Larry Swedroe: Look Past Expense Ratios

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nedsaid
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Re: Larry Swedroe: Look Past Expense Ratios

Post by nedsaid » Fri Jul 13, 2018 9:31 am

HomerJ wrote:
Thu Jul 12, 2018 9:43 pm
Random Walker wrote:
Thu Jul 12, 2018 7:25 pm
Homer J,
I’m not expecting anywhere near the accuracy &/or precision you describe.
Then I don't understand how you can "tune" your portfolio to be super efficient using factors. Larry has said many times that one can lower their equity exposure, if they use factors to give themselves higher expected returns on a smaller percentage of a portfolio.

But that's just adding another risk. What if factors don't deliver in the future like they did in the past?
There are a lot of "what ifs" in the investment world. I don't even know that stocks will outperform bonds over the rest of my life. All I have to go on is history and investing theory. What I can do, however, is stack the odds in my favor as much as I can. So much is unknowable, this is where a perspective from a good knowledge of market history comes in. There is an element of faith to all of this, we just don't want to admit it. Not blind faith as we deal with what is likely in the future in light of what we know from the past.
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Re: Larry Swedroe: Look Past Expense Ratios

Post by Random Walker » Fri Jul 13, 2018 10:08 am

nedsaid wrote:
Fri Jul 13, 2018 9:31 am
HomerJ wrote:
Thu Jul 12, 2018 9:43 pm
Random Walker wrote:
Thu Jul 12, 2018 7:25 pm
Homer J,
I’m not expecting anywhere near the accuracy &/or precision you describe.
Then I don't understand how you can "tune" your portfolio to be super efficient using factors. Larry has said many times that one can lower their equity exposure, if they use factors to give themselves higher expected returns on a smaller percentage of a portfolio.

But that's just adding another risk. What if factors don't deliver in the future like they did in the past?
There are a lot of "what ifs" in the investment world. I don't even know that stocks will outperform bonds over the rest of my life. All I have to go on is history and investing theory. What I can do, however, is stack the odds in my favor as much as I can. So much is unknowable, this is where a perspective from a good knowledge of market history comes in. There is an element of faith to all of this, we just don't want to admit it. Not blind faith as we deal with what is likely in the future in light of what we know from the past.
Totally agree there is an element of optimistic faith. I think Bogle has said the same thing. For me, the “faith” part of diving into factors had to be balanced against the certain increased costs. The costs are for sure: no faith involved there. But at some point for me the evidence and logic supporting paying more for a more efficient portfolio looked highly likely to outweigh the certain costs.

I think the value of Larry’s factor book is way more generalizable (is that a word?) than the factors themselves. His 5 criteria for evaluating factors can be used to evaluate the possible benefit of any potential portfolio addition. Appreciating that all components of the portfolio meet the persistent, pervasive, robust, intuitive, and investable criteria should strengthen the investor’s faith tremendously.

Dave

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Re: Larry Swedroe: Look Past Expense Ratios

Post by danielc » Fri Jul 13, 2018 12:39 pm

Random Walker wrote:
Thu Jul 12, 2018 10:12 pm
Exactly! The point is that market beta is just another factor, no more and no less. It also may not deliver over any given investing horizon. Sounds like a strong reason to diversify across independent sources of return.
I question the notion that SMB and HML are independent sources of return. In fact, one the main reasons why they are RISK factors in the first place is that they tend to crash at the same time as TSM, and they crash harder. This is possibly the most salient risk you are taking when you take SMB and HML risk -- and it is precisely correlated risk. Bernstein spends a lot of time talking about this in Rational Expectations book. I think even Swedroe talks about that in his books. SMB and HML have their worst performance and highest correlation precisely at the moment when you'd most like them to be uncorrelated. There's your risk.

