S/V tilting during this crisis (6/30/2009 update)

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Henry Sadovsky
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S/V tilting during this crisis (6/30/2009 update)

Post by Henry Sadovsky » Fri Oct 31, 2008 4:05 am

.

7/1/2009 update: http://www.bogleheads.org/forum/viewtop ... 142#506142

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5/31/2009 update: http://www.bogleheads.org/forum/viewtop ... 723#483723

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2/28/2009 update: http://www.bogleheads.org/forum/viewtop ... 153#414153

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1/31/2009 update: http://www.bogleheads.org/forum/viewtop ... 137#390137

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12/31/2008 update: http://www.bogleheads.org/forum/viewtop ... 400#374400

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12/3 update: http://www.bogleheads.org/forum/viewtop ... 918#343918
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Image

This is as far back as I could go with this particular charting tool. The three funds graphed, and their cumulative returns for the two periods selected (not including distributions)are:
  • Vanguard 500 Index: +35.4%/ -14.9%.
    DFA LV Index: +78.2%/ -5.0%
    DFA SV Index: +163%/ +40%.
Of note, the large advantage that S/V tilting enjoyed over the market portfolio from 1/99, to the beginning of the credit crisis in the summer of 2007, has been largely reduced in the past 1.5 years. Those who initiated S/V tilting since 2004 have enjoyed no advantage whatsoever. Will this recession completely wipe out the S/V advantage of the early 2000-2010 decade? Will S/V lead the charge out of this bear market?

Time will tell...


H.

Edited

Edited 11/21/2008 to add (11/21 update to title) and to correct 2002 to 2004.

Edited again 11/21/2008 to change title to "S/V tilt during this crisis." With the markets having deteriorated further since this thread was started, I feel that the original title ("How now S/V tilting enthusiasm") is no longer clever (assuming it ever was)".

Edited 12/3 to announce 12/3 update (with link).

Edited 1/12/2009 to announce 12/31/2008 update (with link)

Edited 1/31/2009 to announce 1/31/2009 update (with link)

Edited 2/28/2009 to announce update (with link)

Edited 5/30/2009 to announce update (with link)

Edited 7/1/2009 to announce update (with link)
Last edited by Henry Sadovsky on Wed Jul 01, 2009 5:31 pm, edited 8 times in total.
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Post by Karamatsu » Fri Oct 31, 2008 4:38 am

I thought I recognized the car ;-) How have you been? I suppose you could derive some useful views by going back and looking at periods with similar long-term credit woes, but you'd need to ensure that the data wasn't polluted by survivor bias. My working hypothesis has always been that SV enhanced returns resulted mainly from the risk of failure or continued underperformance -- so just the kind of companies that would likely be purged from datasets.

In a credit crunch, you'd kind of expect whatever characteristics made an SV company "V" to be exacerbated, since they'd be the last places a bank would want to lend to and their customers might well dry up. But in truth that can only be determined by analyzing them individually. Sometimes small firms are so resilient... they can cut costs and turn on a dime, while large monsters are more like trying to turn an oil tanker with a canoe paddle.

I've wondered lately if the best class right now wouldn't be profitable LV, moving into SV later on after we've found the bottom of this mess. If we're going to have a default wave next year, it seems like SV probably wouldn't be where you want to be until some of the dust settles.

But that said, I'm not changing my AA. I just enjoy thinking about it. I love the fact that, in hindsight, everything seems so clear, yet in real-time it's of no value at all. It appeals to my sense that this life is some kind of perverse joke.

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Post by dumbmoney » Fri Oct 31, 2008 5:01 am

Large caps look pretty good to me. Even tech stocks have decent dividend yields now - Intel at 3.7%, for example. Of course earnings will be depressed as long as the recession continues.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.

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Post by larryswedroe » Fri Oct 31, 2008 7:19 am

Henry

Keep in mind that if you tilt to sv you can lower beta exposure while keeping expected return the same. So that has helped a lot during periods like this.

Also as you would expect small and value should underperform during such periods or there would be no risk, and thus no risk premium

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Post by Derek Tinnin » Fri Oct 31, 2008 7:36 am

This is a silly example of data mining and confuses outcome with strategy. Would you abandon the equity risk premium in light of the fact that the S&P 500 shows substantial underporfmance relative to bonds since May 30, 2007? Please use the same chart service to compare VFINX and VBMFX over those exact same time frames and let us know your conclusions...

Are stocks riskier than bonds? yes
Are small cap stocks riskier than large cap? yes
Are value stocks riskier than growth stocks? yes

Are risk and return related? yes...

