Is Small Value Still A Winner?

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Alexa9
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Is Small Value Still A Winner?

Post by Alexa9 »

This latest bull run shows a small value premium is still alive and well.

Portfolio Visualizer: Total Stock Market vs. Small Cap Value
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nisiprius
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Re: Is Small Value Still A Winner?

Post by nisiprius »

How do results from 1972-2018 show that small value is "still" a winner? The small value premium has not shown up visibly since 2004, particularly if we look at risk-adjusted return (which we should, since I think everyone agrees that small value is considerably more risky than the market as a whole, by any reasonable measure of risk).

Source

Portfolio 1 (blue), 100% "US Stock Market"
Portfolio 2 (red), 100% "US Small Cap Value"
Portfolio Analysis Results (Jan 2005 - Sep 2018)
Image

They had virtually identical return--there was no "premium." But small cap value had noticeably higher volatility (17.76% versus 13.98%) and a larger maximum drawdown--higher risk. So investors were not compensated for that extra risk, and thus small cap value had a lower Sharpe ratio, 0.49 compared to 0.60 for the market.

Jared Kizer has written:
6. Any transparent strategy... is capable of extended periods of underperformance. There is nothing that preordains these strategies to work over any period of any length. Investors should either commit to these strategies over an extremely long time horizon or not tilt toward these factors at all.

7. A corollary to the sixth point is that it is virtually impossible to determine whether a given factor premium no longer exists precisely because each is capable of extended periods of underperformance. The period of underperformance could either be because “the world has changed” or simply a reasonable point on the distribution of possible outcomes.
In short, the small cap value premium has not been seen since 2004 and nobody knows whether it has died--as a result of it becoming well-known and overcrowded, perhaps--or whether it is merely in hiding and waiting to emerge.

But it has not outperformed "during the latest bull run." Why do you think it has? The only way I can see this is that since it crash to a lower point in 2008-2009, then if you choose to measure exactly from the low, then it outperformed from that point--but that was just making up the ground it lost, relative to the market, during the crash.
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Re: Is Small Value Still A Winner?

Post by lukestuckenhymer »

Hard to look past these figures:
Image

I don't see a premium.
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Alexa9
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Re: Is Small Value Still A Winner?

Post by Alexa9 »

Ah, I see my chart was including growth since 1972 which looks much larger when compounded. Still, small cap value is ahead going back 10 years. It depends on the years and you can cherry pick data to make the premium look great or terrible. It takes a long stretch including rebalancing to show up.
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Re: Is Small Value Still A Winner?

Post by WhiteMaxima »

Globalization. Big cap out perform small cap.
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Re: Is Small Value Still A Winner?

Post by onourway »

Yes, it will take a long, long time to see the advantage or not, and the problem is, it's impossible to tell during those periods of volatility if this is just normal or something has permanently changed, driving down SCV returns permanently.
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Re: Is Small Value Still A Winner?

Post by nisiprius »

Alexa9 wrote: Wed Oct 31, 2018 5:44 pm Ah, I see my chart was including growth since 1972 which looks much larger when compounded. Still, small cap value is ahead going back 10 years. It depends on the years and you can cherry pick data to make the premium look great or terrible.
Yes, it does, and I chose 2005-present because I knew that 2000-2003 was a time when many of the asset classes recommended as diversifiers... small cap value and REITs in particularly... did really well, going up when the stock market as a whole was going down.

But since then, the performance has really been quite similar, and you can easily make either the market or small-cap value come out ahead by choice of endpoints.
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Taylor Larimore
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"Lies, damned lies and statistics"

Post by Taylor Larimore »

Bogleheads:

Without pointing at anyone, the first two charts are a good example of Lies, damned lies and statistics

Best wishes.
Taylor
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Re: Is Small Value Still A Winner?

Post by crystalbank »

I don't know if SCV will repeat it's returns in future years, but I've decided to tilt my portfolio to SCV significantly (40%). I was conflicted about choosing Small Cap Blended or Value, but in the end decided to stick with SCV.

My reasoning is simply that if there is indeed a SCV premium I would rather be invested in it than not. Worst case, SCV underperforms the market over the long run and that is a risk I'm willing to take. So far it has not under performed.

Another reason, something something about Small Cap companies being anti-fragile.
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Re: Is Small Value Still A Winner?

Post by michaeljc70 »

I feel about as confident chiming in on this as posting lottery numbers.
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Re: Is Small Value Still A Winner?

