Larry Swedroe: Value Premium Lives!

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Random Walker
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Larry Swedroe: Value Premium Lives!

Post by Random Walker » Wed May 16, 2018 8:30 am

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

In this article Larry places the last decade’s value performance in historical context and in the context of the behavior of other factors, including market beta, over different time periods. Larry briefly discusses the criteria he uses to evaluate a factor (really any potential portfolio addition): persistent, pervasive, robust, intuitive, investable. If the value premium had disappeared after publication, we should have seen one time big gains and a narrowing of the spread between value and growth measures. This has not happened. He also shows the benefits of international diversification. He shows that like market beta, the SD of the value premium is much bigger than the premium itself. He even alludes to my personal interest in volatility drag on compounded returns.
What matters is the portfolio as a whole, and this article is focused only on the value premium. I would hope some readers would use this as an introduction to his book: Your Complete Guide to Factor Based Investing. There he displays the power of diversifying across factors, including value. In this article Larry focuses on the risk based explanations for the value factor. I have particular faith in value because there are both strong risk based and behavioral based explanations for it.

Dave

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Taylor Larimore
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Re: Larry Swedroe: Value Premium Lives!

Post by Taylor Larimore » Wed May 16, 2018 8:54 am

Mr. Swedroe's Conclusion:

"My conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative."

It is difficult (and expensive) to try to "beat the market."

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe: Value Premium Lives!

Post by Ron Scott » Wed May 16, 2018 9:03 am

While buying what is cheap may outperform buying what is expensive in the long term, it begs the question why not buy what's both cheap and good, which sends us down a familiar rabbit hole.

But the ultimate question for investors is can active strategies outperform Bogle. Larry has some more work to do on that one...

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Re: Larry Swedroe: Value Premium Lives!

Post by Random Walker » Wed May 16, 2018 9:33 am

Taylor Larimore wrote:
Wed May 16, 2018 8:54 am
Mr. Swedroe's Conclusion:

"My conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative."

It is difficult (and expensive) to try to "beat the market."

Best wishes.
Taylor
In the article, Larry has a table showing that the likelihood of the value premium being negative is about the same over any time frame as the likelihood of market beta being negative. Even at 20 years there is a finite chance of them both being negative. Given the fact that value and market are overall uncorrelated, there is strong reason to diversify across both factors, not depend on just one. As Taylor points out, every step towards a more efficient portfolio comes at increased cost relative to a TSM Index fund. Unless one is committed to placing all their bets on a single factor, market beta, they will have to decide where to draw the line on increasing marginal portfolio cost for the sake of potential increased marginal portfolio efficiency. Likely the cheapest and best diversifier of an equity market beta portfolio is high quality bonds. But those decrease expected portfolio return.
None of this is about “beating the market”. It’s about taking what the market gives in a more efficient manner. For sure, the increased costs are certain and the improved portfolio efficiency only potential. But there is a real cost to an inefficient portfolio, just much harder to measure than an expense ratio. One could very intelligently elect to have a TSM portfolio, but it is only a rational decision if he learns about the trade offs involved and then actively chooses to minimize costs for the sake of other potential portfolio benefits. Better to understand and acknowledge the trade offs than to sweep them under the rug.

Dave

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Re: Larry Swedroe: Value Premium Lives!

Post by Random Walker » Wed May 16, 2018 10:05 am

Ron Scott wrote:
Wed May 16, 2018 9:03 am

But the ultimate question for investors is can active strategies outperform Bogle. Larry has some more work to do on that one...
I think Larry and Bogle are way more on the same page than you think. They both ardently believe active management is a loser’s game. Both strongly advocate passive investing. Bogle strongly advocates passive investing in index funds, but even he expresses a preference towards value. Larry emphasizes the fact that passive formulaic investing can involve more than pure index funds, and likely overcome some of the weaknesses of pure indexing. Both Bogle and Swedroe focus on market cap weighting for the passive funds. And both strongly acknowledge that valuations matter.
Larry has shown that after costs DFA funds have beaten VG funds in the same categories over the last 20 years since he wrote his first book.