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Post by richard » Fri Oct 31, 2008 8:38 am

Derek Tinnin wrote:Are stocks riskier than bonds? yes
Are small cap stocks riskier than large cap? yes
Are value stocks riskier than growth stocks? yes
That stocks are riskier than bonds is clear, given their terms

On what metric are S and V riskier? (this issue has come up once or twice)

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Post by Derek Tinnin » Fri Oct 31, 2008 8:46 am

richard wrote:
Derek Tinnin wrote:Are stocks riskier than bonds? yes
Are small cap stocks riskier than large cap? yes
Are value stocks riskier than growth stocks? yes
That stocks are riskier than bonds is clear, given their terms

On what metric are S and V riskier? (this issue has come up once or twice)
Would you think a startup microcap company or a company with a bad balance sheet has no more risk than Microsoft?

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Post by Derek Tinnin » Fri Oct 31, 2008 9:01 am

richard wrote:
Derek Tinnin wrote:Are stocks riskier than bonds? yes
Are small cap stocks riskier than large cap? yes
Are value stocks riskier than growth stocks? yes
That stocks are riskier than bonds is clear, given their terms

On what metric are S and V riskier? (this issue has come up once or twice)
Here are a few more studies on this topic:

http://papers.ssrn.com/sol3/papers.cfm? ... erDownload

http://phys.columbia.edu/~oleg/economic ... french.pdf

http://mba.tuck.dartmouth.edu/pages/fac ... odelV4.pdf

http://www.aqr.com/Research/ValMom%20AMP_20080710.pdf

http://weatherhead.case.edu/academics/d ... d-finance/

http://www.dfaus.com/library/articles/e ... wth_stock/

Other than common sense, the evidence supporting size/value premiums is rather obvious.

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Post by richard » Fri Oct 31, 2008 9:07 am

That was not the question. How is SV riskier? For example, do SV firms declare bankruptcy more often?

Startups may be riskier because they are new. "Bad balance sheet" is not very precise.

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Post by Derek Tinnin » Fri Oct 31, 2008 9:22 am

richard wrote:That was not the question. How is SV riskier? For example, do SV firms declare bankruptcy more often?

Startups may be riskier because they are new. "Bad balance sheet" is not very precise.
I know Henry may disagree with this concept, but think about it in terms of a company's cost of capital. Would a company with a bad balance sheet be able to borrow (obtain capital) on the same terms as a company with a clean balance sheet? The market prices one lower than the other to essentially differentiate companies that have good "credit scores" form those that don't. The lower the price, the higher the expected return. The market uses prices to incent potential buyers.

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Post by mike_slc » Fri Oct 31, 2008 9:26 am

richard wrote:That was not the question. How is SV riskier? For example, do SV firms declare bankruptcy more often?

Startups may be riskier because they are new. "Bad balance sheet" is not very precise.
There are two risk premiums - small and value. Small is easy to understand - small companies have less access to capital and less diversification in customers and lines of business. A small company should be considered less "stable" (i.e. more risky) than a big company.

The value premium is a bit more amorphous, but you can think of value stocks as companies whose market price has been beaten down relative to their fundamental (book) price. This could be because they are in a state of distress, which means they are riskier. If you buy them and they turn things around then you will be compensated for taking that risk, but they could just as easily go the other way.

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Post by richard » Fri Oct 31, 2008 9:37 am

I am asking for specific metrics to back up the claim that S and V are riskier.

You both are answering with vague motivations for the idea, not anything testable.

Unless I've missed something recently, Fama and French have consistently been unable to answer the question beyond saying that SV has had higher returns, higher returns are associated with higher risk, therefore SV is riskier. You will note a certain circularity to this answer. The cost of capital story is just another version of the same answer.

Do you have any empirical studies of the cost of debt capital of SV companies?

By the way, a sizable number of SV fans say the premium is a free lunch, which is not a risk story.

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Post by larryswedroe » Fri Oct 31, 2008 9:46 am

Richard

As you probably know there are many studies showing very specific and logical explanations for the value as a risk story.

My books have gone into them in detail and I have posted on them as well

Now there are also some behavioral explanations as well.

So my conclusion is that it is some of both, not a free lunch but perhaps a free stop at the dessert tray

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Post by Karamatsu » Fri Oct 31, 2008 9:50 am

So that is what I think it comes down to. As a class, SV outperforms (when it does) if and only if the returns of those that turn around (or rise for the first time) outweigh the losses of those that fail, while the ones that remain stagnant essentially do nothing but contribute ballast to reduce the dispersion. Given that and what people have been saying, it makes sense that SV might have a harder time outperforming when credit is tight, though there may be subclasses of SV that are at greater risk than others. The question is whether these are identifiable, and if so, whether the metrics used to form a given index differentiate between them. My guess is no, since otherwise there would be consistently outperforming SV funds that employ the same metrics. Fascinating.