Post by Random Walker »

crystalbank wrote: Wed Oct 31, 2018 6:32 pm I don't know if SCV will repeat it's returns in future years, but I've decided to tilt my portfolio to SCV significantly (40%). I was conflicted about choosing Small Cap Blended or Value, but in the end decided to stick with SCV.

My reasoning is simply that if there is indeed a SCV premium I would rather be invested in it than not. Worst case, SCV underperforms the market over the long run and that is a risk I'm willing to take. So far it has not under performed.

Another reason, something something about Small Cap companies being anti-fragile.
Agree. A SCV Fund has exposure to three factors: market, size, value. TSM has exposure to one factor: market. The SCV fund likely has a market beta of 1. When it underperforms, it’s likely not by much. When it out performs, likely more significant. Intuitively, there is a logical risk based explanation for size and both risk and behavioral based explanations for value. And the case can be made that the value premium is greater in small stocks than large. I’m going to go with SCV, just have to stay committed.

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Re: Is Small Value Still A Winner?

Post by TropikThunder »

Alexa9 wrote: Wed Oct 31, 2018 5:44 pm Ah, I see my chart was including growth since 1972 which looks much larger when compounded. Still, small cap value is ahead going back 10 years. It depends on the years and you can cherry pick data to make the premium look great or terrible. It takes a long stretch including rebalancing to show up.
crystalbank wrote: Wed Oct 31, 2018 6:32 pm My reasoning is simply that if there is indeed a SCV premium I would rather be invested in it than not. Worst case, SCV underperforms the market over the long run and that is a risk I'm willing to take. So far it has not under performed.
Are you sure about that?
lukestuckenhymer wrote: Wed Oct 31, 2018 5:12 pm Hard to look past these figures:
Image
The Vanguard returns show that at least their SCV has underperformed over the last 10 years.
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Re: Is Small Value Still A Winner?

Post by Jeff Albertson »

michaeljc70 wrote: Wed Oct 31, 2018 6:38 pm I feel about as confident chiming in on this as posting lottery numbers.
+1
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Alexa9
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Re: Is Small Value Still A Winner?

Post by Alexa9 »

TropikThunder wrote: Wed Oct 31, 2018 6:42 pm Are you sure about that?
Yes, using portfoliovisualizer. Vanguard's small value fund is not the best. Try IJS. VBR also outperforms VTI though going from 2008-2018 according to their site.
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Re: Is Small Value Still A Winner?

Post by crystalbank »

TropikThunder wrote: Wed Oct 31, 2018 6:42 pm
Alexa9 wrote: Wed Oct 31, 2018 5:44 pm Ah, I see my chart was including growth since 1972 which looks much larger when compounded. Still, small cap value is ahead going back 10 years. It depends on the years and you can cherry pick data to make the premium look great or terrible. It takes a long stretch including rebalancing to show up.
crystalbank wrote: Wed Oct 31, 2018 6:32 pm My reasoning is simply that if there is indeed a SCV premium I would rather be invested in it than not. Worst case, SCV underperforms the market over the long run and that is a risk I'm willing to take. So far it has not under performed.
Are you sure about that?
lukestuckenhymer wrote: Wed Oct 31, 2018 5:12 pm Hard to look past these figures:
Image
The Vanguard returns show that at least their SCV has underperformed over the last 10 years.
I'm not entirely sure what index Vanguard used in the past for SCV (currently it uses a CRSP index) but compare Vanguard Total US Market (VTI) with SP600 Small Cap Value (IJS) here.

Code: Select all

Portfolio Initial Balance Final Balance CAGR	
VTI	$10,000	$25,541 	9.11% 	
IJS	$10,000	$28,059 	10.07% 
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Re: Is Small Value Still A Winner?

Post by sf_tech_saver »

For high tax bracket investing in taxable accounts is there an argument to be made for mid/small cap indexes because of their lower dividend rates?

Buying into this last last dip there were days when mid/small cap funds were .25% down further than VTI so they were doubly attractive to me from a tax/return basis.

Is there a good thread about small/mid in taxable accounts?
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Re: Is Small Value Still A Winner?

Post by heyyou »

Another view: If SCV does not out-perform, will it still do well enough to not severely reduce the portfolio's returns? If you can live with the variable results, the risk at the personal level is not as high as for someone who needs every dollar each year, and is seeking more returns.
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Re: Is Small Value Still A Winner?