Dave

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Taylor Larimore
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Bogle on Value tilted portfolios

Post by Taylor Larimore » Wed May 16, 2018 1:55 pm

Bogle strongly advocates passive investing in index funds, but even he expresses a preference towards value.
Dave:

Can you give a source?

In his speech, The Telltale Chart Mr. Bogle stated:
In any event, place me squarely in the camp of the contrarians who don't accept the inherent superiority of value strategies over growth strategies. I've been excoriated for my views, but I'm comforted by this reported exchange between Dr. Fama and a participant at a recent investment conference: "What do you say to otherwise intelligent people like Jack Bogle who examine this same data and conclude that there is no size or value premium?" His response: "How far are they from the slide? If I get far enough away, I don't see it either . . . Whether you decide to tilt towards value depends on whether you are willing to bear the associated risk . . . The market portfolio is always efficient . . . For most people, the market portfolio is the most sensible decision." Amen!
Best wishes
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe: Value Premium Lives!

Post by Random Walker » Wed May 16, 2018 2:09 pm

I apologize if I misspoke. Though I do believe he has held Wellington fund, described by Morningstar as a LV fund, for a very long time. Perhaps he only holds it for sentimental reasons. I was not speaking from a source, but here is a link to a Bogle lecture on Wellington. He does describe the equity portion of the fund favoring stocks with dividends.

https://www.vanguard.com/bogle_site/sp2 ... onbth.html

Dave

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Re: Larry Swedroe: Value Premium Lives!

Post by JoMoney » Wed May 16, 2018 2:23 pm

While at Vanguard Mr.Bogle helped create the first "Value" and "Growth" index funds, he thought they might be useful for people in different tax situations, but expected over the long-term they'd have roughly similar returns (which is what they have done mostly over the past 25+ years).
John Bogle in The Little Book of Common Sense Investing wrote:...when Vanguard created the industry's first Growth Index Fund and Index Value Fund in 1992, the former was designed for younger investors who focused on wealth accumulation, were seeking tax-efficiency, and were willing to assume larger risks. The latter was designed for older investors who focused on wealth preservation, were seeking higher income, and were happy to reduce their risks. Alas, while the original idea was strong, the ensuing reality was weak. What followed their introduction was a classic case of performance chasing.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Larry Swedroe: Value Premium Lives!

Post by JoMoney » Wed May 16, 2018 2:32 pm

Random Walker wrote:
Wed May 16, 2018 2:09 pm
I apologize if I misspoke. Though I do believe he has held Wellington fund, described by Morningstar as a LV fund, for a very long time. Perhaps he only holds it for sentimental reasons. I was not speaking from a source, but here is a link to a Bogle lecture on Wellington. He does describe the equity portion of the fund favoring stocks with dividends.

https://www.vanguard.com/bogle_site/sp2 ... onbth.html

Dave
Wellington is an actively managed fund with an objective/focus on income. It may fall into the "value" style box, but is a different objective.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Larry Swedroe: Value Premium Lives!

Post by pkcrafter » Wed May 16, 2018 3:22 pm

My conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative."
Combine that with this from John Bogle--
What followed their introduction was a classic case of performance chasing.
Combine these two quotes and you get an elusive small premium that attracts investors when it outperforms, but it's also very difficult to hold through the times of underperformance. Ten years is a verrrry long time to watch your tilted portfolio losing ground to the total market portfolio you used to hold. The fact that the small premium is so inconsistent is probably one of the major reasons it exists at all.

Taylor provides this additional quote from Mr. B.
The market portfolio is always efficient . . . For most people, the market portfolio is the most sensible decision."
For Most people... and that probably applies to 9 out of 10 investors. That 9 includes smart Boglehead investors who beat the average by following this advice from Mr. Bogle.
Don't just do something, stand there
.
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Larry Swedroe: Value Premium Lives!