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Post by BlueEars » Fri Oct 31, 2008 10:34 am

larryswedroe wrote:Richard
As you probably know there are many studies showing very specific and logical explanations for the value as a risk story.

My books have gone into them in detail and I have posted on them as well
Larry, when I look at recessions like 1973-74 and 2000-2002 the SV risk does not seem to show up in very dramatic underperformance versus say, SP500. For instance, in 1973 SV underperformed by 11.3% but then in 1974 it outperformed by 8.3%. Of couse, in 2000-2002 it SV outperformed by a wide margin because of the growth stock bubble.

So where has the SV risk story shown up? I don't see any data in your Winning Investment Strategy book on this riskiness.

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Post by richard » Fri Oct 31, 2008 10:35 am

Larry, we have discussed this at great length over the years and there has been a lot written on the subject from many perspectives.

Derek and Mike are claiming it's a risk story, which makes SV less fun than if it is a free desert. The trouble with risk stories is that the risk may show up. Taking excess risks makes sense if you don't have the risk profile of the average investor (e.g., tech workers should probably underweight tech), otherwise, it seems risky.

If it's a behavioral or other free desert, and it will continue, then everyone should load up. Of course, everyone loading up would decrease the effect.

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Post by Derek Tinnin » Fri Oct 31, 2008 10:40 am

richard wrote:I am asking for specific metrics to back up the claim that S and V are riskier.

You both are answering with vague motivations for the idea, not anything testable.

Unless I've missed something recently, Fama and French have consistently been unable to answer the question beyond saying that SV has had higher returns, higher returns are associated with higher risk, therefore SV is riskier. You will note a certain circularity to this answer. The cost of capital story is just another version of the same answer.

Do you have any empirical studies of the cost of debt capital of SV companies?

By the way, a sizable number of SV fans say the premium is a free lunch, which is not a risk story.
I have posted a few studies above that tell a compelling story. Do you have any empirical studies that show how the premium has been a free lunch and why it should disappear now (even though is hasn't in the face of a couple of decades of popularity)?

Evidence is great, but evidence alone doesn't really cut it. You need economic logic. How would the economy function in your world, where size and profitability are ignored in the prices of securities? Is that good economic logic?

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Post by Derek Tinnin » Fri Oct 31, 2008 10:48 am

richard wrote:Of course, everyone loading up would decrease the effect.
Why shouldn't this same logic apply to the equity risk premium and not just size or value? Like skydiving, certain risks do not go away with popularity.

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Post by Sunny Sarkar » Fri Oct 31, 2008 10:55 am

Two things to always keep in mind for a SV tilt...

1. Expect extended periods of negative tracking error vs TSM. This is a problem because when TSM does well, it's always "on your face" as everyone everywhere talks about how great the market is doing. OTOH when SV does better, you may not even notice unless you frequent this forum and find 50% of the posts asking how to best tilt towards SV.

2. Don't expect SV premium to be a certainty over any specific investment period. Heck, even equity premium is not certain (1965-1981) although we often get into the trap of treating them as such.

That's my point of view, but I'm a biased TSM-er :-)

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Post by Derek Tinnin » Fri Oct 31, 2008 10:57 am

richard wrote:The trouble with risk stories is that the risk may show up.
Exactly. On that we can agree. Tilting is risky.

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Post by ziggy29 » Fri Oct 31, 2008 11:02 am

Sunny wrote:Two things to always keep in mind for a SV tilt...

1. Expect extended periods of negative tracking error vs TSM. This is a problem because when TSM does well, it's always "on your face" as everyone everywhere talks about how great the market is doing. OTOH when SV does better, you may not even notice unless you frequent this forum and find 50% of the posts asking how to best tilt towards SV.)

Indeed -- in the 2000-2002 large-cap bear market, SV was up pretty sharply even while TSM was melting. For those who overweighted small value in their portfolios, 2000-02 probably wasn't too bad if they didn't also overweight tech.

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Post by dumbmoney » Fri Oct 31, 2008 11:11 am

Derek Tinnin wrote:
richard wrote:Of course, everyone loading up would decrease the effect.
Why shouldn't this same logic apply to the equity risk premium and not just size or value? Like skydiving, certain risks do not go away with popularity.
Everyone cannot overweight small and value. There is zero net supply of these synthetic "asset classes".

Everyone can buy stocks, of course. There's a supply.
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.