Post by TropikThunder »

Alexa9 wrote: Wed Oct 31, 2018 6:49 pm
TropikThunder wrote: Wed Oct 31, 2018 6:42 pm Are you sure about that?
Yes, using portfoliovisualizer. Vanguard's small value fund is not the best. Try IJS. VBR also outperforms VTI though going from 2008-2018 according to their site.
If you go from Jan 1008 to today, IJR 10.07%, VBR 9.69%, VTI 9.11% CAGR.
If you go from Oct 2008 to today, VTI 12.09%, IJS 11.59%, VBR 11.39% CAGR.

So, technically, over the last 10 years (month-to-month) TSM beats SCV.
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Re: Is Small Value Still A Winner?

Post by MJW »

TropikThunder wrote: Wed Oct 31, 2018 7:02 pm If you go from Jan 1008 to today, IJR 10.07%, VBR 9.69%, VTI 9.11% CAGR.
I'm guessing Olaf Haraldsson's raids in the Baltic are impacting your starting date. Another example of cherry-picked data. :x
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Re: Is Small Value Still A Winner?

Post by TropikThunder »

MJW wrote: Wed Oct 31, 2018 7:12 pm
TropikThunder wrote: Wed Oct 31, 2018 7:02 pm If you go from Jan 1008 to today, IJR 10.07%, VBR 9.69%, VTI 9.11% CAGR.
I'm guessing Olaf Haraldsson's raids in the Baltic are impacting your starting date. Another example of cherry-picked data. :x
:P Should have put everything into VLA (Viking Large Axe) funds.
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Re: Is Small Value Still A Winner?

Post by harvestbook »

So we just keep moving endpoints around until we prove that we're "right"? Cool. I keep hearing investing is simple, and now I see why.
I'm not smart enough to know, and I can't afford to guess.
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Re: Is Small Value Still A Winner?

Post by MJW »

harvestbook wrote: Wed Oct 31, 2018 7:17 pm So we just keep moving endpoints around until we prove that we're "right"? Cool. I keep hearing investing is simple, and now I see why.
Now you've got it!
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Bogle: "The Telltale Chart"

Post by Taylor Larimore »

Bogleheads:

For those of us who believe in the wisdom of Jack Bogle, you will find his opinion about small-value stocks here:

The Telltale Chart

Best wishes
Taylor
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Re: "Lies, damned lies and statistics"

Post by JoMoney »

Taylor Larimore wrote: Wed Oct 31, 2018 6:03 pm... Lies, damned lies and statistics...
:thumbsup :D

I'm not going to assume what the goal was of someone who picked a small-value fund, or on what grounds it might constitute being a "winner", but of the 9 style-box styles small-value had higher volatility and lower returns than just about everything else... so I guess it won on that.
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Re: Is Small Value Still A Winner?

Post by Alexa9 »

Lots of closed mindedness towards small value without looking at the data that supports it that may take 20 or more years to show up. Market weight index funds are simple, I'll give them that much and you certainly could do worse. Beyond that, I don't see that they are ideal for a 50+ year investment horizon.
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Re: Is Small Value Still A Winner?

Post by unclescrooge »

TropikThunder wrote: Wed Oct 31, 2018 6:42 pm
Alexa9 wrote: Wed Oct 31, 2018 5:44 pm Ah, I see my chart was including growth since 1972 which looks much larger when compounded. Still, small cap value is ahead going back 10 years. It depends on the years and you can cherry pick data to make the premium look great or terrible. It takes a long stretch including rebalancing to show up.
crystalbank wrote: Wed Oct 31, 2018 6:32 pm My reasoning is simply that if there is indeed a SCV premium I would rather be invested in it than not. Worst case, SCV underperforms the market over the long run and that is a risk I'm willing to take. So far it has not under performed.
Are you sure about that?
lukestuckenhymer wrote: Wed Oct 31, 2018 5:12 pm Hard to look past these figures:
Image
The Vanguard returns show that at least their SCV has underperformed over the last 10 years.
If you want value tilt, avoid vanguard funds.
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Re: Is Small Value Still A Winner?

Post by JoMoney »

unclescrooge wrote: Wed Oct 31, 2018 9:55 pm...
If you want value tilt, avoid vanguard funds.
Yeah.. Vanguard's are lower cost, have had lower volatility, and higher returns than DFA funds. I'm not sure why someone would buy a small-value fund, but if you want higher costs, higher volatility, and lower returns there are funds that do that
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Re: Is Small Value Still A Winner?