Post by triceratop » Wed May 16, 2018 4:56 pm

Taylor Larimore wrote:
Wed May 16, 2018 8:54 am
Mr. Swedroe's Conclusion:

"My conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative."

It is difficult (and expensive) to try to "beat the market."

Best wishes.
Taylor
Meanwhile one of the most popular cheap retail products among Bogleheads to factor tilt, the iShares S&P Small-Cap 600 Value ETF (IJS), has outperformed Vanguard Total Stock Market over the following time periods:
  1. YTD
  2. 1-year
  3. 3-year
  4. 5-year (more like broke even)
  5. 10-year
  6. 15-year
The iShares S&P 600 Small-Cap Value ETF hit a new all-time high today while Total Stock Market is 5% below its all time high.

Past Performance Is No Guarantee of Future Results
"To play the stock market is to play musical chairs under the chord progression of a bid-ask spread."

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JoMoney
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Re: Larry Swedroe: Value Premium Lives!

Post by JoMoney » Wed May 16, 2018 5:39 pm

"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: Larry Swedroe: Value Premium Lives!

Post by david1082b » Wed May 16, 2018 5:50 pm

triceratop wrote:
Wed May 16, 2018 4:56 pm
Taylor Larimore wrote:
Wed May 16, 2018 8:54 am
Mr. Swedroe's Conclusion:

"My conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative."

It is difficult (and expensive) to try to "beat the market."

Best wishes.
Taylor
Meanwhile one of the most popular cheap retail products among Bogleheads to factor tilt, the iShares S&P Small-Cap 600 Value ETF (IJS), has outperformed Vanguard Total Stock Market over the following time periods:
  1. YTD
  2. 1-year
  3. 3-year
  4. 5-year (more like broke even)
  5. 10-year
  6. 15-year
The iShares S&P 600 Small-Cap Value ETF hit a new all-time high today while Total Stock Market is 5% below its all time high.

Past Performance Is No Guarantee of Future Results
Would it make more sense to compare small value to small growth in the context of premium? The small-cap 600 growth ETF $IJT versus $IJS:

One year: growth won http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Three year: growth won http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Five year: growth won http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Ten year: growth won http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Fifteen year: growth won http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

I think this is more what LS was talking about in terms of the value premium being negative in the last ten years.

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Re: Larry Swedroe: Value Premium Lives!

Post by whodidntante » Wed May 16, 2018 5:52 pm

Being totally selfish, the more people who don't believe in the value premium, the larger it is likely to be. So I'm OK with y'all concluding it is a bunch of Edward Jones.

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Re: Larry Swedroe: Value Premium Lives!

Post by sreynard » Wed May 16, 2018 6:09 pm

Taylor Larimore wrote:
Wed May 16, 2018 8:54 am
Mr. Swedroe's Conclusion:

"My conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative."

It is difficult (and expensive) to try to "beat the market."

Best wishes.
Taylor
Elvis Lives! He's going to jump up and start singing any day now.... :twisted:

Maybe value will return from the grave and maybe it won't. I have no idea. Maybe I'll wish I had been one of the faithful believers holding out for the value resurrection. I'm sure someone will tell us how much value has to come roaring back to make up for 10 years of under performance.

I'll think I'll just stick with my basic 3-fund. OK, actually pretty much a 2-fund until I get my mortgage paid off. Using different funds/ETFs because I can't get the same ones in my 401K, HSA, and IRAs.

Value has left the building.... :wink:

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Re: Larry Swedroe: Value Premium Lives!

