Value investing got too popular for its own good?

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Beliavsky
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Value investing got too popular for its own good?

Post by Beliavsky » Sat May 11, 2019 7:58 am

I think recent returns for an implemented strategy should be thought of as "out-of-sample data" rather than "just noise", although both in-sample and out-of-sample data in finance have considerable noise.

What Warren Buffett’s Teacher Would Make of Today’s Market
Value stocks haven’t performed well for a long time. But Ben Graham’s lessons still matter.
By Jason Zweig
Wall Street Journal
May 10, 2019 11:00 a.m. ET

...

Over the past five years, the S&P 500 Growth index, led by such gazelles as Amazon.com Inc. and Google’s parent, Alphabet Inc., has generated an average 14.2% return annually. The S&P 500 Value index, full of such mastodons as JPMorgan Chase & Co. and AT&T Inc., gained 8.7% annually. At this point, growth has slightly outperformed value over the past 20, 25, 30, 35 and 40 years as well.

That may be partly because giant technology companies seem to be getting even more dominant as they grow bigger, instead of becoming more sluggish. That could mean weaker competitors may no longer be able to recover from setbacks that once would have been temporary—making the turnaround stocks long favored by value investors less likely to turn around.

Or perhaps value investing got too popular for its own good.

...

After technology stocks were crushed in 2000-2002, investors favored safety over growth. In the 10 years through the end of 2014, investors pulled an estimated $273 billion from funds investing in large growth stocks and poured $87 billion into large-company value funds, according to Morningstar. As value went from pariah to crowd-pleaser, its returns went cold.

Meanwhile, fewer investors analyze one value stock at a time by hand. Often, they use computers to buy the value “factor” en masse, capturing cheapness as a common attribute across hundreds of stocks at once.

That has lowered costs for investors. But it has also driven up prices, reducing the supply of bargains among value stocks, says Tano Santos, faculty co-director of the Heilbrunn Center for Graham & Dodd Investing at Columbia Business School.

...

LittleD
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Re: Value investing got too popular for its own good?

Post by LittleD » Sat May 11, 2019 8:16 am

Large and Mid-cap Growth have been in favor since the great recession in 2008. Value has clearly underperformed the S&P in those years. Over the last 50-75 years, Value (small cap value in particular) has usually outperformed the Growth and S&P indexes by about 2% but, Technology stocks have been the investor's choice over the last decade. At some point, Value will come back to the forefront as Growth becomes way overpriced. That is the natural order of the investing environment. No one can tell you when that may occur but, you will be able to see the change take place with monitoring.

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whodidntante
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Re: Value investing got too popular for its own good?

Post by whodidntante » Sat May 11, 2019 8:29 am

There are plenty of growth stocks that I don't want to own because they are awful, cash destroying hobbies with no clear plan to get to profitability. Netflix is great for consumers and Tesla drove EV innovation, but both companies seem doomed to me. Time will tell.

But I also wonder if big tech can repeat their impressive hypergrowth trick. I mean, does Facebook really have another card to play that is as good as the last one? How about Google? What specifically are they going to be able to do to repeat their golden age? Everyone who is able and interested already uses their products, so they seem to have more to lose than to gain.

With value stocks, you don't need a period of hypergrowth. The price and the price appreciation isn't dependent on one. I think it's more likely that we are living through a golden age of large cap growth than the market has suddenly and permanently changed. I don't know where the high water mark will be, but I do think the waters will recede. Let's meet back in 40 years and compare notes.

LittleD
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Re: Value investing got too popular for its own good?

Post by LittleD » Sat May 11, 2019 8:38 am

You have to look at the investing environment of new millennial investors to answer your question. They seem to want to own technology and information which includes the FAANG universe. They are all about the New World Order and the future of "green" climate change investment positioning. Just look at all the money plowing into Crypto and Cannibis stocks. They want whatever is popular on social media and twitter.

Random Walker
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Re: Value investing got too popular for its own good?

Post by Random Walker » Sat May 11, 2019 8:56 am

My understanding is that the value-growth spread in valuations is really no different than about 1994. If value were over grazed, wouldn’t that spread be narrowed? Larry Swedroe has written a few essays covering the subject.

https://www.etf.com/sections/index-inve ... nopaging=1

https://www.etf.com/sections/index-inve ... nopaging=1

https://www.etf.com/sections/index-inve ... s-15-years

Dave

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Earl Lemongrab
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Re: Value investing got too popular for its own good?

Post by Earl Lemongrab » Sat May 11, 2019 1:32 pm

First of all, in an efficient market, the pricing should reflect risk. If not, then you could avoid value and get the same return for reduced risk. That would be a market inefficiency.