Post by unclescrooge »

JoMoney wrote: Wed Oct 31, 2018 10:12 pm
unclescrooge wrote: Wed Oct 31, 2018 9:55 pm...
If you want value tilt, avoid vanguard funds.
Yeah.. Vanguard's are lower cost, have had lower volatility, and higher returns than DFA funds. I'm not sure why someone would buy a small-value fund, but if you want higher costs, higher volatility, and lower returns there are funds that do that
Image
:mrgreen: that's one way to take at it. Another is that you're confusing outcome with strategy.

Personally, I chose to not use DFA funds in favor of other companies.
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Re: Is Small Value Still A Winner?

Post by JoMoney »

unclescrooge wrote: Wed Oct 31, 2018 10:20 pm...
:mrgreen: that's one way to take at it. Another is that you're confusing outcome with strategy...
Perhaps, but if the strategy doesn't show it's predictive of an outcome... What does that say of the strategy vs. a coin flip?
What is it that "small-value" is supposed to do? Be more 'risky'? I suppose it's shown that.
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Re: Is Small Value Still A Winner?

Post by White Coat Investor »

crystalbank wrote: Wed Oct 31, 2018 6:32 pm I don't know if SCV will repeat it's returns in future years, but I've decided to tilt my portfolio to SCV significantly (40%). I was conflicted about choosing Small Cap Blended or Value, but in the end decided to stick with SCV.

My reasoning is simply that if there is indeed a SCV premium I would rather be invested in it than not. Worst case, SCV underperforms the market over the long run and that is a risk I'm willing to take. So far it has not under performed.

Another reason, something something about Small Cap companies being anti-fragile.
I also tilt. Worst case scenario it underperforms the market over my investing horizon at greater expense and risk. A much more likely scenario is that it performs about as well as everything else and it doesn't matter. But I think the most likely thing is it will outperform over the 60 years I invest in it. But I wasn't willing to bet the whole farm on that. My ratio of TSM to SV is 25%:15% and the two of them make up my domestic stock allocation (40% of portfolio). It's a good bet, but I'll live if it doesn't pay off.
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Re: Is Small Value Still A Winner?

Post by nedsaid »

TropikThunder wrote: Wed Oct 31, 2018 7:02 pm
Alexa9 wrote: Wed Oct 31, 2018 6:49 pm
TropikThunder wrote: Wed Oct 31, 2018 6:42 pm Are you sure about that?
Yes, using portfoliovisualizer. Vanguard's small value fund is not the best. Try IJS. VBR also outperforms VTI though going from 2008-2018 according to their site.
If you go from Jan 1008 to today, IJR 10.07%, VBR 9.69%, VTI 9.11% CAGR.
If you go from Oct 2008 to today, VTI 12.09%, IJS 11.59%, VBR 11.39% CAGR.

So, technically, over the last 10 years (month-to-month) TSM beats SCV.
Wow. You have investment performance back to 1008? Didn't know they had ETFs back then. :wink:
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Re: Is Small Value Still A Winner?

Post by nedsaid »

White Coat Investor wrote: Wed Oct 31, 2018 10:40 pm
crystalbank wrote: Wed Oct 31, 2018 6:32 pm I don't know if SCV will repeat it's returns in future years, but I've decided to tilt my portfolio to SCV significantly (40%). I was conflicted about choosing Small Cap Blended or Value, but in the end decided to stick with SCV.

My reasoning is simply that if there is indeed a SCV premium I would rather be invested in it than not. Worst case, SCV underperforms the market over the long run and that is a risk I'm willing to take. So far it has not under performed.

Another reason, something something about Small Cap companies being anti-fragile.
I also tilt. Worst case scenario it underperforms the market over my investing horizon at greater expense and risk. A much more likely scenario is that it performs about as well as everything else and it doesn't matter. But I think the most likely thing is it will outperform over the 60 years I invest in it. But I wasn't willing to bet the whole farm on that. My ratio of TSM to SV is 25%:15% and the two of them make up my domestic stock allocation (40% of portfolio). It's a good bet, but I'll live if it doesn't pay off.
This is also my take. The case for Small Value made by the academics is compelling enough that I am willing to take a chance to get the extra return. Over many years, I figure that worse case is that I would track the market.
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Re: Is Small Value Still A Winner?