Post by JoMoney » Wed May 16, 2018 6:10 pm

whodidntante wrote:
Wed May 16, 2018 5:52 pm
Being totally selfish, the more people who don't believe in the value premium, the larger it is likely to be. So I'm OK with y'all concluding it is a bunch of Edward Jones.
I think you would actually need people arguing there is a "growth" premium, to have a counter-party your style preference might profit from. The counter argument around here, is typically to own both value and growth styles, and that you might actually improve performance through lower transaction costs and higher risk adjusted returns through diversification.
Last edited by JoMoney on Wed May 16, 2018 6:11 pm, edited 1 time in total.
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Re: Larry Swedroe: Value Premium Lives!

Post by pkcrafter » Wed May 16, 2018 6:10 pm

whodidntante wrote:
Wed May 16, 2018 5:52 pm
Being totally selfish, the more people who don't believe in the value premium, the larger it is likely to be. So I'm OK with y'all concluding it is a bunch of Edward Jones.
:wink:

I'm not saying the value premium does not exist, I'm saying most investors don't have the patience to capture it.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Larry Swedroe: Value Premium Lives!

Post by jeffyscott » Wed May 16, 2018 6:14 pm

There may not have been a value premium, but I think there's been a Wellington premium :?: :twisted:
press on, regardless - John C. Bogle

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Re: Larry Swedroe: Value Premium Lives!

Post by JoMoney » Wed May 16, 2018 6:18 pm

pkcrafter wrote:
Wed May 16, 2018 6:10 pm
...I'm not saying the value premium does not exist, I'm saying most investors don't have the patience to capture it...
Considering the (lack of a) FF Large-Value "Premium" over the past 30+ years, some investors may not live long enough to capture it.
Image

"Small-Value" proponents may need to consider the differences between academic portfolios, and real-world funds
Portfolio Constituency Rules and the Value Premium in the Small-Cap Space
...we find the impact of constituency rule restrictions on portfolio returns to be asymmetric with respect to value and growth in the small-cap investment space. Growth portfolios benefit from these changes more than value portfolios. Consistent with prior research, we find that value and growth style portfolios constructed from more liquid equities to be void of a statistically significant value-minus-growth return premium. We suggest these results might go a long way in explaining why market-based growth fund returns generally equal those of their value fund counterparts over time.
Last edited by JoMoney on Wed May 16, 2018 6:23 pm, edited 1 time in total.
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Re: Larry Swedroe: Value Premium Lives!

Post by carofe » Wed May 16, 2018 6:20 pm

I'm most likely to stick to the plan with SP500 or Total Stock Market than with slice and dice to tilt to small value and see it underperform for long periods of time. I already tried it and I found it too complex to put my trust in it.
I think being able to stick to the plan and low cost, low fund fees + no need for advisors because of simplicity, is more important than the small extra premium you "might" get over really long periods of time.
US Total Stock Market + Intermediate Term Bond. That's it.

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Re: Larry Swedroe: Value Premium Lives!

Post by samsdad » Wed May 16, 2018 6:24 pm

david1082b wrote:
Wed May 16, 2018 5:50 pm
triceratop wrote:
Wed May 16, 2018 4:56 pm
Taylor Larimore wrote:
Wed May 16, 2018 8:54 am
Mr. Swedroe's Conclusion:

"My conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative."

It is difficult (and expensive) to try to "beat the market."

Best wishes.
Taylor
Meanwhile one of the most popular cheap retail products among Bogleheads to factor tilt, the iShares S&P Small-Cap 600 Value ETF (IJS), has outperformed Vanguard Total Stock Market over the following time periods:
  1. YTD
  2. 1-year
  3. 3-year
  4. 5-year (more like broke even)
  5. 10-year
  6. 15-year
The iShares S&P 600 Small-Cap Value ETF hit a new all-time high today while Total Stock Market is 5% below its all time high.

Past Performance Is No Guarantee of Future Results
Would it make more sense to compare small value to small growth in the context of premium? The small-cap 600 growth ETF $IJT versus $IJS:

One year: growth won http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Three year: growth won http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Five year: growth won http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Ten year: growth won http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

Fifteen year: growth won http://quotes.morningstar.com/chart/fun ... A%5B%5D%7D

I think this is more what LS was talking about in terms of the value premium being negative in the last ten years.
Or you could hedge and go with the “blend” option IJR.

