through thick and thin to capture the premium.
The enclosed graph goes back to 1972. No one denies that the small value premium existed and was robust prior to the time it got widely known and factor investing became popular. SCV did quite well relative to TSM also during that period and also after the tech bubble bursting in 2000. For the 14 years prior to that popping of the bubble it significantly underperformed. SCV alternates between periods of outperformance and periods of underperformance relative to TSM. This provides nice diversification whether or not you get long term outperformance.

We have 2 things at work today that are likely to work against future SCV returns. First, currently factor-based investment approaches have become wildly popular, more so as time passes. As of 2016, 14% of all worldwide equity etfs were choosing factor approaches. This does not include hedge funds and private equity who follow these approaches in non-etf form. The money flows as a percentage of total accelerated last year and this year. Correct me if I wrong on this, but I seem to recall that 40% of all new money coming into equity funds now is factor-based. This popularity didn't exist in 1927 - 1992 when the massive SCV outperformance occurred, an era when SCV stocks were widely ignored by investors. At that time SCV stocks with PE less than 10 and P/B less than 1 were common. No such stocks exist today and it doesn't seem reasonable to assume that the robust returns of SCV during this period of SCV neglect are reliable estimates going into the future. This question relates to popularity and capacity restraints. SCV, generously defined, covers no more than 3% of the market which suggests that a very real capacity restraint in this tiny market segment versus huge factor-based dollar inflows. This that is expected to dilute valuations and, hence, decrease future outperformance.

Second, as Simplegift points out, there is a macroeconomic backdrop in which SCV has done well historically (significant but not stifling inflation and strong macroeconomic growth). There are also economic conditions in which SCV tends to underperform (low to absent inflation combined with absent, sluggish or slow economic growth). These latter conditions are what we've had for quite some time and IMO are at least partly responsible for SCV's recent underperformance. So how SCV performs going forward may have a lot to do with how the economy as a whole does. When profits are hard to come by, growth companies which can still manage to increase profits demand a large premium while struggling small firms can get shunned. If the economy gets stuck at 2% - 2.5% growth and similar inflation rates which are lower for both than in the long term past, SCV may continue to struggle until that changes. No one knows what the macroeconomic picture will be in the future but few expect robust growth (3+%) and historical rates of inflation (3+%) going forward which are the kind of conditions when SCV outperformed.

I therefore don't believe we can accept that impressive SCV graph from 1972 forward as a reliable prediction of what the future holds for SCV going forward.

Garland Whizzer

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Re: Value premium harvestable?

Post by snarlyjack » Sat Apr 07, 2018 10:37 pm

Garlandwhizzer,

In your intro you were talking about & analyzing the
average value fund vs. the average growth fund.
Comparing the difference between the two funds.
(Is the value premium harvestable)?

To me this is a completely different question than
talking about factors & scv/scg stocks.

In my remarks I was addressing the pro's of a
large cap. value fund. In actuality I was addressing
value dividend paying stocks. It seems to me that we
have 3 or 4 different conversations going on. In my mind,
yes their is a difference between value & growth funds &
yes the value premium can be harvested. If through nothing
else but the dividend.

stlutz
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Re: Value premium harvestable?

Post by stlutz » Sat Apr 07, 2018 11:16 pm

I would offer a bit of a corrective to the overall tenor of the discussion. There has not been value underperformance when comparing VIVAX vs. VIGRX:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Instead, what we've seen is one period where growth pulled ahead, another where value pulled ahead, and another where they've tracked one another fairly closely.

Now, this result would certainly be disappointing to the investor who was expecting to beat the market by several percentage points per year merely by buying low price-to-X stocks, but anyone who loaded up on value stocks has actually done quite well--just not any better than the someone who loaded up on growth stocks.

This is a pattern that suggests that Fama/French's real service was to the economy as a whole by revealing that investors had not been accurately valuing broad swaths of assets. Note--that's not saying that investors pre-early 90s were dumb, just inaccurate. With the needed corrective information provided, the market has become more efficient in pricing assets.

Lastrun
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Re: Value premium harvestable?

Post by Lastrun » Sun Apr 08, 2018 12:34 pm

stlutz wrote:
Sat Apr 07, 2018 11:16 pm
This is a pattern that suggests that Fama/French's real service was to the economy as a whole by revealing that investors had not been accurately valuing broad swaths of assets. Note--that's not saying that investors pre-early 90s were dumb, just inaccurate. With the needed corrective information provided, the market has become more efficient in pricing assets.
Thank you for posting the chart, I find it fascinating. For me, it begs two queries based on the above comment:

1. Why then does there appear to be efficiency prior to 1999. I know factors may not "show up" for long periods and that is a fair explanation.