Post by ClosetIndexer »

nedsaid wrote: Wed Oct 31, 2018 11:03 pm
White Coat Investor wrote: Wed Oct 31, 2018 10:40 pm
crystalbank wrote: Wed Oct 31, 2018 6:32 pm I don't know if SCV will repeat it's returns in future years, but I've decided to tilt my portfolio to SCV significantly (40%). I was conflicted about choosing Small Cap Blended or Value, but in the end decided to stick with SCV.

My reasoning is simply that if there is indeed a SCV premium I would rather be invested in it than not. Worst case, SCV underperforms the market over the long run and that is a risk I'm willing to take. So far it has not under performed.

Another reason, something something about Small Cap companies being anti-fragile.
I also tilt. Worst case scenario it underperforms the market over my investing horizon at greater expense and risk. A much more likely scenario is that it performs about as well as everything else and it doesn't matter. But I think the most likely thing is it will outperform over the 60 years I invest in it. But I wasn't willing to bet the whole farm on that. My ratio of TSM to SV is 25%:15% and the two of them make up my domestic stock allocation (40% of portfolio). It's a good bet, but I'll live if it doesn't pay off.
This is also my take. The case for Small Value made by the academics is compelling enough that I am willing to take a chance to get the extra return. Over many years, I figure that worse case is that I would track the market.
And mine. I try to avoid paying large fees to access SV, and I go for a relatively conservative tilt (aim for up to a 0.4 weighting to HML and SMB). I think it's most likely this will outperform TSM over my investing horizon, and in the worst case it's unlikely to under-perform by much. It's conceivable that the value premium could be gone, but I can't think of a compelling case why it would go persistently negative. (Of course it could well go negative for extended periods, as it has in the past.)
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Re: Is Small Value Still A Winner?

Post by unclescrooge »

JoMoney wrote: Wed Oct 31, 2018 10:29 pm
unclescrooge wrote: Wed Oct 31, 2018 10:20 pm...
:mrgreen: that's one way to take at it. Another is that you're confusing outcome with strategy...
Perhaps, but if the strategy doesn't show it's predictive of an outcome... What does that say of the strategy vs. a coin flip?
What is it that "small-value" is supposed to do? Be more 'risky'? I suppose it's shown that.
If anything, it is shown to produce higher return WITH higher risk.

Unfortunately, the return may not show up during your time horizon and then you're just left with the risk. But like roller coasters at amusement parks, you should should enjoy the ride 😉

I have explicit, but slight tilt towards mid cap value and small cap value. The higher volatility with regular rebalancing works for me.
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Re: Bogle: "The Telltale Chart"

Post by nedsaid »

Taylor Larimore wrote: Wed Oct 31, 2018 7:53 pm Bogleheads:

For those of us who believe in the wisdom of Jack Bogle, you will find his opinion about small-value stocks here:

The Telltale Chart

Best wishes
Taylor
Taylor, Mr. Bogle's "Telltale Chart" speech has been pretty effectively debunked. Indeed our own Siamond has done work on this and it contradicts Bogle's assertions.

Here is an interesting thread where Siamond uses Telltale Charts for things other than Small Value tilting. I have an exchange with Siamond critiquing his charts with suggestions to make them better. He later said he wanted to avoid the discussion of Bogle's speech and the Small Value premium and we discussed that as well. I then discuss why Bogle's speech was effectively debunked by both Larry Swedroe and Siamond and how Bogle could have better stated his case.

viewtopic.php?t=225074

Here I summarize my arguments:
Were I Bogle, I would probably admit that the Small/Value premium is real but that most investors in real life will have a difficult time actually capturing that premium. Mostly time period related reasons and using less than optimal investment vehicles. The "real life" vs. "Ivory Tower" argument is a much better argument. The actual numbers show that Bogle is, was, and will likely continue to be wrong on this issue. Or maybe we haven't seen the mean reversion yet.
Some more looking around will find more discussion on the topic including Mr. Swedroe himself weighing in on different threads. Triceratop makes good comments too.
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Re: Is Small Value Still A Winner?

Post by Taylor Larimore »

nedsed wrote:Taylor, Mr. Bogle's "Telltale Chart" speech has been pretty effectively debunked. Indeed our own Siamond has done work on this and it contradicts Bogle's assertions.
nedsed:

I am not smart enough to know whether Mr. Bogle or Siamond is correct. I DO know it probably doesn't matter:
"Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea." -- Bill Schultheis, adviser and author of The Coffeehouse Investor
Best wishes.
Taylor
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Re: Is Small Value Still A Winner?