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Re: Larry Swedroe: Value Premium Lives!

Post by willthrill81 » Wed May 16, 2018 6:49 pm

pkcrafter wrote:
Wed May 16, 2018 6:10 pm
whodidntante wrote:
Wed May 16, 2018 5:52 pm
Being totally selfish, the more people who don't believe in the value premium, the larger it is likely to be. So I'm OK with y'all concluding it is a bunch of Edward Jones.
:wink:

I'm not saying the value premium does not exist, I'm saying most investors don't have the patience to capture it.

Paul
Therein lies a big part of the individual investor's advantage. S/he can hang on to a specific strategy for far longer than an active fund manager can. Whether they will is another matter.
“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: Larry Swedroe: Value Premium Lives!

Post by pkcrafter » Wed May 16, 2018 7:06 pm

willthrill81 wrote:
Wed May 16, 2018 6:49 pm
pkcrafter wrote:
Wed May 16, 2018 6:10 pm
whodidntante wrote:
Wed May 16, 2018 5:52 pm
Being totally selfish, the more people who don't believe in the value premium, the larger it is likely to be. So I'm OK with y'all concluding it is a bunch of Edward Jones.
:wink:

I'm not saying the value premium does not exist, I'm saying most investors don't have the patience to capture it.

Paul
Therein lies a big part of the individual investor's advantage. S/he can hang on to a specific strategy for far longer than an active fund manager can. Whether they will is another matter.
Will, that is a very insightful comment. Individual investors can hold the strategy longer, but most don't have the strength of long term conviction to do it. Most investors think of time and expectations in dog years. :happy

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Larry Swedroe: Value Premium Lives!

Post by Robert T » Wed May 16, 2018 7:16 pm

,
Just because something has growth in its name doesn't mean it is the opposite of value. For example the S&P 600 Growth ETF has in fact had a positive and significant 'value tilt'. https://www.portfoliovisualizer.com/fac ... sion=false'
.

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Re: Larry Swedroe: Value Premium Lives!

Post by pkcrafter » Wed May 16, 2018 7:17 pm

JoMoney wrote:
Wed May 16, 2018 6:18 pm
pkcrafter wrote:
Wed May 16, 2018 6:10 pm
...I'm not saying the value premium does not exist, I'm saying most investors don't have the patience to capture it...
Considering the (lack of a) FF Large-Value "Premium" over the past 30+ years, some investors may not live long enough to capture it.
Image

"Small-Value" proponents may need to consider the differences between academic portfolios, and real-world funds
Portfolio Constituency Rules and the Value Premium in the Small-Cap Space
...we find the impact of constituency rule restrictions on portfolio returns to be asymmetric with respect to value and growth in the small-cap investment space. Growth portfolios benefit from these changes more than value portfolios. Consistent with prior research, we find that value and growth style portfolios constructed from more liquid equities to be void of a statistically significant value-minus-growth return premium. We suggest these results might go a long way in explaining why market-based growth fund returns generally equal those of their value fund counterparts over time.
I was mainly thinking of the small value premium, and I agree with what you've posted on the overall value premium.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

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Re: Larry Swedroe: Value Premium Lives!

Post by willthrill81 » Wed May 16, 2018 7:19 pm

pkcrafter wrote:
Wed May 16, 2018 7:06 pm
willthrill81 wrote:
Wed May 16, 2018 6:49 pm
pkcrafter wrote:
Wed May 16, 2018 6:10 pm
whodidntante wrote:
Wed May 16, 2018 5:52 pm
Being totally selfish, the more people who don't believe in the value premium, the larger it is likely to be. So I'm OK with y'all concluding it is a bunch of Edward Jones.
:wink:

I'm not saying the value premium does not exist, I'm saying most investors don't have the patience to capture it.