2. Why does the pattern show up only after two of the most significant events in market history? Stated differently, is the inefficiency somehow related to the two fairly cataclysmic events.

Also, admittedly, I am a neophyte on this stuff and am just trying to learn. Thanks.

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triceratop
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Re: Value premium harvestable?

Post by triceratop » Sun Apr 08, 2018 1:22 pm

snarlyjack wrote:
Sat Apr 07, 2018 3:33 pm
Ok...

If you look at a long term chart of VHDYX & VDADX & VTSMX they
are within "hairs" of each other for total return. I'm not getting blown out
by any main stream fund.

I just finished up my taxes & have yet to pay 1 dime out of my pocket for taxes.
I have over $300,000. in my account & I received approx. $9,000. in dividends
last year. That $9,000 in dividends bought more shares each quarter and that
is not counting my personal contributions. I think my taxes will be even better
in 2018.

What I see is a big disconnect here. From my actual real life experience
the snowball is growing each & every quarter. I think in a down market (or flat)
it will grow even faster. From my perspective I don't see what the problem is.
The snowball is rolling down the mountain & picking up speed...
If you do not have any dependents and are single then you filled out your taxes incorrectly. The Montana exemption plus standard deduction is less than $9,000.

Your thinking regarding after-tax implications of dividend investing have been repeatedly shown to be flawed, in past threads.
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

snarlyjack
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Re: Value premium harvestable?

Post by snarlyjack » Sun Apr 08, 2018 4:48 pm

Triceratop.

In my defense I take (0) zero exemptions at work so I have
extra tax money sitting in my account. When it was all said
& done I did get a small amount money back.

But your point is well taken...I expect in the future this will
be a taxable event.

My $9000. in dividends (about $2250 a quarter) made
some excellent buys. Especially this last buy in March.
Just the dividends alone bought about 270 additional shares.

The exciting point is I can see this strategy working. The snowball
is rolling... I can see that if anything happens (lose my job) I
won't starve in the streets. My Mom would be proud that I'am
able to take care of myself no matter what....:)
That is the goal...I' am not starving in the streets. The strategy
still needs time to fill out tho.

The Bogleheads have given me some excellent advice over the
years & I appreciate it...Thank You for your help Triceratop!

Valuethinker
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Re: Value premium harvestable?

Post by Valuethinker » Mon Apr 09, 2018 4:23 am

snarlyjack wrote:
Sun Apr 08, 2018 4:48 pm
Triceratop.

In my defense I take (0) zero exemptions at work so I have
extra tax money sitting in my account. When it was all said
& done I did get a small amount money back.

But your point is well taken...I expect in the future this will
be a taxable event.

My $9000. in dividends (about $2250 a quarter) made
some excellent buys. Especially this last buy in March.
Just the dividends alone bought about 270 additional shares.

The exciting point is I can see this strategy working. The snowball
is rolling... I can see that if anything happens (lose my job) I
won't starve in the streets. My Mom would be proud that I'am
able to take care of myself no matter what....:)
That is the goal...I' am not starving in the streets. The strategy
still needs time to fill out tho.

The Bogleheads have given me some excellent advice over the
years & I appreciate it...Thank You for your help Triceratop!
The problem with Value (or any other) strategies in a taxable account is the tax drag.

If you can get around that, fine. But Value funds will:

- generally pay more dividends than Growth funds or (percentage wise) the market as a whole => tax drag

- have more disposals and realized gains than Index funds as a whole (due to changes in what constitutes a Value stock; also take-private transactions) => tax drag

And so it goes. Value strategies don't work well in taxable accounts. Small Cap Value strategies don't work well at all, due to dealing costs. DFA takes a clever approach to SCV- -but you have more fees there, and as I understand it, they haven't actually outperformed the equivalent (US domestic) Vanguard funds.

DFA is conceptually the right approach, even if it means they are not an index fund:

- pay particular attention to dealing costs
- "clean" accounting numbers where suspect (e.g. Emerging Market equities)
- hold stocks that are no longer strictly "value" but have positive price/ earnings momentum (as I understand it) i.e. bottom decile stocks in Value-Growth axis, held until 5th decile (haven't read anything re DFA in a while, but this was my understanding)

Longtermgrowth
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Re: Value premium harvestable?

Post by Longtermgrowth » Mon Apr 09, 2018 4:30 am

Snarlyjack, the one misconception I keep seeing you talk about is the snowball effect: when a stock fund pays out a dividend, the NAV (net asset value) of the fund drops by the amount of the dividend! In essence the dividend distribution is no different than selling a few shares of a total stock index to equal the same amount!

Here's another example of why only dollar amount invested, not share amount, matters: Last year, a fund I own (DES) had a three for one stock split. I now own 3X as many shares, but the same dollar amount. You are already paying at least something in state taxes for your dividends, which you would realize if not working, without a decent amount withheld for taxes.