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Post by SmallHi » Fri Oct 31, 2008 11:44 am

Of note, the large advantage that S/V tilting enjoyed over the market portfolio from 1/99, to the beginning of the credit crisis in the summer of 2007, has been largely reduced in the past 1.5 years.
--Personal attack deleted by moderator--

1/99-9/08 Annualized Returns

Code: Select all

S&P 500 = +1.1%
MSCI 1750 Value = +9.4%

SV premium = +8.3%
Doesn't seem to be "largely reduced" to me?

As for the risk? Here is a quiz:

We have had 8 brutal bear markets in the last 80 years*. One dimension of the market (between S&P 500 and SV) has lost more in 7 or these 8 downturns, and its average loss is about (32%) annualized vs. (21%) annualized.

Which dimension is this? And how much of a return premium should you expect to take that risk? Here is a hint, as Sharpe explained this as well as any:

“Some investments do have higher expected returns than others. Which ones? Well, by and large they’re the ones that will do the worst in bad times.” - William F. Sharpe Nobel Laureate in Economics, 1990, Stanford Professor of Economics

sh

*9/29-5/32, 4/37-5/40, 12/68-6/70, 3/72-12/74, 9/89-10/90, 5/98-8-98, 4/00-3/03, 7/07-10/08

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BlueEars
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Post by BlueEars » Fri Oct 31, 2008 12:27 pm

SH, when you post the answer could you also post the comparitive data for the *'d periods at least. I'd like to save it for reference, thanks.

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my view

Post by Will M » Fri Oct 31, 2008 1:07 pm

My US stocks are 75% Total market & 25% scv.
My foreign stocks are 100% world ex US as I have found no acceptable foreign scv fund or etf.
I do think that scv is riskier than total market BUT it does reduce bubble risk.

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Post by Henry Sadovsky » Fri Oct 31, 2008 1:47 pm

Hi Derek.
Derek Tinnin wrote:
I know Henry may disagree with this concept, but think about it in terms of a company's cost of capital.
I actually agree fully with the concept. Companies that have more volatile histories, and/or range of prospects, should have higher cost of capital than those with less volatile ones. So... cost of capital, and expected return, should reflect that greater volatility. The problem with the S/V "risk story" is that historical returns have far exceeded what would have been predicted by price volatility as the risk measure. What then is the correct risk measure?

In any event, the above has not much to do with the questions raised in the OP.

H.
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Henry Sadovsky
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Sure... ignore the last two months.

Post by Henry Sadovsky » Fri Oct 31, 2008 2:01 pm

SmallHi wrote:
1/99-9/08 Annualized Returns

Code: Select all

S&P 500 = +1.1%
MSCI 1750 Value = +9.4%

SV premium = +8.3%
The OP compared two periods: 1/1/1999 - 5/30/2007, and 1/1/99 - 10/30/2008. Your data is silent on both the first period, and on the past two months.

H.


Edited
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Post by Derek Tinnin » Fri Oct 31, 2008 2:12 pm

Henry Sadovsky wrote:The problem with the S/V "risk story" is that historical returns have far exceeded what would have been predicted by price volatility as the risk measure. What then is the correct risk measure?
Hi Henry,

In this study:

http://mba.tuck.dartmouth.edu/pages/fac ... odelV4.pdf

They attempt to answer your question:
"We have examined two tools to help investors understand the risk/reward tradeoff which they face when making investments. We first introduced the CAPM, with its inherent simplicity, linking market covariance risk to expected returns. Its simplicity helps to build intuition around the concept of modeling return as a function of risk. The CAPM’s simplicity is also its greatest shortcoming, as the underlying assumptions limit its ability to explain and predict actual returns. The Fama-French Three-Factor Model expands the capabilities of the model by adding two company specific risk factors - SMB and HML. The three factors in concert explain most of the returns due to risk exposure."

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Post by Rodc » Fri Oct 31, 2008 2:13 pm

I'm confused about the question.

I have not looked in detail at the performance of various funds, but the three US funds I own, Vanguard TSM, large value and small value over the last 12 months are extremely close with SV out in front by a hair and large value last by a hair.

YTD (converging on the 12 month numbers of course), show all three pretty close as well, but not quite as close, with SV in front by 3% and the other two in a near tie.

I see nothing in the near past to be alarmed about. No miracle of diversification or out performance to be sure.

I did not look at the most recent month or the most recent week (in isolation), maybe that is more exciting? Wouldn't surprise me with the recent volatility, but I'm not sure I should worry much about weekly or monthly data.
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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And the risk definitions are...?