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Re: Larry Swedroe: Look Past Expense Ratios

Post by danielc » Fri Jul 13, 2018 12:42 pm

FIREchief wrote:
Thu Jul 12, 2018 10:32 pm
Every time I see this thread title I am reminded of one saying. "Pay no attention to the man behind the curtain." :annoyed
I am familiar with the Wizard of Oz, but I've never quite understood what people mean when they say this.

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Re: Larry Swedroe: Look Past Expense Ratios

Post by danielc » Fri Jul 13, 2018 12:57 pm

nisiprius wrote:
Fri Jul 13, 2018 6:44 am
2) In order to believe that market beta has a persistent and worthwhile premium, one needs to believe only that businesses are capable of making money and that (in a loosely-coupled general sort of long-term way) stocks of money-making companies will be money-making stocks. That's reasonably easy to believe. More important, you can believe in it without assuming an inefficient market.
Exactly. I also have infinitely more confidence in market beta than any other "factor". Ultimately, companies are the only thing in the economy that produces things and has earnings. Corporate bonds are paid out of corporate earnings. It seems intuitive that it is just not possible for corporate bonds to grow in value faster than the earnings growth rate of companies. Likewise, federal bonds are paid through taxes which are taken from profit-making entities which means companies. So it seems like a mathematical necessity that over long periods the return rate of any type of bond has to be bounded above by the return rate of companies, which we own via stocks. I have read several books and articles by Swedroe and Bernstein and others and I have never seen an argument for SMB or HML that was even remotely as convincing (to me) as the argument I just made about stocks vs bonds. Correspondingly, my confidence in market beta is much much higher than my confidence in SMB and HML.
nisiprius wrote:
Fri Jul 13, 2018 6:44 am
In order to believe that any other factor has superior risk-adjusted return, it is necessary to believe three things. First, that the market is inefficient.
I agree. So contrary to Dave, I am NOT persuaded by behavioural explanations. To the extent that SMB and HML premia are behavioural, they should disappear the moment they are discovered. So I HOPE that SMB and HML are mostly risk premia.

nisiprius wrote:
Fri Jul 13, 2018 6:44 am
I don't know how true the EMH is, but there are hundreds of people out there saying, in various ways, "I can take money away from all the other investors who are trying to take money away from me."
This is brilliant.

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Re: Larry Swedroe: Look Past Expense Ratios

Post by nisiprius » Fri Jul 13, 2018 6:43 pm

Larry Swedroe sent me this PM:
Larry Swedroe wrote:sorry but this is also wrong:
nisiprius wrote:In order to believe that market beta has a persistent and worthwhile premium, one needs to believe only that businesses are capable of making money and that (in a loosely-coupled general sort of long-term way) stocks of money-making companies will be money-making stocks. That's reasonably easy to believe. More important, you can believe in it without assuming an inefficient market.
Just think about what the price you pay for the stocks, these money making businesses. It matters. If you pay more than the risk-free rate of return, as prices reached in 2000, then you get a negative risk premium. Also we know that there are whole lot of lottery stocks which have negative risk adjusted returns, big time. And simply excluding them makes portfolios more efficient, hence TSM while a nice theory being most efficient is certainly wrong as you can exclude those stocks at no cost and improve returns while reducing risk.

Now TSM as the most efficient portfolio is nice theory and helps us understand how markets work, as does the EMH, but you can have preference for risks that others don't like, that's one of theories for value premium, owning stocks that do poorly in bad times requires big premium as investors don't like such assets, and thus improve efficiency as the LP has done.

Best wishes
Larry
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Re: Larry Swedroe: Look Past Expense Ratios

Post by golfCaddy » Fri Jul 13, 2018 7:38 pm

Random Walker wrote:
Fri Jul 13, 2018 10:08 am
I think the value of Larry’s factor book is way more generalizable (is that a word?) than the factors themselves. His 5 criteria for evaluating factors can be used to evaluate the possible benefit of any potential portfolio addition. Appreciating that all components of the portfolio meet the persistent, pervasive, robust, intuitive, and investable criteria should strengthen the investor’s faith tremendously.