Paul
Therein lies a big part of the individual investor's advantage. S/he can hang on to a specific strategy for far longer than an active fund manager can. Whether they will is another matter.
Will, that is a very insightful comment. Individual investors can hold the strategy longer, but most don't have the strength of long term conviction to do it. Most investors think of time and expectations in dog years. :happy

Paul
I firmly believe that investors' typically short-term expectations are one of the big drivers of the gap between active and passive investment results. Any deviation from the market (e.g. active strategy, any tilt) is bound to underperform the market at some point, and this underperformance can go on for a long time. But most investors aren't willing to wait it out, and so active fund managers have an even bigger hurdle to face: not only must they beat the market on a cost-adjusted basis, but they must do so consistently enough to keep investors content, knowing that their mouse is never far away from the sell button.
“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: Larry Swedroe: Value Premium Lives!

Post by Random Walker » Wed May 16, 2018 9:21 pm

Several posters seem to be looking at this as a binary choice between value tilt and all TSM. First of all, the data in the article shows that the value premium is negative about as often at each length of time as is market beta. Since value and market are uncorrelated, this is an argument to diversify and invest in both value and market.
For that matter, if people are worried about value underperformance, that is just more reason to diversify across all the known factors, including market beta: market, size, value, momentum, profitability/quality. The examples of 1/n portfolios that Larry has periodically shown are powerful. Chapter 9 of his factor book displays this nicely.

Dave

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Re: Larry Swedroe: Value Premium Lives!

Post by willthrill81 » Wed May 16, 2018 9:24 pm

Random Walker wrote:
Wed May 16, 2018 9:21 pm
Several posters seem to be looking at this as a binary choice between value tilt and all TSM. First of all, the data in the article shows that the value premium is negative about as often at each length of time as is market beta. Since value and market are uncorrelated, this is an argument to diversify and invest in both value and market.
For that matter, if people are worried about value underperformance, that is just more reason to diversify across all the known factors, including market beta: market, size, value, momentum, profitability/quality. The examples of 1/n portfolios that Larry has periodically shown are powerful. Chapter 9 of his factor book displays this nicely.

Dave
Interestingly, the equities in Paul Merriman's UBH portfolio are 50% blend and 50% value, in addition to 50% large cap and 50% small cap.
“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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Factor investing with one fund.

Post by Taylor Larimore » Wed May 16, 2018 9:57 pm

if people are worried about value underperformance, that is just more reason to diversify across all the known factors, including market beta: market, size, value, momentum, profitability/quality.
Dave:

Total Stock Market Index Fund includes all U.S. stock factors in one fund.

Please read my "Simplicity" link below.

Thank you and best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Factor investing with one fund.

Post by whodidntante » Wed May 16, 2018 10:13 pm

Taylor Larimore wrote:
Wed May 16, 2018 9:57 pm
Total Stock Market Index Fund includes all U.S. stock factors in one fund.
Thanks for your contribution to my value factor disinformation campaign. :twisted:

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Re: Larry Swedroe: Value Premium Lives!

Post by stlutz » Wed May 16, 2018 10:52 pm

Just because something has growth in its name doesn't mean it is the opposite of value. For example the S&P 600 Growth ETF has in fact had a positive and significant 'value tilt
Robert: I would highly recommend the paper that JoMoney linked (and that we originally discussed a few years back in this thread: viewtopic.php?t=157764).

If "small growth" index funds as a whole all have positive value loading (which they pretty much do), that's an indication that the model is flawed as opposed to the growth funds secretly buying value stocks. And that why the myth that the value premium is much larger in the smallcap space is not really a very accurate representation of actual market behavior.

Best,

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Re: Larry Swedroe: Value Premium Lives!

Post by fennewaldaj » Wed May 16, 2018 11:10 pm

stlutz wrote:
Wed May 16, 2018 10:52 pm
Just because something has growth in its name doesn't mean it is the opposite of value. For example the S&P 600 Growth ETF has in fact had a positive and significant 'value tilt
Robert: I would highly recommend the paper that JoMoney linked (and that we originally discussed a few years back in this thread: viewtopic.php?t=157764).