I am just trying to point out a few things that I view as misconceptions related to stock index funds vs fixed income, when mentioning the snowball effect, and not trying to sway your investment decisions in any way at this point. For sure many do much worse than the funds you mention, and who knows, maybe they'll outperform the total market index in the coming decades once the value premium shows up again. Though it is always greater in small caps :beer

Valuethinker
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Re: Value premium harvestable?

Post by Valuethinker » Mon Apr 09, 2018 4:38 am

My own thought is, US market at least, what you are seeing is a change in the companies which are winning, and the way those companies behave, strategically.

Technology change since 2000, in terms of real impact, is at least as fast as the 1920s-30s period. Maybe faster.

Just as that era saw industrial giants, effective monopolists, like US Steel, Standard Oil etc. dominate, so this era we have Google, Apple, Facebook, Microsoft. Each of which is a near monopoly in their area of business. Of course there are other areas like Boeing/ Airbus or Lockheed which have established near total domination of their industries, as well. Look at the concentration of large pharma since 1990 - Pfizer eating everything, GSK etc. In retail we have WalMart (30% of non food US retail sales?). Walgreen. Various consolidations in the US healthcare sector. Berkshire Hathaway in railways and insurance, etc. And there's Amazon.

And strategically the leadership of those companies have all studied disruptive innovation and what is known about the fate of previous industry leaders. Thus you see Facebook buying rapidly emerging tech cos at an early stage-- Instagram, WhatsAp etc. Google also runs around buying small tech cos. In banking you have JP Morgan buying everything.

This all tilts the market towards large cap growth stocks. In a sluggish economy, the big players grow market share and thus profits (in the long run) ahead of the profits of listed USA as a whole.

On the other end, the rise and rise of the Private Equity/ LBO industry gobbles up a lot of SCV companies via "take private" transactions. Debt is being substituted for equity, private ownership for public. SCVs are probably not as cheap as they once were due to this activity. The Michael Price Mutual Shares strategies just don't work as well - the widespread availability on line of financial information does not help-- finding these gems used to take a lot of hard work and heavy lifting, can now be done at the touch of a button.

Valuethinker
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Re: Value premium harvestable?

Post by Valuethinker » Mon Apr 09, 2018 4:39 am

MotoTrojan wrote:
Sat Apr 07, 2018 1:03 pm
snarlyjack wrote:
Sat Apr 07, 2018 6:35 am
Garlandwhizzer.

As you know I' am a young guy who never plans on selling...

Buy low & sell high...doesn't work for me.

But what I can do is invest in value stocks & collect the
dividends forever. I don't care what the value of the
portfolio is (because I' am never going to sell). I much
prefer income portfolios. When I look at a portfolio I
look for dividend growth, dividend appreciation, dividend
yield.

If value & growth are approximately the same over time why
not go for dividend growth. What am I going to do with
Facebook or Gopro? Imho, value stocks are where it's at...

Growth stocks = buy low sell high.
Value stocks = income forever.
Income forever = I can pay my bills in a flat or down market
or a rising market. It has better/more opportunities.

WWWBD = What Would Warren Buffett Do?
I bet Buffett understands total return and doesn’t rely on or gauge dividends. Your thinking is frankly flawed.
In fact he wrote an oft-quoted, famous, letter to investors explaining why they are equivalent and why BH does not pay dividends (they would simply give Buffett & Munger and many of their loyal investors a personal tax problem).

Valuethinker
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Re: Value premium harvestable?

Post by Valuethinker » Mon Apr 09, 2018 4:44 am

snarlyjack wrote:
Sat Apr 07, 2018 6:35 am
Garlandwhizzer.

As you know I' am a young guy who never plans on selling...

Buy low & sell high...doesn't work for me.

But what I can do is invest in value stocks & collect the
dividends forever. I don't care what the value of the
portfolio is (because I' am never going to sell). I much
prefer income portfolios. When I look at a portfolio I
look for dividend growth, dividend appreciation, dividend
yield.

If value & growth are approximately the same over time why
not go for dividend growth. What am I going to do with
Facebook or Gopro? Imho, value stocks are where it's at...

Growth stocks = buy low sell high.
Value stocks = income forever.
Income forever = I can pay my bills in a flat or down market
or a rising market. It has better/more opportunities.

WWWBD = What Would Warren Buffett Do?
If you buy individual stocks you will find that a distressing percentage of them get into financial trouble, and then they slash the dividends.

The problem is you are sectorally tilted, and that will hurt. Every sector is in turmoil. But banks & financials were great dividend payers and looked "cheap" until we hit the 2008-09 Crash. GE is another classic example.