Dave
Except that some factors, ex. profitability/quality, don't have intuitive explanations except for explanations so illogical and contorted that they would get a failing grade in a freshman paper: low risk/quality and profitable businesses attract more competition, the competition threatens future earnings, and therefore profitable businesses are more risky. Some of this is so completely asinine, that a business can be less risky because it's losing money, you wonder how it ever made through peer review for publication.

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"Look Past Expense Ratios" Dangerous Advice

Post by Taylor Larimore » Fri Jul 13, 2018 7:55 pm

Bogleheads:

"Look Past Expense Ratios" can be dangerous:
United States Securities and Exchange Commission: "Independent studies show (low) fees and expenses can be a reliable predictor of mutual fund performance."
Best wishes.
Taylor
Last edited by Taylor Larimore on Fri Jul 13, 2018 8:09 pm, edited 1 time in total.
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Re: Larry Swedroe: Look Past Expense Ratios

Post by dumbmoney » Fri Jul 13, 2018 8:04 pm

nisiprius wrote:
Fri Jul 13, 2018 6:44 am
Random Walker wrote:
Thu Jul 12, 2018 10:12 pm
...The point is that market beta is just another factor, no more and no less...
I think it is very different from other factors, in two aspects: ease of access, and coexistence with the efficient market hypothesis.
More simply, beta is the only factor that investors as a group are exposed to. There's no net investment in value, size, momentum, etc.

Which to me, makes factor investing more like robo stock picking than "passive" investing.
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Re: Larry Swedroe: Look Past Expense Ratios

Post by Random Walker » Fri Jul 13, 2018 8:31 pm

golfCaddy wrote:
Fri Jul 13, 2018 7:38 pm
Random Walker wrote:
Fri Jul 13, 2018 10:08 am
I think the value of Larry’s factor book is way more generalizable (is that a word?) than the factors themselves. His 5 criteria for evaluating factors can be used to evaluate the possible benefit of any potential portfolio addition. Appreciating that all components of the portfolio meet the persistent, pervasive, robust, intuitive, and investable criteria should strengthen the investor’s faith tremendously.

Dave
Except that some factors, ex. profitability/quality, don't have intuitive explanations except for explanations so illogical and contorted that they would get a failing grade in a freshman paper: low risk/quality and profitable businesses attract more competition, the competition threatens future earnings, and therefore profitable businesses are more risky. Some of this is so completely asinine, that a business can be less risky because it's losing money, you wonder how it ever made through peer review for publication.
I agree with you that the risk story for profitability does seem a bit contorted

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Re: Larry Swedroe: Look Past Expense Ratios

Post by stlutz » Fri Jul 13, 2018 9:39 pm

nisiprius wrote:
Fri Jul 13, 2018 6:43 pm
Larry Swedroe sent me this PM:
Larry Swedroe wrote:sorry but this is also wrong:
nisiprius wrote:In order to believe that market beta has a persistent and worthwhile premium, one needs to believe only that businesses are capable of making money and that (in a loosely-coupled general sort of long-term way) stocks of money-making companies will be money-making stocks. That's reasonably easy to believe. More important, you can believe in it without assuming an inefficient market.
Just think about what the price you pay for the stocks, these money making businesses. It matters. If you pay more than the risk-free rate of return, as prices reached in 2000, then you get a negative risk premium.
Nisiprius and Swedroe aren't really talking about the same thing.

It is necessarily the case that over time stocks will produce positive returns. Businesses make money and they distribute profits to shareholders. (Nisiprius' point)

On the other hand, it's not necessarily the case that stocks will beat T-bills, which would be the definition of market beta. If stocks were priced at 300x earnings, they probably wouldn't. (Swedroe's point)

It's also not necessarily the case that one group of stocks will outperform another group. If I go long a random list of 1000 stocks and go short a different random set of 1000, there is no intrinsic profit there. It would be silly to expect a return different from zero. (nisi's point)

On the other hand, some investors are highly confident that they know which set of 1000 stocks will outperform as a group and which set will underperform. They will expect a positive return from their long/short portfolio. (Swedore's point) This is not an intrinsic property of the portfolio, however. (nisi's point).