If "small growth" index funds as a whole all have positive value loading (which they pretty much do), that's an indication that the model is flawed as opposed to the growth funds secretly buying value stocks. And that why the myth that the value premium is much larger in the smallcap space is not really a very accurate representation of actual market behavior.

Best,
Yeah it seems like few funds index or active really buy the black hole stocks. It must be individual investors not funds who are buying them. So they are more or less irrelevant.

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Re: Larry Swedroe: Value Premium Lives!

Post by Robert T » Thu May 17, 2018 12:38 am

stlutz wrote:
Wed May 16, 2018 10:52 pm
Just because something has growth in its name doesn't mean it is the opposite of value. For example the S&P 600 Growth ETF has in fact had a positive and significant 'value tilt
Robert: I would highly recommend the paper that JoMoney linked (and that we originally discussed a few years back in this thread: viewtopic.php?t=157764).

If "small growth" index funds as a whole all have positive value loading (which they pretty much do), that's an indication that the model is flawed as opposed to the growth funds secretly buying value stocks. And that why the myth that the value premium is much larger in the smallcap space is not really a very accurate representation of actual market behavior.

Best,
Not all 'small growth' index funds have positive value loads. My point above was that just because something has 'growth' in its name does not necessarily mean its the opposite value, not that all growth indexes have positive value loads. For example, the popular Russell 2000 Value and Growth indexes are more opposites (low and high p/b sorts), and the Russell 2000 Growth index has a negative value load.

1979-2017: Annualized Returns
Russell 2000 Value Index = 13.2%
Russell 2000 Growth Index = 9.9%

Or put another way, $1 in the Russell 2000 Value Index would have grown to more than three times that of $1 in the Russell 2000 Growth Index over this period ($126.9 vs. $39.7).

To quote Bill Bernstein again - "Over the long-haul what matter is factor exposure and expense" (not fund names). Determine your factor exposure targets, then select funds to achieve these at lowest cost. IMO the value of the approach is amplified (rather than invalidated) by different sort criteria used by different funds (whatever their names). This works well for me.

Robert
.

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Re: Factor investing with one fund.

Post by Random Walker » Thu May 17, 2018 10:22 am

Taylor Larimore wrote:
Wed May 16, 2018 9:57 pm
if people are worried about value underperformance, that is just more reason to diversify across all the known factors, including market beta: market, size, value, momentum, profitability/quality.
Dave:

Total Stock Market Index Fund includes all U.S. stock factors in one fund.

Please read my "Simplicity" link below.

Thank you and best wishes.
Taylor
Hi Taylor,
Thanks for the link. I’m a huge believer in efficient markets. When I first read Bogle’s Common Sense On Mutual Funds, Malkiel’s Random Walk Down Wall Street, and Ellis’ Winning The Loser’s Game, these books resonated with me. I have a natural inclination to see the ultra competitive financial markets like the lines intersecting in Econ 101 or equilibrium in Chemistry 1. I think 90% of stock prices are set by one big firm’s computer trading with another big firm’s computer, and both firms have the very best and brightest from all fields programming them. And from amateur tennis, I can certainly appreciate that eliminating the unforced errors is way more important than hitting spectacular winners. So for me, I have a big biased inclination towards an ultra low cost TSM approach. My evolution to something more complicated occurred over about a decade.
Didn’t Einstein say “everything should be made as a simple as possible, but not simpler”? I’m 55 years old, and was in early and mid accumulation phases with an aggressive portfolio during the 2001-2002 and 2007-2008 big market declines. Modern Portfolio Theory offers some solutions to dampen the effects of huge hits like that to the market. Certainly, the first and cheapest solution is a big dose of bonds. A person who diversifies across sources of return, diversifies across factors, invests in the riskiest equity asset classes, can have an even bigger dose of those cheap bonds and maintain the portfolio expected return.
I am so naturally inclined towards the simple, low cost, do it yourself, TSM approach, that it took a lot of reading and time to evolve into an asset class/factor/style/alternative junkie. Markets will humble the brightest minds; the same minds that generate the data and conclusions I base my portfolio on. My best guess is that my portfolio has lagged TSM over the last decade, but given current equity valuations and interest rates, I’ll take my portfolio looking forward. Costs, including advisors and expense ratios, are certain. The likely benefits of a more efficient portfolio only potential. Both roads will lead to Dublin if we live way below our means.
It has not escaped my eye, and I bet not yours either, that Rick Ferri seems to have evolved over time even more towards the simpler TSM route. That certainly gets my attention!
One thing I bet we both agree on is that, as Charles Ellis has written, Investing keeps us engaged, makes life interesting, keeps us younger. It’s absolutely fascinating to see how all this plays out. You may well be right. You certainly have a good head start and tailwind by minimizing expenses!