Post by steve321 »

Taylor Larimore wrote: Thu Nov 01, 2018 3:40 pm
nedsed wrote:Taylor, Mr. Bogle's "Telltale Chart" speech has been pretty effectively debunked. Indeed our own Siamond has done work on this and it contradicts Bogle's assertions.
nedsed:

I am not smart enough to know whether Mr. Bogle or Siamond is correct. I DO know it probably doesn't matter:
"Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea." -- Bill Schultheis, adviser and author of The Coffeehouse Investor
Best wishes.
Taylor
Taylor Larimore,
please, can you kindly explain why one should dismiss Meb Faber's advice based on the bad performance of his ETF during the last 3 years (as you implied in your reply to my OP on market cap weighting yesterday) since like you say past performance has no correlation to future performance?
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Re: Is Small Value Still A Winner?

Post by nedsaid »

Taylor Larimore wrote: Thu Nov 01, 2018 3:40 pm
nedsed wrote:Taylor, Mr. Bogle's "Telltale Chart" speech has been pretty effectively debunked. Indeed our own Siamond has done work on this and it contradicts Bogle's assertions.
nedsed:

I am not smart enough to know whether Mr. Bogle or Siamond is correct. I DO know it probably doesn't matter:
"Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea." -- Bill Schultheis, adviser and author of The Coffeehouse Investor
Best wishes.
Taylor
Hi Taylor:

The three fund portfolio is perfectly A-OK. It is a very good portfolio and has been beating the Small/Value tilted portfolios over the last 10 years. Not surprising as we have seen a US Large Growth Stock Market for a decade now. In fact, a two fund portfolio with just US Total Stock Market and Total Bond market would have beaten the three fund portfolio as International has also lagged.

As I have been joking, a one fund portfolio with just the S&P 500 would have beaten them all. What the heck did we need bonds for anyways? :wink: I also have been joking that if the market takes a big tumble, the forum might be down to the Zero Fund Portfolio and we will all be hiding in CDs. There is a point to be made about diversification, smart investors do it anyways despite more recent asset class performance.

I am just saying that the academic research and Siamond's own work has shown that the Small/Value effect is pretty dramatic. I looked at Siamond's charts and others and it certainly caused my eyebrow to rise.

Bogle, in my view, was wrong to say the effect didn't exist. What he could have said and in fact did say was that in the real world that investors would have a hard time capturing it. The thing is, it wasn't easy to capture market returns either as retail index funds didn't exist until the mid-1970's. No matter how much you loved the S&P 500 or its predecessors, you couldn't have invested in it until Bogle introduced the first retail version of the S&P 500. So he made good points but he made a mistake dismissing the evidence. Small Value funds were awfully hard to find in 1926 but so were S&P 500 index funds. :wink:

It pretty much boils down to whether one believes in the academic research and if one believe that the broad market indexes can be beaten with factor tilting. It is perfectly logical to just take what the markets give you. I am willing to try to get a bit extra return, my guess is that an extra 0.50% to 1.00% a year is doable. Not aware of any research that says that long term that Small Value underperforms the broad market. I think it is a risk worth taking.

Furthermore, it seems logical to not only diversify across asset classes but also across factors. In the old days, we used to call them investment styles. You can't help but notice that Growth and Value take turns outperforming each other. Ditto with Large and Small. Same with US and International. Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.

Mr. Bogle is pretty darned smart and he isn't the only one who is dubious about factors. Wanted to point out there is a good case that disagrees with the conclusions of his "Telltale Chart" speech.

It is sort of a Yankees vs. Red Sox or a "Taste's Great" vs. "Less Filling."

By the way Taylor, you are plenty smart.
A fool and his money are good for business.
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ClosetIndexer
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Re: Is Small Value Still A Winner?

Post by ClosetIndexer »

nedsaid wrote: Thu Nov 01, 2018 5:52 pmFurthermore, it seems logical to not only diversify across asset classes but also across factors. In the old days, we used to call them investment styles. You can't help but notice that Growth and Value take turns outperforming each other. Ditto with Large and Small. Same with US and International. Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
I was with you up until here. The total stock market is, by definition, diversified between value and growth, and between small and large. When you tilt to value, you're tilting away from growth, not diversifying between the two. Ditto small and large. The diversification you're adding is, rather, additional sources of risk and return (risk factors) besides market beta (and term/credit on the bond side).
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Re: Is Small Value Still A Winner?