Post by Henry Sadovsky » Fri Oct 31, 2008 2:27 pm

Hi Derek.
Derek Tinnin wrote:
In this study:

http://mba.tuck.dartmouth.edu/pages/fac ... odelV4.pdf

They attempt to answer your question:
The Fama-French Three-Factor Model expands the capabilities of the model by adding two company specific risk factors - SMB and HML. The three factors in concert explain most of the returns due to risk exposure."
I'm very familiar with the work of Fama and French. I challenge you to pick a company, or group of companies, and quantify their HmL and SmB "risks". You know full well that these are not "risks" at all- they are simply correlates of historical returns. Since when does correlation imply causality?

Again, all this is interesting, but it has little to do with the OP.


H.


Edited.
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Re: And the risk definitions are...?

Post by Derek Tinnin » Fri Oct 31, 2008 2:47 pm

Henry Sadovsky wrote:Hi Derek.
Derek Tinnin wrote:
In this study:

http://mba.tuck.dartmouth.edu/pages/fac ... odelV4.pdf

They attempt to answer your question:
The Fama-French Three-Factor Model expands the capabilities of the model by adding two company specific risk factors - SMB and HML. The three factors in concert explain most of the returns due to risk exposure."
I'm very familiar with the work of Fama and French. I challenge you to pick a company, or group of companies, and quantify their HmL and SmB "risks". You know full well that these are not "risks" at all- they are simply correlates of historical returns. Since when does correlation imply causality?

Again, all this is interesting, but it has little to do with the OP.


H.


Edited.

OK. I will rely on economic logic and you can continue your search for specific measures in current data. I am certain you are not alone in your quest and if data beyond F/F exists, it will surely show up. It does seem odd, however, that F/F has not been disproven yet after all this time...

To address one of the questions in the OP, we have some evidence that growth will do better in declining rate environments. If you feel we are ultimately in store for higher rates, perhaps a tilt to value is in order. I personally will not attempt to time my entries on tilts.

http://www.mscibarra.com/resources/pdfs ... y_2008.pdf

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Simply a snapshot...

Post by Henry Sadovsky » Fri Oct 31, 2008 2:54 pm

Rodc wrote:
I have not looked in detail at the performance of various funds, but the three US funds I own, Vanguard TSM, large value and small value over the last 12 months are extremely close with SV out in front by a hair and large value last by a hair.
Image

Since this financial crisis started (summer 2007), U.S. SmValue has decline about 15% more so than has the U.S. market portfolio. (~40% vs ~35%). I am simply marking this point in time, and focusing on relative performance from this point forward. Who knows- if SV takes a severe beating (relative to TSM) over the next months/years, perhaps it would present a good opportunity for tilting virgins?

H.
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Re: Simply a snapshot...

Post by Rodc » Fri Oct 31, 2008 2:59 pm

Henry Sadovsky wrote:
Rodc wrote:
I have not looked in detail at the performance of various funds, but the three US funds I own, Vanguard TSM, large value and small value over the last 12 months are extremely close with SV out in front by a hair and large value last by a hair.
Image

Since this financial crisis started (summer 2007), U.S. SmValue has decline about 15% more so than has the U.S. market portfolio. (~40% vs ~35%). I am simply marking this point in time, and focusing on relative performance from this point forward. Who knows- if SV takes a severe beating (relative to TSM) over the next months/years, perhaps it would present a good opportunity for tilting virgins?

H.
Thanks Henry.

Hard to know what to make of 6% when we have days that go up and down that much in one day. Craziness. Right now yahoo has SV up 3.5% and TSM up 0.9%, but who knows what it will do in the last 5 minutes. I can't look now or I'd have to edit my post, because surely it has changed as I type. :)

History certainly has other times, very long times, as well when value or small under performed. So off hand I don't see where this is outside of what we might expect.

Rod
We live a world with knowledge of the future markets has less than one significant figure. And people will still and always demand answers to three significant digits.

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Post by Derek Tinnin » Fri Oct 31, 2008 3:16 pm

In any given rolling period, value has historically outperformed the S&P 500 about 60% of the time at one year intervals. After 10 years, it's about 75% of the time. After 20 years it's a little more than 80%, after 30 years it's over 90%, and after 40 years it's 98%.

Small outperformed less than 60% of the time for periods less than 10 years. After 10 it was 66%, after 20 its was 85%, after 30 it was 94%, and after 40 years it was 100%.

So I'm not sure what conclusions you can draw by looking at periods of less than 2 years. I would have expected value and small to underperform in this environment anyway. It is certainly not uncommon for tilts to not work for several years in a row. Tilting is truly for those with a long-term mindset who can put up with sometimes years of underperformance relative to TSM. The outcome of recent history is interesting, but doesn't really imply anything.

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The challenge?