Dave

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Re: Larry Swedroe: Value Premium Lives!

Post by azanon » Thu May 17, 2018 10:35 am

It's pretty clear what the contrarians are buying: Large-cap growth. And they've been handsomely rewarded for having done so since about 2009 (~ 1.3% CAGR alpha despite slightly less standard deviation vs. total market). I mean, is there even any investor left that ranks as at least casual, that hasn't heard at least 20 times now how small and value is all the rage? So if you want to buy what everyone else is being talked into, small and value is your thing. Contrarian though? Large cap growth. Actually, maybe mid cap growth, since of all the sector funds at Vanguard, it has by far the lowest invested in it.

Or maybe it's best to just let everyone else try to tweak this, and just do what Taylor's suggesting. Remember, there's not going to be a lot of people in the industry pushing just total market, because there's not many ways to make money doing so. There's not much to say about it because its so straight-forward, and Vanguard (and others like ishares) are already offering this investing strategy for a few bps.

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Re: Larry Swedroe: Value Premium Lives!

Post by Taylor Larimore » Thu May 17, 2018 12:51 pm

Dave:

Thank you for your thoughtful and well written reply to my last post.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe: Value Premium Lives!

Post by Taylor Larimore » Thu May 17, 2018 12:52 pm

Dave:

Thank you for your thoughtful and well written reply to my last post.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Larry Swedroe: Value Premium Lives!

Post by sreynard » Thu May 17, 2018 1:55 pm

willthrill81 wrote:
Wed May 16, 2018 6:49 pm
pkcrafter wrote:
Wed May 16, 2018 6:10 pm
whodidntante wrote:
Wed May 16, 2018 5:52 pm
Being totally selfish, the more people who don't believe in the value premium, the larger it is likely to be. So I'm OK with y'all concluding it is a bunch of Edward Jones.
:wink:

I'm not saying the value premium does not exist, I'm saying most investors don't have the patience to capture it.

Paul
Therein lies a big part of the individual investor's advantage. S/he can hang on to a specific strategy for far longer than an active fund manager can. Whether they will is another matter.
Which is true whether the strategy is a good one or a bad one.

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Re: Larry Swedroe: Value Premium Lives!

Post by fortyofforty » Thu May 17, 2018 5:48 pm

Total, you're done.

Factors, for fun.

Just don't play with lifestyle-altering amounts.
"In a time of universal deceit, telling the truth becomes a revolutionary act." - George Orwell | There are many roads to doublin'. | Original Vanguard Diehard

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Re: Larry Swedroe: Value Premium Lives!

Post by One Ping » Thu May 17, 2018 6:10 pm

willthrill81 wrote:
Wed May 16, 2018 9:24 pm
Interestingly, the equities in Paul Merriman's UBH portfolio are 50% blend and 50% value, in addition to 50% large cap and 50% small cap.
... and, diversifying even further, 50% US and 50% International. :happy
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