Post by vineviz »

ClosetIndexer wrote: Sat Nov 03, 2018 4:36 am
nedsaid wrote: Thu Nov 01, 2018 5:52 pmFurthermore, it seems logical to not only diversify across asset classes but also across factors. In the old days, we used to call them investment styles. You can't help but notice that Growth and Value take turns outperforming each other. Ditto with Large and Small. Same with US and International. Diversifying across Value and Growth, Small and Large should give you a less volatile portfolio. You can't get this with a Total Market Index, you need to tilt to get factor diversification.
I was with you up until here. The total stock market is, by definition, diversified between value and growth, and between small and large. When you tilt to value, you're tilting away from growth, not diversifying between the two. Ditto small and large. The diversification you're adding is, rather, additional sources of risk and return (risk factors) besides market beta (and term/credit on the bond side).
This is a common misperception.

The market portfolio has many important characteristics, but it is not the most diversified portfolio. It is trivially easy to construct a portfolio that is more diversified than the total stock market.

Since “growth” is not a true risk factor, it may be that some definitions arbitrarily classify it as the opposite of value but that’s more of a tautological approach than a technical approach to diversification.
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Re: Is Small Value Still A Winner?

Post by betablocker »

Seems like we need to distinguish some terms. Total stock market is more diversified in some ways or deworseified. The goal of factor investors isn’t diversification alone. It’s diversification to factors with positive expected returns. As this chart shows (https://www.factorresearch.com/research ... mpics-2017), factors outperform and underperform depending on the year. I would not want to diversify to just market, value and size. I want momentum and quality as well. but I don’t want growth because it has historically underperformed over long cycles even while it can outperform during short periods.
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Re: Is Small Value Still A Winner?

Post by vineviz »

betablocker wrote: Sat Nov 03, 2018 9:20 am Seems like we need to distinguish some terms. Total stock market is more diversified in some ways or deworseified. The goal of factor investors isn’t diversification alone. It’s diversification to factors with positive expected returns.
Total stock market is "more diversified" than what?

Diversification is a function of asset volatility, asset correlations, and asset weights. Many people assume that the total stock market is the MOST diversified portfolio possible, but I suspect we both know that isn't the case. I was merely pointing that out.

For what its worth, I don't think ANY rational investor has a goal of "diversification alone".

Diversification, at its most broad definition, is just the process of managing risk. Every investor is seeking to balance the risk (which they control through diversification) and return .
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: Is Small Value Still A Winner?

Post by JoMoney »

"Diversification" is a strategy to mitigate risk.
Factor investors intentionally increase their risk in hopes of chasing returns they believe are represented in some risk/return factor model.
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Re: Is Small Value Still A Winner?

Post by vineviz »

JoMoney wrote: Sat Nov 03, 2018 9:44 am "Diversification" is a strategy to mitigate risk.
Factor investors intentionally increase their risk in hopes of chasing returns they believe are represented in some risk/return factor model.
I seriously doubt that all "factor investors" are doing things more similarly than all Boglehead investors are.

Still, I suspect the thing that is being implied here is based on a misunderstanding of both diversification and factor investing.

Diversification involves something more than an attempt to "mitigate" risk. After all, an investor could reduce risk by simply holding a portfolio entirely comprised of 30 day treasury bills. Rather, diversification is an attempt to balance the risk of a portfolio across multiple uncorrelated sources of risk.

All investors take on risk to improve their expected returns, whether they are "factor investors" or not. There is no basis for presuming that most factor investors are actually taking on MORE risk than other investors. In fact I suspect that most factor investors are simply more aware of the risks they are taking than other investors are.
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Re: Is Small Value Still A Winner?

Post by JoMoney »

vineviz wrote: Sat Nov 03, 2018 9:55 am
JoMoney wrote: Sat Nov 03, 2018 9:44 am "Diversification" is a strategy to mitigate risk.
Factor investors intentionally increase their risk in hopes of chasing returns they believe are represented in some risk/return factor model.
I seriously doubt that all "factor investors" are doing things more similarly than all Boglehead investors are.

Still, I suspect the thing that is being implied here is based on a misunderstanding of both diversification and factor investing.

Diversification involves something more than an attempt to "mitigate" risk. After all, an investor could reduce risk by simply holding a portfolio entirely comprised of 30 day treasury bills. Rather, diversification is an attempt to balance the risk of a portfolio across multiple uncorrelated sources of risk.

