Who killed value?

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CULater
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Who killed value?

Post by CULater » Fri May 24, 2019 10:28 am

With the value factor on track to deliver it's worst decade-long returns since long ago, the question is "what happened?" According to Dr. Bernstein, maybe low inflation is a culprit:
In order to examine the problem, I took advantage of Ken French’s wonderful Web site and downloaded the HmL series (a familiar Fama-French acronym for "high-minus-low" book value), which goes back to July 1926. This series basically represents the return of the top third of stocks sorted on book/price, minus the return of the bottom third. In other words, the value-minus-growth return difference. A positive number signifies higher returns for value stocks, and vice versa. The simple plot of monthly inflation versus HmL is an eye-crossing scattergram, but the slope of HmL on inflation is clearly positive, with a t stat of 2.91 and a p value of .0037. So there is indeed a significant positive correlation between inflation and value return, albeit a very noisy one.
http://www.efficientfrontier.com/ef/701/value.gif
Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof. ~ John Kenneth Galbraith

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nisiprius
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Re: Who killed value?

Post by nisiprius » Fri May 24, 2019 10:48 am

Every time a child says "I don't believe in factors," a factor dies...
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

EddyB
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Re: Who killed value?

Post by EddyB » Fri May 24, 2019 10:52 am

nisiprius wrote:
Fri May 24, 2019 10:48 am
Every time a child says "I don't believe in factors," a factor dies...
I can still hear the value-factor bell ring.

Beliavsky
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Re: Who killed value?

Post by Beliavsky » Fri May 24, 2019 11:03 am

CULater wrote:
Fri May 24, 2019 10:28 am
With the value factor on track to deliver it's worst decade-long returns since long ago, the question is "what happened?" According to Dr. Bernstein, maybe low inflation is a culprit:
In order to examine the problem, I took advantage of Ken French’s wonderful Web site and downloaded the HmL series (a familiar Fama-French acronym for "high-minus-low" book value), which goes back to July 1926. This series basically represents the return of the top third of stocks sorted on book/price, minus the return of the bottom third. In other words, the value-minus-growth return difference. A positive number signifies higher returns for value stocks, and vice versa. The simple plot of monthly inflation versus HmL is an eye-crossing scattergram, but the slope of HmL on inflation is clearly positive, with a t stat of 2.91 and a p value of .0037. So there is indeed a significant positive correlation between inflation and value return, albeit a very noisy one.
http://www.efficientfrontier.com/ef/701/value.gif
Are returns of the value factor more correlated with the level of inflation or the inflation surprise (actual - expected inflation)? If value returns are correlated with unexpected inflation, maybe future value returns will be the same as the long term average, because inflation surprises by definition have zero mean. OTOH, if value returns are correlated with the level of inflation, and future inflation will be low, value returns will continue to be low.

kosomoto
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Re: Who killed value?

Post by kosomoto » Fri May 24, 2019 11:16 am

CULater wrote:
Fri May 24, 2019 10:28 am
With the value factor on track to deliver it's worst decade-long returns since long ago, the question is "what happened?" According to Dr. Bernstein, maybe low inflation is a culprit:
In order to examine the problem, I took advantage of Ken French’s wonderful Web site and downloaded the HmL series (a familiar Fama-French acronym for "high-minus-low" book value), which goes back to July 1926. This series basically represents the return of the top third of stocks sorted on book/price, minus the return of the bottom third. In other words, the value-minus-growth return difference. A positive number signifies higher returns for value stocks, and vice versa. The simple plot of monthly inflation versus HmL is an eye-crossing scattergram, but the slope of HmL on inflation is clearly positive, with a t stat of 2.91 and a p value of .0037. So there is indeed a significant positive correlation between inflation and value return, albeit a very noisy one.
http://www.efficientfrontier.com/ef/701/value.gif
Value returns are still solid. Lower than growth but still 7%+. Nobody is going to fail to retire because they invested in value rather than the broad market. Savings rate is far more important than growth/value choices.

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nisiprius
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Re: Who killed value?

Post by nisiprius » Fri May 24, 2019 11:47 am

That article is from 2001, I think l....
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

garlandwhizzer
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Re: Who killed value?