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Re: Larry Swedroe: Look Past Expense Ratios

Post by nedsaid » Sat Jul 14, 2018 9:44 am

Random Walker wrote:
Fri Jul 13, 2018 8:31 pm
golfCaddy wrote:
Fri Jul 13, 2018 7:38 pm
Random Walker wrote:
Fri Jul 13, 2018 10:08 am
I think the value of Larry’s factor book is way more generalizable (is that a word?) than the factors themselves. His 5 criteria for evaluating factors can be used to evaluate the possible benefit of any potential portfolio addition. Appreciating that all components of the portfolio meet the persistent, pervasive, robust, intuitive, and investable criteria should strengthen the investor’s faith tremendously.

Dave
Except that some factors, ex. profitability/quality, don't have intuitive explanations except for explanations so illogical and contorted that they would get a failing grade in a freshman paper: low risk/quality and profitable businesses attract more competition, the competition threatens future earnings, and therefore profitable businesses are more risky. Some of this is so completely asinine, that a business can be less risky because it's losing money, you wonder how it ever made through peer review for publication.
I agree with you that the risk story for profitability does seem a bit contorted
You are missing barriers to entry, competitive advantage, or what Morningstar calls a moat. Many of these companies have competitive advantages that are hard to replicate. There is also the value of a brand, the value of a franchise, and also the going concern value of a company. Once a business gets to a certain point, it takes on a life of its own. It develops loyal customers, a reputation in the market place, and its own identity. Sort of like Newtonian physics, what is in motion tends to stay in motion.

Quality/Profitability is not hard to explain. It is a function of the premium that Wall Street puts on consistency of earnings and consistency of earnings growth. Wall Street loves consistency and will pay a premium for it. A secondary story is the strength of the balance sheet that these companies tend to have.

Consistency is so valued that even the slower earnings growth Low-Volatility stocks tend to beat the market most of the time. Wall Street loves consistent earnings growth even if that growth is relatively slow compared to Growth stocks. There is also a Value story here as expectations for Low-Vol stocks are lower than for Growth, but my guess is that this is mostly about consistency and predictability.
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Re: Larry Swedroe: Look Past Expense Ratios

Post by nisiprius » Sat Jul 14, 2018 10:27 am

stlutz wrote:
Fri Jul 13, 2018 9:39 pm
...Nisiprius and Swedroe aren't really talking about the same thing...(Nisiprius' point)...(Swedroe's point)...(nisi's point)... (Swedroe's point)..(nisi's point).
Nice! I'll confirm that you understand my point of view accurately.
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Re: Larry Swedroe: Look Past Expense Ratios

Post by danielc » Sat Jul 14, 2018 1:53 pm

nedsaid wrote:
Sat Jul 14, 2018 9:44 am
You are missing barriers to entry, competitive advantage, or what Morningstar calls a moat. Many of these companies have competitive advantages that are hard to replicate. There is also the value of a brand, the value of a franchise, and also the going concern value of a company. Once a business gets to a certain point, it takes on a life of its own. It develops loyal customers, a reputation in the market place, and its own identity. Sort of like Newtonian physics, what is in motion tends to stay in motion.

Quality/Profitability is not hard to explain. It is a function of the premium that Wall Street puts on consistency of earnings and consistency of earnings growth. Wall Street loves consistency and will pay a premium for it. A secondary story is the strength of the balance sheet that these companies tend to have.