There's more merit in a "Dividend Achievers" approach. These are not necessarily Value stocks- think Johnson & Johnson. But for whatever reason there's a historic adherence by the Board to increasing, or at least holding, the dividend.

Note you've just created a record keeping nightmare if you reinvest via dividend purchase schemes -- figuring out your average book cost. We had to track that for my father's estate, it proved impossibly difficult.

fennewaldaj
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Re: Value premium harvestable?

Post by fennewaldaj » Mon Apr 09, 2018 5:03 am

Valuethinker wrote:
Mon Apr 09, 2018 4:23 am


The problem with Value (or any other) strategies in a taxable account is the tax drag.

If you can get around that, fine. But Value funds will:

- generally pay more dividends than Growth funds or (percentage wise) the market as a whole => tax drag

- have more disposals and realized gains than Index funds as a whole (due to changes in what constitutes a Value stock; also take-private transactions) => tax drag

And so it goes. Value strategies don't work well in taxable accounts. Small Cap Value strategies don't work well at all, due to dealing costs. DFA takes a clever approach to SCV- -but you have more fees there, and as I understand it, they haven't actually outperformed the equivalent (US domestic) Vanguard funds.
Is this really a huge issue with small/mid cap value? The dividend payments for most of these funds (VBR, VOE, IJS, ect) are only a bit higher than the S+P 500. Ishares and vanguard etfs don't really distribute capital gains either.

Longtermgrowth
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Re: Value premium harvestable?

Post by Longtermgrowth » Mon Apr 09, 2018 5:30 am

fennewaldaj wrote:
Mon Apr 09, 2018 5:03 am
Is this really a huge issue with small/mid cap value? The dividend payments for most of these funds (VBR, VOE, IJS, ect) are only a bit higher than the S+P 500. Ishares and vanguard etfs don't really distribute capital gains either.
Shoot, just look at triceratop's tax efficiency thread. IJS and Vanguards equivalent, VIOV, are more tax efficient than a 500 index due to the lower dividend yield.
VBR is close in dividend yield to the 500, but has a lower QDI (qualified dividend income ratio).

Here's a link for you: viewtopic.php?t=242137#p3791554

snarlyjack
Posts: 780
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Location: Montana

Re: Value premium harvestable?

Post by snarlyjack » Mon Apr 09, 2018 9:50 am

Thank You Everyone.

Happy Birthday (me) just turned 24 years old.

Just a fast recap:
My Mom died when I was just turning 21 years old.
I inherited $250,000. in Life Insurance money.
Out of that money I had to pay for her funeral + settle the estate ($15,000.).
Money after expenses $235,000.
Found Bogleheads & started reading & studying.

I chose to invest in 2 funds:
Vanguard Dividend Appreciation Fund (VDADX) & Vanguard High Dividend
Yield Fund (VHDYX). Both low cost index funds. Total stocks between both
funds 572. My AA is 90/10, 10% in bank cd.

Started with $235,000. (2014/2015) today's value $312,000. Increase of $77,000. (April 2018).
Increase due to my contributions + dividends + growth of funds.
Totality on my own, no parental back up.
Goals, financial security for myself. I always need to be able to pay my bills.
I chose these 2 Vanguard Index Funds because I thought they would give me
better financial security to pay bills (quarterly dividends) + still grow the account.
I can resonate with these 2 funds (they speak to me). I like the strategy, I can
identify with it. Is it the best strategy (I don't know)? But I personally like it.

I hope this brief history helps someone. I save as much as possible & invest it.
I' am very frugal. Not married, no kids, B.S. Degree in Finance.

MotoTrojan
Posts: 1906
Joined: Wed Feb 01, 2017 8:39 pm

Re: Value premium harvestable?

Post by MotoTrojan » Mon Apr 09, 2018 10:35 am

fennewaldaj wrote:
Mon Apr 09, 2018 5:03 am
Valuethinker wrote:
Mon Apr 09, 2018 4:23 am


The problem with Value (or any other) strategies in a taxable account is the tax drag.

If you can get around that, fine. But Value funds will:

- generally pay more dividends than Growth funds or (percentage wise) the market as a whole => tax drag

- have more disposals and realized gains than Index funds as a whole (due to changes in what constitutes a Value stock; also take-private transactions) => tax drag

And so it goes. Value strategies don't work well in taxable accounts. Small Cap Value strategies don't work well at all, due to dealing costs. DFA takes a clever approach to SCV- -but you have more fees there, and as I understand it, they haven't actually outperformed the equivalent (US domestic) Vanguard funds.
Is this really a huge issue with small/mid cap value? The dividend payments for most of these funds (VBR, VOE, IJS, ect) are only a bit higher than the S+P 500. Ishares and vanguard etfs don't really distribute capital gains either.
Not sure the answer but dividend % is only half the picture. S&P is mostly qualified dividends, is small cap?

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