Post by garlandwhizzer » Fri May 24, 2019 12:28 pm

I think it is true that when inflation is low and the economy is struggling to produce robust growth--conditions that have mostly been present for a decade following the Great Recession--that the value factor usually struggles. This has certainly been the case for the last decade. What it demonstrates is that macroeconomic factors have a huge influence on specific factor returns, not a big surprise. Historically value does well with moderate 3+% inflation and robust economic growth 3+%, conditions that were prevalent during much of the US historical past. This may contribute to why long term value backtesting looks so good. It's important to remember however that the driver of value factor returns is often the underlying specific state of the macroeconomy. Markets do not preordain that value will always work. If inflation remains low and growth continues to be relatively sluggish going forward, one might expect value to continue to struggle. In such conditions creating corporate profit growth is very difficult for struggling companies, especially small ones (SCV), and investors seem very willing pay up enormously for companies that have robust and reliable top and bottom line growth, huge volumes of free cash flow, and lots of cash on the balance sheet (FAANGS). In addition future profit growth of these rapidly growing companies does not get discounted by rapidly growing inflation. Sound familiar?

Garland Whizzer

asif408
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Re: Who killed value?

Post by asif408 » Fri May 24, 2019 12:38 pm

Value has actually outperformed growth in many overseas markets since January 2016, particularly in the emerging markets.

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Re: Who killed value?

Post by azanon » Fri May 24, 2019 2:40 pm

EddyB wrote:
Fri May 24, 2019 10:52 am
nisiprius wrote:
Fri May 24, 2019 10:48 am
Every time a child says "I don't believe in factors," a factor dies...
I can still hear the value-factor bell ring.
Yeah value investing is definitely getting tested for several years now. But what are "we" to do? The only other popular idea for picking stocks, is to buy and hold proportionally more of what's done well in the past (aka buying high/selling low, and also capitalization-weighted investing).

Oakwood42
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Re: Who killed value?

Post by Oakwood42 » Fri May 24, 2019 2:46 pm

This is not a well researched response however when I read the question my first thought was "low interest rates."

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nisiprius
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Re: Who killed value?

Post by nisiprius » Fri May 24, 2019 3:34 pm

After doing well 2000-2002, didn't the most recent "death of value" begin about 2003? If so, that doesn't correspond to low interest rates (2009 or so) nor to any change in inflation (low and stable since Volcker.)
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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tadamsmar
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Re: Who killed value?

Post by tadamsmar » Fri May 24, 2019 4:51 pm

It’s the law of averages. The gambler’s fallacy has to be true part of the the time due to regression of mean reversion.

My avatar warned us that the excess return of a value speculator is zero.
Last edited by tadamsmar on Fri May 24, 2019 5:20 pm, edited 2 times in total.

retiringwhen
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Re: Who killed value?

Post by retiringwhen » Fri May 24, 2019 4:52 pm

The Factor Shoppe (with apologies to Monty Python)

A customer enters a shop.

Customer: 'Ello, I wish to register a complaint.

(The owner does not respond.)

C: 'Ello, Miss?

Owner: What do you mean "miss"?

C: I'm sorry, I have a cold. I wish to make a complaint!

O: We're closin' for lunch.

C: Never mind that, my lad. I wish to complain about this value factor what I purchased not half an hour ago from this very boutique.

O: Oh yes, the, uh, the Norwegian Blue Value Fund...What's,uh...What's wrong with it?

C: I'll tell you what's wrong with it, my lad. 'E's dead, that's what's wrong with it!

O: No, no, 'e's uh,...he's resting.

C: Look, matey, I know a dead factor when I see one, and I'm looking at one right now.

O: No no he's not dead, he's, he's restin'! Remarkable factor fund, the Norwegian Blue, idn'it, ay? Beautiful plumage!

C: The plumage don't enter into it. It's stone dead.

O: Nononono, no, no! 'E's resting!

C: All right then, if he's restin', I'll wake him up!

(shouting at the cage)
......

https://www.dailymotion.com/video/x2hwqnp

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Kenkat
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Re: Who killed value?