Consistency is so valued that even the slower earnings growth Low-Volatility stocks tend to beat the market most of the time. Wall Street loves consistent earnings growth even if that growth is relatively slow compared to Growth stocks. There is also a Value story here as expectations for Low-Vol stocks are lower than for Growth, but my guess is that this is mostly about consistency and predictability.
That's not what a premium is. In fact, it's the opposite of a premium. Because everyone loves those companies (1) where's the extra risk? and (2) if anything, the fact that people love those companies should be included in their stock price. If anything, one of the reasons why traditional growth companies (i.e. precisely the companies everybody loves) DO NOT return as much as value companies is that they are so-loved that investors overestimate their ability to increase earnings. So historically growht companies have indeed grown their earnings faster than the rest of the market but not at a high enough rate to match the rosy expectations of investors.

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Re: Larry Swedroe: Look Past Expense Ratios

Post by FIREchief » Sat Jul 14, 2018 7:47 pm

danielc wrote:
Fri Jul 13, 2018 12:42 pm
FIREchief wrote:
Thu Jul 12, 2018 10:32 pm
Every time I see this thread title I am reminded of one saying. "Pay no attention to the man behind the curtain." :annoyed
I am familiar with the Wizard of Oz, but I've never quite understood what people mean when they say this.
I won't try to address the various levels of that classic story, as there are likely sub-forums on other sites entirely devoted to it. 8-)

That said, and in this context, I would suggest it applies when investors become so focused on the fantasy of beating the market (through factors, alternatives, predicting the future, "analytical academic research," etc.) that they lose focus on the fact that some guy in a nice suit is "stealing" one to two percent of their money each and every year.

Come to think of it, a couple of financial advisors I have met did resemble Frank Morgan a bit..... If there are any responses to this post, you'll likely start to see more of what constitutes the "curtain." :sharebeer
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Re: Larry Swedroe: Look Past Expense Ratios

Post by fennewaldaj » Sat Jul 14, 2018 9:46 pm

nedsaid wrote:
Sat Jul 14, 2018 9:44 am
Random Walker wrote:
Fri Jul 13, 2018 8:31 pm
golfCaddy wrote:
Fri Jul 13, 2018 7:38 pm
Random Walker wrote:
Fri Jul 13, 2018 10:08 am
I think the value of Larry’s factor book is way more generalizable (is that a word?) than the factors themselves. His 5 criteria for evaluating factors can be used to evaluate the possible benefit of any potential portfolio addition. Appreciating that all components of the portfolio meet the persistent, pervasive, robust, intuitive, and investable criteria should strengthen the investor’s faith tremendously.

Dave
Except that some factors, ex. profitability/quality, don't have intuitive explanations except for explanations so illogical and contorted that they would get a failing grade in a freshman paper: low risk/quality and profitable businesses attract more competition, the competition threatens future earnings, and therefore profitable businesses are more risky. Some of this is so completely asinine, that a business can be less risky because it's losing money, you wonder how it ever made through peer review for publication.
I agree with you that the risk story for profitability does seem a bit contorted
You are missing barriers to entry, competitive advantage, or what Morningstar calls a moat. Many of these companies have competitive advantages that are hard to replicate. There is also the value of a brand, the value of a franchise, and also the going concern value of a company. Once a business gets to a certain point, it takes on a life of its own. It develops loyal customers, a reputation in the market place, and its own identity. Sort of like Newtonian physics, what is in motion tends to stay in motion.

Quality/Profitability is not hard to explain. It is a function of the premium that Wall Street puts on consistency of earnings and consistency of earnings growth. Wall Street loves consistency and will pay a premium for it. A secondary story is the strength of the balance sheet that these companies tend to have.

Consistency is so valued that even the slower earnings growth Low-Volatility stocks tend to beat the market most of the time. Wall Street loves consistent earnings growth even if that growth is relatively slow compared to Growth stocks. There is also a Value story here as expectations for Low-Vol stocks are lower than for Growth, but my guess is that this is mostly about consistency and predictability.
Right but the quality explanation is more of a behavioral thing. Its coming up with a risk based explanation that is difficult. To me value has both behavior and risk based explanations that are plausible. Small has a risk story that makes sense. Momentum and quality seem to really have more behavioral explanations.