I don't know that value is really particularly popular among actual investors. It gets a lot of talk in certain areas, but the typical investors focus more on popular growth stocks.

venkman
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Re: Value investing got too popular for its own good?

Post by venkman » Sat May 11, 2019 8:51 pm

Value tends to do better in periods of higher interest rates (growth stock future earnings don't look as good compared to a higher risk-free rate) and higher inflation (value stocks tend to be more highly leveraged, and inflation reduces the real value of that debt).

Both conditions have been conspicuously lacking over the past decade, so it's not really a surprise that growth has outperformed. The question is how long low interest rates and low inflation will continue to be the norm.

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Wildebeest
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Re: Value investing got too popular for its own good?

Post by Wildebeest » Sat May 11, 2019 9:03 pm

The next thirty years will tell us.

I am dialed in on SCV and small cap emerging markets and would buy small value emerging markets if I could and I am not changing course till I hit an iceberg.
The Golden Rule: One should treat others as one would like others to treat oneself.

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nedsaid
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Re: Value investing got too popular for its own good?

Post by nedsaid » Sat May 11, 2019 10:05 pm

The answer is no.

Sample themes from 1999: Vanguard Growth Index becomes non-diversified. Warren Buffett has lost his touch. Value is dead. High tech and internet stocks lead the market.

Sample themes from 2019: Vanguard Growth Index becomes non-diversified. Warren Buffett has lost his touch. Value is dead. High tech and internet stocks lead the market.

The difference between 1999 and 2019 is that we are not in a mania. Stocks are relatively expensive today but we are not in a bubble. Still the similarities are amazing.
A fool and his money are good for business.

pdavi21
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Re: Value investing got too popular for its own good?

Post by pdavi21 » Sun May 12, 2019 12:59 am

Value underperformed because it has a negative loading of momentum (sarcasm).

The real reason value underperformed is because it did. Sometimes stuff just happens and people sound foolish trying to explain it. The weirder part of the last decade was international stocks continuing to underperform despite more "valuey" valuations.

That's the real point value investors should consider. If I'm tilting to value, why am I overweight on US stock? Why is my average PE/PEG/PB/PS/etc ratio higher than VT if I am such a "value" investor?
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

columbia
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Re: Value investing got too popular for its own good?

Post by columbia » Sun May 12, 2019 6:33 am

Since 1972, splitting your allocation between value and growth and rebalancing annually has juiced returns by about 0.50%.

https://www.portfoliovisualizer.com/bac ... 0&total3=0


I don’t know that it would have been worth anyone’s effort over 47 years to achieve that difference.

rkhusky
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Re: Value investing got too popular for its own good?

Post by rkhusky » Sun May 12, 2019 6:40 am

columbia wrote:
Sun May 12, 2019 6:33 am
Since 1972, splitting your allocation between value and growth and rebalancing annually has juiced returns by about 0.50%.

https://www.portfoliovisualizer.com/bac ... 0&total3=0


I don’t know that it would have been worth anyone’s effort over 47 years to achieve that difference.
Are you kidding? We have long discussions here on whether a 0.05% difference in ER is significant. :-)

And isn't that about the size of the premium that one expects from factor investing?

Even if value makes a comeback, will it be sufficiently large to overcome the last 10 years of growth out-performance?

Easier to just invest in the whole market and then you don't have to lay awake in bed wondering if you chose the wrong factor for the last 30 years.
Last edited by rkhusky on Sun May 12, 2019 6:44 am, edited 1 time in total.

columbia
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Re: Value investing got too popular for its own good?

Post by columbia » Sun May 12, 2019 6:42 am

47 years....but, also not sure if you’re serious. :D

rkhusky
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Re: Value investing got too popular for its own good?

Post by rkhusky » Sun May 12, 2019 6:50 am

columbia wrote:
Sun May 12, 2019 6:42 am
47 years....but, also not sure if you’re serious. :D
Looks like the technique gives 0.4%/yr over the last 30 years, 0.3%/yr over the last 20 years, and 0.15%/yr over the last 10 years.

And the results only change a little if you rebalance monthly.

David Althaus
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Re: Value investing got too popular for its own good?

Post by David Althaus » Sun May 12, 2019 8:08 am

Arbitrage and reversion to the mean are powerful and inexorable. Problem is no one knows how long it will take each to occur. This makes the three fund portfolio very attractive--and for older investors like me (72) the only practical approach. Value should work in the long run but is it an overinvested class and too well known to avoid arbitrage? I've been waiting a long time for VXUS to revert to the mean and it's no fun.

With the three fund portfolio (and your chosen asset allocation) you can rest easy you will beat 70% of active managers each year, 95% over five years, and 99% over 20 years. Consider a relaxed no thinking approach--a proven method to avoid big mistakes.

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