Post by Kenkat » Fri May 24, 2019 5:07 pm

The last time I heard so much talk about value being dead was 1999.

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nedsaid
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Re: Who killed value?

Post by nedsaid » Fri May 24, 2019 7:07 pm

Kenkat wrote:
Fri May 24, 2019 5:07 pm
The last time I heard so much talk about value being dead was 1999.
Yes, what we are seeing is an echo from 1999-early 2000. Warren Buffett has lost his touch, Value is dead, High Technology leads the market, the Vanguard Growth Index is in non-diversified status. The main difference now compared to then is that we aren't seeing euphoria, valuations are high but not extreme, and the markets have been flat since January 2018 with a 20% correction in between. Goes to show that history rhymes but does not repeat.

Another difference is that the level of interest rates are much lower today than they were then. Bonds are not the "steal of the Century" as they were in 1999-early 2000. Rates were 6%-7% compared to 3% or so today.
A fool and his money are good for business.

m@ver1ck
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Re: Who killed value?

Post by m@ver1ck » Fri May 24, 2019 8:11 pm

Love to hear this talk if value dead. So it’s orobabky a good time to buy some.
I got lucky and was invested big in growth / didn’t realize what I was doing.
I still don’t know what I’m doing - but as a counterweight to growth, sp500 in my 401K ($400K) I’ve put away about 100K in Wellington (value + bonds) in my Ira.
Mostly since it did not have any apple in it - and if I recall right not much of FB either. Didn’t want that much exposure to Fang.
Rest of it is in vtsax and vtblx.
Thoughts?

stlutz
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Re: Who killed value?

Post by stlutz » Fri May 24, 2019 8:58 pm

Couple of thoughts:

a) In backtesting, the value premium has been quite a bit larger in down markets than up markets. If the pattern holds, value may look better if we have a sustained downturn.

b) In my investing lifetime, we've had a significant period where growth outperformed, a significant one where value outperformed, and a significant one where they've been about the same. If you're doing a long-short strategy, then I guess value has gotten "killed". Otherwise it has just given you a little bit of a different pattern of ups and downs but nothing that is particularly exciting either. The value premium has been 0 in the time that I've cared about it.

If there is no value premium, there is still a 50/50 chance that it will outperform over any given time period. On the other hand, the historical theoretical premium suggests something like a 90% probability of value outperformance over a 20 year period. That means that the actual results were highly unlikely, but on the other hand things with a 10% probability happen to all of us every day.

Using actual returns, I don't think there will be a way to determine if I should have expected to see a value premium in my lifetime or not.

TropikThunder
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Re: Who killed value?

Post by TropikThunder » Fri May 24, 2019 11:32 pm

Kenkat wrote:
Fri May 24, 2019 5:07 pm
The last time I heard so much talk about value being dead was 1999.
Well, the article OP got the figure from is from "Summer 2001" so it's probably contemporary.

http://www.efficientfrontier.com/ef/701.pdf

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nisiprius
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Re: Who killed value?

Post by nisiprius » Fri May 24, 2019 11:44 pm

stlutz wrote:
Fri May 24, 2019 8:58 pm
...b) In my investing lifetime, we've had a significant period where growth outperformed, a significant one where value outperformed, and a significant one where they've been about the same. If you're doing a long-short strategy, then I guess value has gotten "killed". Otherwise it has just given you a little bit of a different pattern of ups and downs but nothing that is particularly exciting either. The value premium has been 0 in the time that I've cared about it....
Yep. Like so many other things. Peek-a-boo, now you see it, now you don't, on again, off again. Overall, mostly the luck of the draw and no big deal. Because of the nature of financial markets it can look big when you're in the middle of a particularly good or bad run, but unless you think you can time the factors, it's just some random stuff and mostly a matter of luck.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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HanSolo
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Re: Who killed value?