Post by Henry Sadovsky » Fri Oct 31, 2008 3:28 pm

.
Hi Derek.
Derek Tinnin wrote:It is certainly not uncommon for tilts to not work for several years in a row. Tilting is truly for those with a long-term mindset who can put up with sometimes years of underperformance relative to TSM. The outcome of recent history is interesting, but doesn't really imply anything.
Thank you. I agree fully with that.

H.


P.S. What about that challenge I posed you?
"What we can't say we can't say, and we can't whistle it either." | Frank P. Ramsey" | | (f.k.a. Zalzel)

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Mistakes

Post by SmallHi » Fri Oct 31, 2008 3:42 pm

Zalzel,

let me point out your mistakes:

1) My data covers the entire period, up until 1 month ago. Not "2 months ago". All the info you need to realize how silly your OP was.

2) The total return for DFSVX from 1/99 through 10/30/08 is +110.97%, and +290.41% through 5/07 including distributions -- which are part of the return. No reason to exclude them, that alone would have been enough reason to ignore your comments.

3) as my data showed you (regardless of the SV bogey), the "advantage" has not been "largely reduced".

4) there has been a huge advantage to SV over S&P 500 from 1/02 through 10/30/08: S&P 500 = (5.70%); DFSVX = +39.61%. That annualized return advantage is not only significant, its larger than the average outperformance of SV over the S&P 500 for 80 years. To correct you: its above average. And a long way from "no advantage whatsoever".

Thank god for edit, eh? Honestly, I wouldn't blame you if you deleted your OP, its not very good.

sh

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Post by larryswedroe » Fri Oct 31, 2008 4:20 pm

Les the value risk has shown up in virtually every credit/liquidity crisis and check the returns in the Great Depression

The issue is that we have been lucky in that these crisis with except of the Great Depression have been resolved favorably and in short order. That however is just one history, alternative universes might have shown up

HerbertSitz
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Re: And the risk definitions are...?

Post by HerbertSitz » Fri Oct 31, 2008 4:37 pm

Henry Sadovsky wrote:You know full well that these are not "risks" at all- they are simply correlates of historical returns. Since when does correlation imply causality?
Answer: when the correlation involves something more than coincidence. If their correlation arises from anything other than pure chance, then there's some kind of causal relationship between two sets of facts. The correlation may be the result of extra risk, of behavioral anomalies, or some combination of the two. To imply that it's neither of those things, that the correlation is simply a matter of chance, surely must be mistaken. If the implication is that the correlation is caused entirely by behavioral anomalies -- with risk not figuring in at all -- would also be a pretty extreme position.
Last edited by HerbertSitz on Fri Oct 31, 2008 5:35 pm, edited 3 times in total.

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wab
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Re: And the risk definitions are...?

Post by wab » Fri Oct 31, 2008 4:37 pm

Henry Sadovsky wrote: I'm very familiar with the work of Fama and French. I challenge you to pick a company, or group of companies, and quantify their HmL and SmB "risks". You know full well that these are not "risks" at all- they are simply correlates of historical returns. Since when does correlation imply causality?
H, I'm curious if you caught this thread:

http://www.bogleheads.org/forum/viewtopic.php?t=25425

For me, the migration data explains ScV better than some abstract "risks."

We know that ScV funds are basically boxes -- stocks come into the box when they get "small or cheap" and they leave the box when they get "big or expensive." Virtually all of the "premium" comes from this migration into and out of the box. The "risky" stocks that stay in the box contribute very little to the excess return.

My only question is how did these stocks grow from small to large and from cheap to expensive? Was it due to rocket-like earnings growth or does the migration premium simply capture speculative P/E growth? To me, it looks like mechanized market timing. But it should still work going forward. :)

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Henry Sadovsky
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Re: Mistakes

Post by Henry Sadovsky » Fri Oct 31, 2008 6:51 pm

SmallHi wrote:
The total return for DFSVX from 1/99 through 10/30/08 is +110.97%, and +290.41% through 5/07
Or to put it another way: The total return for DFSVX from 1/99 through 5/2007 was +290.41%. From 1/99 to 10/30/08, it has been substantially reduced to +110.97%.

Stay tuned...


H.


P.S. Is an SV bubble deflating?

Edited to add P.S.
Last edited by Henry Sadovsky on Fri Oct 31, 2008 7:16 pm, edited 1 time in total.
"What we can't say we can't say, and we can't whistle it either." | Frank P. Ramsey" | | (f.k.a. Zalzel)

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Henry Sadovsky
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Re: And the risk definitions are...?