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Re: Larry Swedroe: Look Past Expense Ratios

Post by nedsaid » Sun Jul 15, 2018 11:18 am

danielc wrote:
Sat Jul 14, 2018 1:53 pm
nedsaid wrote:
Sat Jul 14, 2018 9:44 am
You are missing barriers to entry, competitive advantage, or what Morningstar calls a moat. Many of these companies have competitive advantages that are hard to replicate. There is also the value of a brand, the value of a franchise, and also the going concern value of a company. Once a business gets to a certain point, it takes on a life of its own. It develops loyal customers, a reputation in the market place, and its own identity. Sort of like Newtonian physics, what is in motion tends to stay in motion.

Quality/Profitability is not hard to explain. It is a function of the premium that Wall Street puts on consistency of earnings and consistency of earnings growth. Wall Street loves consistency and will pay a premium for it. A secondary story is the strength of the balance sheet that these companies tend to have.

Consistency is so valued that even the slower earnings growth Low-Volatility stocks tend to beat the market most of the time. Wall Street loves consistent earnings growth even if that growth is relatively slow compared to Growth stocks. There is also a Value story here as expectations for Low-Vol stocks are lower than for Growth, but my guess is that this is mostly about consistency and predictability.
That's not what a premium is. In fact, it's the opposite of a premium. Because everyone loves those companies (1) where's the extra risk? and (2) if anything, the fact that people love those companies should be included in their stock price. If anything, one of the reasons why traditional growth companies (i.e. precisely the companies everybody loves) DO NOT return as much as value companies is that they are so-loved that investors overestimate their ability to increase earnings. So historically growht companies have indeed grown their earnings faster than the rest of the market but not at a high enough rate to match the rosy expectations of investors.
If it isn't a premium, then why is Quality/Profitability a factor? Why does Larry and the Academics talk about it so much? There is also a paradox in all of this. If Value is a factor, it would seem contradictory that Quality/Profitability is a factor too. Throw into all of that Momentum. Pretty much Value works because it is unloved. Quality/Profitability work because stocks are loved but not too much. Momentum works but is subject to dramatic reversals. Low Volatility seems to work most of the time but doesn't that contradict Momentum.

I suspect the stocks that fall into the various factor categories are pretty much all of the stock market except for the awful Value traps and the equally awful Lottery Stocks, which I call the anti-factors. Pretty much, all you have to do is screen out the anti-factors. I am beginning to think that a well-constructed index that screens out the junk will do the job that the various factor funds are trying to do.
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Re: Larry Swedroe: Look Past Expense Ratios

Post by nedsaid » Sun Jul 15, 2018 11:21 am

fennewaldaj wrote:
Sat Jul 14, 2018 9:46 pm
nedsaid wrote:
Sat Jul 14, 2018 9:44 am

You are missing barriers to entry, competitive advantage, or what Morningstar calls a moat. Many of these companies have competitive advantages that are hard to replicate. There is also the value of a brand, the value of a franchise, and also the going concern value of a company. Once a business gets to a certain point, it takes on a life of its own. It develops loyal customers, a reputation in the market place, and its own identity. Sort of like Newtonian physics, what is in motion tends to stay in motion.

Quality/Profitability is not hard to explain. It is a function of the premium that Wall Street puts on consistency of earnings and consistency of earnings growth. Wall Street loves consistency and will pay a premium for it. A secondary story is the strength of the balance sheet that these companies tend to have.