All investors take on risk to improve their expected returns, whether they are "factor investors" or not. There is no basis for presuming that most factor investors are actually taking on MORE risk than other investors. In fact I suspect that most factor investors are simply more aware of the risks they are taking than other investors are.
Yes, your misunderstanding of "Diversification" and it's purpose is the cause for lots of confusion.
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Re: Is Small Value Still A Winner?

Post by betablocker »

I’d also say that all investors are factor investors. Maybe you only invest in the market and duration factors.
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Re: Is Small Value Still A Winner?

Post by vineviz »

JoMoney wrote: Sat Nov 03, 2018 9:58 am Yes, your misunderstanding of "Diversification" and it's purpose is the cause for lots of confusion.
What, precisely, do you disagree with? I'm sorry for confusing you, but I'm happy to try to improve your understanding if I can.
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Re: Is Small Value Still A Winner?

Post by siamond »

nedsaid wrote: Thu Nov 01, 2018 5:52 pmI am just saying that the academic research and Siamond's own work has shown that the Small/Value effect is pretty dramatic. I looked at Siamond's charts and others and it certainly caused my eyebrow to rise.
Thank you for the reference, nedsaid.

For the OP and other readers of this thread, here is the blog entry where I updated the Bogle's Telltale chart for Small-Cap-Value (and more) and provided more analysis of past (US) returns, including various risk ratios and annualized premiums for rolling periods of 30 years. Here are the observations I made by then:

  • Only MCV and SCV displayed a clear & sustained premium over TSM, which keeps increasing over time thanks to occasional spurts of accelerated growth (early 40s, late 60s, late 70s, early 2000s).
  • LCV didn’t display much of a premium, it is the only asset class that seems to ‘return to the mean’ (if the mean is defined as US Total Market).
  • SCB displayed a nice premium, but mostly due to two time periods (early 40s and late 70s). It stayed roughy on par with TSM for two periods of more than 30 years.
  • The MCV trajectory was quite remarkable, with a strong premium, but less of a roller coaster than SCV.
    There were long periods of time (decade or more) during which MCV or SCV underperformed or did not display any advantage, strongly challenging the fortitude of value investors.

Now, when exploring such a hypothesis, the right thing to do is to look for 'out of sample' tests. The always excellent authors of the annual Credit Suisse Global Investment Returns Yearbook 2017 performed a full study of factor (inc. SCV) investing for the various countries they studied. Unfortunately, the public version ('highlights') of their paper doesn't provide much information besides the fact that in the UK, the SCV effect was even stronger than in the US. If somebody has a paper copy of the integral 2017 yearbook and could share some real highlights, this would be appreciated. I would be very surprised if the updated study would contradict their previous findings on the topic though. I also ran a test for Japan myself since 1980 (public data is available from Nomura) and findings were similar.

Bottomline: the historical evidence appears very strong, albeit stomach-churning. Now will this premium persist and will real-life index funds truly capture it (notably Vanguard with their new reliance on the CRSP indices), I am like anybody else, I don't have a crystal ball...

PS. I was convinced enough by historical data to decide to allocate 10% of my own asset allocation to (US) SCV and 10% to (US) MCV, and I'll try to stick to it on the long run. The lack of premium in the past decade didn't faze me given the past history (and also given the amazing premium of the previous decade). We shall see...
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Re: Is Small Value Still A Winner?

Post by JoMoney »

Regarding Telltale Charts, since it was brought up, I thought I should point out if anyone else is interested in them that if you create an account on PortfolioVisualizer.com and upload a custom asset that has 0% return , you can then use the 'Backtest Portfolio' feature to create your own "Telltale Charts" for funds.

For example, here's a chart I created that is the small-cap fund DFSCX 100% , and subtracting the S&P 500 Fund VFINX -100% ... I have to add a third asset, my zero-return asset at 100% so the total equals 100
Image
Over this period, from 1985 through August 2018 (I need to update my Zero-Return asset to extend past August) you can see the lack of any "Premium" between these funds.
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Re: Is Small Value Still A Winner?

Post by Random Walker »

I believe all the factors are stronger in small stocks: value stronger in small, momentum stronger in small, profitability stronger in small. People have argued whether or not there is a risk premium associated with size. I believe there is. Whether there is or not though, one could rationally tilt to size for the sake of possible risk premium and likely strength of the other factors in small.

Dave
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