Post by Henry Sadovsky » Fri Oct 31, 2008 7:02 pm

.
HerbertSitz wrote:The correlation may be the result of extra risk, of behavioral anomalies, or some combination of the two.
Yup. A reward for risk (in this context) can be expected over the long term. A reward for "correct behavior"? From Wall Street capitalists? How does one factor that into the cost-of-capital-story?

I like free lunches as much as the next guy. I simply wonder if the free lunch component of SV's return can be counted/planned on given that it is now so widely known? That's all. That's my one and only point. Some seem to jump up and down and insist that they know the answer to that. Good for them... maybe.

H.
"What we can't say we can't say, and we can't whistle it either." | Frank P. Ramsey" | | (f.k.a. Zalzel)

Derek Tinnin
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Re: And the risk definitions are...?

Post by Derek Tinnin » Fri Oct 31, 2008 7:12 pm

Henry Sadovsky wrote:I like free lunches as much as the next guy. I simply wonder if the free lunch component of SV's return can be counted/planned on given that it is now so widely known? That's all. That's my one and only point.
It has been widely known for at least a couple of decades. Why didn't it disappear long ago?

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Henry Sadovsky
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Re: And the risk definitions are...?

Post by Henry Sadovsky » Fri Oct 31, 2008 7:32 pm

Derek Tinnin wrote:
Henry Sadovsky wrote:I like free lunches as much as the next guy. I simply wonder if the free lunch component of SV's return can be counted/planned on given that it is now so widely known? That's all. That's my one and only point.
It has been widely known for at least a couple of decades. Why didn't it disappear long ago?
I think that your statement is false. Only ten years ago, very few outside of academia seriously considered that a behavioral (free lunch) component to the SV premium might exist. Many SV tilt proponents, such as yourself, still do not acknowledge this (historical) possibility. Yet, there are undoubtedly multitudes more than there were ten years ago who are acting to capture such a premium.

We shall see... In any event, it is an interesting thing to follow.


H.
"What we can't say we can't say, and we can't whistle it either." | Frank P. Ramsey" | | (f.k.a. Zalzel)

SVariance
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Post by SVariance » Fri Oct 31, 2008 8:11 pm

larryswedroe wrote:Richard

As you probably know there are many studies showing very specific and logical explanations for the value as a risk story.

My books have gone into them in detail and I have posted on them as well

Now there are also some behavioral explanations as well.

So my conclusion is that it is some of both, not a free lunch but perhaps a free stop at the dessert tray
Larry, I have seen your previous posts that indicate you believe that the risk based rationale is only valid rationale. You sound like Kenneth French who now believes that behavioral ressons may also contribute to the premium.

SV

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Post by SVariance » Fri Oct 31, 2008 9:00 pm

Deleted
Last edited by SVariance on Sat Nov 01, 2008 7:48 am, edited 1 time in total.

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Henry Sadovsky
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Re: And the risk definitions are...?

Post by Henry Sadovsky » Sat Nov 01, 2008 1:52 am

wab wrote: We know that ScV funds are basically boxes -- stocks come into the box when they get "small or cheap" and they leave the box when they get "big or expensive." Virtually all of the "premium" comes from this migration into and out of the box. The "risky" stocks that stay in the box contribute very little to the excess return.

(snip) To me, it looks like mechanized market timing. But it should still work going forward. :)
Interesting... I'll look at that paper.

Thanks,

H.
"What we can't say we can't say, and we can't whistle it either." | Frank P. Ramsey" | | (f.k.a. Zalzel)

Trev H
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Choose your tilt...

Post by Trev H » Sat Nov 01, 2008 7:12 am

.
Updated my Data Set back to 1970 with YTD Returns as of 10/31/2008.