Consistency is so valued that even the slower earnings growth Low-Volatility stocks tend to beat the market most of the time. Wall Street loves consistent earnings growth even if that growth is relatively slow compared to Growth stocks. There is also a Value story here as expectations for Low-Vol stocks are lower than for Growth, but my guess is that this is mostly about consistency and predictability.
Right but the quality explanation is more of a behavioral thing. Its coming up with a risk based explanation that is difficult. To me value has both behavior and risk based explanations that are plausible. Small has a risk story that makes sense. Momentum and quality seem to really have more behavioral explanations.
I am thinking that the risk explanations also have a large behavioral element. Let's face it, human beings are not 100% rational beings. We get greedy and we get fearful, often at the very wrong times.
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Re: Larry Swedroe: Look Past Expense Ratios

Post by danielc » Sun Jul 15, 2018 1:59 pm

nedsaid wrote:
Sun Jul 15, 2018 11:18 am
If it isn't a premium, then why is Quality/Profitability a factor? Why does Larry and the Academics talk about it so much?
You'll have to ask them, not me. All I'm saying is that the thing that you described is not a premium.

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Re: Larry Swedroe: Look Past Expense Ratios

Post by stlutz » Sun Jul 15, 2018 2:39 pm

Could I make a friendly suggestion that we stop dropping crucial modifiers when talking about "premiums" or "factors"?

A "risk" premium indicates that one should expect asset A to return more than asset B because asset A is more risky and most investors should prefer asset B despite the lower expected return.

A "behaviorial" premium indicates that should expect asset A to return more than asset B because investors chronically overvalue asset B.

A "return" premium indicates that asset A has returned more than asset B but I'm not offering any further explanation as to why (i.e. I'm being honest).

Same with the word "factor".

A "risk" factor is any risk that affects the price of an asset. It may be the type of asset it is, macroeconomic variables such as inflation or interest rates, or common characteristics between different companies. Risk factor measurements help understand what has/will impact the price of a company. Risk factor analysis is not fundamentally about seeking return premiums.

"Factor investing" isn't really about risk-factor modeling much at all, but the focus here is that one has/can obtain a return premium by screening stocks based on looking at a few simple ratios or calculations.

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Re: Larry Swedroe: Look Past Expense Ratios

Post by TD2626 » Sun Jul 15, 2018 5:28 pm

nisiprius wrote:
Fri Jul 13, 2018 8:49 am

For example, say that I happen to like a high probability of a small downside and a low probability of a big upside--positive skew, "lottery ticket." Then, if what I think I've read is correct, I ought to like small growth stocks. On the other hand, if I want a high probability of a slow and steady upside coupled with a low probability of a severe downside, I ought to like small value stocks. That would be personal preference. However, I think I hear factor advocates suggesting that everybody ought to prefer small value, perhaps because widespread taste for small growth has driven its price up. That would make sense if I do not care about the skewness of returns, but if I like a positive skew, then I might still prefer small growth if shaping the distribution that way is worth the extra price.

I don't even know a good way to assess risk tolerance itself. I've never seen anything that purported to help you match at a finer level of detail.

Do you know of a risk tolerance questionnaire that would help an investor assess whether, based on their personal tastes, they ought to prefer total market investing or factor-based investing?
I haven't seen a risk tolerance questionnaire that asks about preference for skew. Or Kurtosis. Most of the time the focus is on return and std. deviation. I guess factor advocates have (or should have) very special desires when it comes to return distributions.

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Re: Larry Swedroe: Look Past Expense Ratios

Post by golfCaddy » Sun Jul 15, 2018 9:51 pm

fennewaldaj wrote:
Sat Jul 14, 2018 9:46 pm
Right but the quality explanation is more of a behavioral thing. Its coming up with a risk based explanation that is difficult. To me value has both behavior and risk based explanations that are plausible. Small has a risk story that makes sense. Momentum and quality seem to really have more behavioral explanations.
Except, there's not much of a behavioral explanation for Quality/Profitability either. What's the theory: people have a behavioral bias to own junk or a behavioral bias to own unprofitable companies? The closest explanation I've heard is it excludes lottery stocks, which is also what the value factor is supposed to do. It's as if the behavioral economists gave up on coming up with new explanations for factors, and are recycling the old explanations for existing factors to explain newly discovered factors.

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