Post by HanSolo » Fri May 24, 2019 11:49 pm

m@ver1ck wrote:
Fri May 24, 2019 8:11 pm
Love to hear this talk if value dead. So it’s orobabky a good time to buy some.
I got lucky and was invested big in growth / didn’t realize what I was doing.
I still don’t know what I’m doing - but as a counterweight to growth, sp500 in my 401K ($400K) I’ve put away about 100K in Wellington (value + bonds) in my Ira.
Mostly since it did not have any apple in it - and if I recall right not much of FB either. Didn’t want that much exposure to Fang.
Rest of it is in vtsax and vtblx.
Thoughts?
Exactly. What I don't like about total US stock funds is the overweight of Big Tech (FANG). I own some, but have a larger position in Wellesley. And I created a sizable position in Wellington on Jan. 3, for long-term holding (probably life-long), and have no regrets. Those who prefer indexing can get de-FANGed exposure with Vanguard Dividend Appreciation, or Vanguard High Dividend Yield (more diversified), or a combination of those two (as they have somewhat different composition).

Buffett didn't care for the tech run-up in 1999, and I don't care for this one... just don't! Cheers...

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JoMoney
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Re: Who killed value?

Post by JoMoney » Fri May 24, 2019 11:59 pm

retiringwhen wrote:
Fri May 24, 2019 4:52 pm
The Factor Shoppe (with apologies to Monty Python)

A customer enters a shop.

Customer: 'Ello, I wish to register a complaint.

(The owner does not respond.)

C: 'Ello, Miss?

Owner: What do you mean "miss"?

C: I'm sorry, I have a cold. I wish to make a complaint!

O: We're closin' for lunch.

C: Never mind that, my lad. I wish to complain about this value factor what I purchased not half an hour ago from this very boutique.

O: Oh yes, the, uh, the Norwegian Blue Value Fund...What's,uh...What's wrong with it?

C: I'll tell you what's wrong with it, my lad. 'E's dead, that's what's wrong with it!

O: No, no, 'e's uh,...he's resting.

C: Look, matey, I know a dead factor when I see one, and I'm looking at one right now.

O: No no he's not dead, he's, he's restin'! Remarkable factor fund, the Norwegian Blue, idn'it, ay? Beautiful plumage!

C: The plumage don't enter into it. It's stone dead.

O: Nononono, no, no! 'E's resting!

C: All right then, if he's restin', I'll wake him up!

(shouting at the cage)
......

https://www.dailymotion.com/video/x2hwqnp
:D :beer
viewtopic.php?f=10&t=254612#p4034065
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Kenkat
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Re: Who killed value?

Post by Kenkat » Sat May 25, 2019 8:19 am

TropikThunder wrote:
Fri May 24, 2019 11:32 pm
Kenkat wrote:
Fri May 24, 2019 5:07 pm
The last time I heard so much talk about value being dead was 1999.
Well, the article OP got the figure from is from "Summer 2001" so it's probably contemporary.

http://www.efficientfrontier.com/ef/701.pdf
I am sure I actually read that article back in 2001 since I followed Efficient Frontier eagerly back then - love Bill Bernstein articles in general. The article ended with:
So, value enthusiasts, rejoice investing in cheap stocks has not gone the way of John Cleese’s parrot. Even as we speak, value investing is slowly rising from its coffin. The renaissance of the dull may have only just begun.
I just remember posting on the old Morningstar Vanguard Diehards forum and there was a lot of talk about value being dead. Holding some of my portfolio in value stocks as well as REIT, EM, etc. really softened the blow of the tech crash for my portfolio.

retiringwhen
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Re: Who killed value?

Post by retiringwhen » Sat May 25, 2019 9:00 am

JoMoney wrote:
Fri May 24, 2019 11:59 pm
:D :beer
viewtopic.php?f=10&t=254612#p4034065
:sharebeer

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Phineas J. Whoopee
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Re: Who killed value?

Post by Phineas J. Whoopee » Sat May 25, 2019 9:32 am

If I may, and I'm not spouting accusations against anyone, including the good Doctor, the title of the thread assumes value stocks will outperform non-value, however defined (and definitions are many and various). They may or may not do so over any specific period of time. Even if they did in the past, they may not do so now, whether or not they will in the future.

If somebody has an asset pricing theory that is directly contradicted by carefully-measured data it is the theory that's incomplete, not the market.

This is the ordinary rational method of inquiry.

PJW

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