01/01/1970 - 10/31/2008

Code: Select all

Year........LCV...........LCG............SCV............SCG..........Market
=============================================================================
Year.....10,000.00.....10,000.00......10,000.00......10,000.00......10,000.00
1970.....11,040.00......9,500.00......10,030.00.......8,140.00.......9,981.00
1971.....12,486.24.....11,780.00......11,474.32......10,052.90......11,578.96
1972.....14,858.63.....14,312.70......12,277.52......10,424.86......13,513.80
1973.....14,323.72.....11,221.16.......9,085.37.......6,348.74......11,042.13
1974.....11,014.94......7,944.58.......7,431.83.......4,228.26.......8,017.69
1975.....17,315.48.....10,661.63......11,482.18.......6,900.52......11,105.30
1976.....24,934.29.....12,559.39......17,636.62.......9,902.25......14,049.32
1977.....25,283.37.....11,341.13......21,481.41......11,912.40......13,432.55
1978.....26,117.72.....12,123.67......26,164.36......14,128.11......14,414.47
1979.....31,471.86.....15,021.23......35,426.54......21,305.19......17,702.41
1980.....39,150.99.....20,969.64......44,424.88......32,447.80......23,457.47
1981.....39,659.95.....18,600.07......51,044.18......29,462.60......22,544.97
1982.....47,591.94.....22,413.08......65,591.78......35,649.75......27,191.49
1983.....61,060.46.....25,999.17......90,910.20......42,815.35......33,121.95
1984.....67,227.57.....25,739.18......93,001.14......36,050.52......34,549.51
1985.....88,404.26.....34,207.37.....121,831.49......47,226.19......45,608.81
1986....106,085.11.....39,475.31.....130,847.02......48,926.33......52,865.17
1987....106,615.53.....41,567.50.....121,556.88......43,789.06......53,663.43
1988....131,350.34.....46,264.63.....157,416.16......52,722.03......63,220.89
1989....164,450.62.....62,873.63.....176,935.76......63,371.88......81,371.60
1990....151,130.12.....62,685.01.....138,363.77......52,345.18......76,334.70
1991....188,308.13.....88,511.23.....196,061.46......79,145.91.....102,677.81
1992....214,294.65.....92,936.79.....253,115.34......85,319.29.....112,545.14
1993....253,617.72.....94,358.72.....313,356.80......96,752.07.....124,497.44
1994....251,766.31.....97,085.69.....308,656.44......94,430.02.....124,285.79
1995....344,768.79....134,036.50.....388,289.81.....123,703.33.....168,767.68
1996....420,135.24....165,856.77.....471,383.82.....137,681.80.....204,141.38
1997....545,209.50....226,129.12.....621,283.88.....155,442.76.....267,404.80
1998....625,028.17....321,578.22.....580,900.43.....157,308.07.....329,603.15
1999....703,594.22....414,064.11.....600,360.59.....188,455.07.....408,081.67
2000....746,372.74....322,100.47.....731,719.49.....191,451.50.....364,947.43
2001....657,703.66....280,452.88.....831,965.06.....189,958.18.....324,912.70
2002....520,177.83....214,041.64.....713,826.02.....160,685.63.....256,811.00
2003....687,935.18....269,521.23.....979,297.92.....229,587.62.....337,321.25
2004....793,120.46....288,926.76...1,209,922.58.....266,459.39.....379,553.87
2005....849,352.70....303,633.13...1,283,364.88.....289,481.49.....402,251.19
2006..1,037,484.33....330,990.48...1,530,284.28.....324,045.58.....464,640.35
2007..1,038,418.06....372,562.88...1,422,093.18.....355,251.16.....490,149.10
2008....697,401.57....248,424.93...1,024.333.72.....230,309.33.....328,988.08
=============================================================================
StDev........18.31.........20.72..........20.64..........24.32..........18.17
CAGR.........11.50..........8.59..........12.60...........8.38...........9.37
Sharpe..........40............23.............39.............22.............28
Correlation.....92............96.............75.............85...........1.00
=============================================================================
Choose your tilt...

Trev H

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Re: And the risk definitions are...?

Post by jhd » Sat Nov 01, 2008 11:14 am

Henry Sadovsky wrote:I simply wonder if the free lunch component of SV's return can be counted/planned on given that it is now so widely known? That's all. That's my one and only point.
Aren't you kind of defeating your own argument? As long as people say "The SV premium is a thing of the past" when it doesn't show up for a few years, then I'm optimistic that it will persist.

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Henry Sadovsky
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Re: Contrarian "-ism"

Post by Henry Sadovsky » Sat Nov 01, 2008 1:30 pm

jhd wrote:
Henry Sadovsky wrote:I simply wonder if the free lunch component of SV's return can be counted/planned on given that it is now so widely known? That's all. That's my one and only point.
Aren't you kind of defeating your own argument? As long as people say "The SV premium is a thing of the past" when it doesn't show up for a few years, then I'm optimistic that it will persist.
Are "people" saying "(t)he SV premium is a thing of the past"? Not on this forum. To be contrarian means to be in the minority. Most aren't!


H.
"What we can't say we can't say, and we can't whistle it either." | Frank P. Ramsey" | | (f.k.a. Zalzel)

SVariance
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Post by SVariance » Sat Nov 01, 2008 2:44 pm

larryswedroe wrote:Les the value risk has shown up in virtually every credit/liquidity crisis and check the returns in the Great Depression

The issue is that we have been lucky in that these crisis with except of the Great Depression have been resolved favorably and in short order. That however is just one history, alternative universes might have shown up
Oddly enough, on a relative basis, SV has outperformed almost every equity asset class this year despite being in a credit crisis.

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