Small Cap Value heads Rejoice !!!

[Anon9001]

You do have to question the wisdom of buying cheap stocks because they are cheap. There has to be some reason why they are cheap like they are operating in a cyclical sector like oil and gas or the company is very capital intensive or the company is run by people who don't know what they are doing. Rarely will you get good companies cheaply by doing this quant screen which I assume picks stocks based on how low the P/E,P/B is relative to Market. The good value investors like Warren Buffet don't even care about Value vs Growth stock difference and pick stocks like Amazon which don't feature in any Value index.

This is EXACTLY why it has worked historically. They are junkier companies, thus riskier, introducing a risk-premium for those that believe markets are efficient. Don't believe markets are efficient? Even better! Because they seem much junkier, and it is much more exciting to invest in the Amazons of the universe, people bid the prices of Amazon irrationally higher, and value stocks irrationally lower, which eventually provides a behavioral boost as some value stocks migrate to blend/growth and growth stocks the other direction. If it worked year-after-year then it would not work at all; value investors should be pleased it is going through a rough-patch as that bodes well for a bright future.

As to Buffett, some of the highest returns of his life were made in net-net stocks which trade below their liquidation value (the deepest of deep-value, he called them cigar butts because you could only get one last puff out of them but it was a great one). Yes as he got bigger he started to incorporate quality along with value, and quality came out in the last decade as another factor style which when combined with the value factor explains a significant portion of Buffett's later returns as well.

Is there any reason to believe junk companies should give you good returns in the present time? Mr.Buffet was doing that in a time where the Internet was not available. Now with the much easier way to get data on companies I doubt you could find companies like that any-more. The Fama French factors don't include low volatility although it is giving very important evidence that the higher risk companies as defined by Beta don't give higher returns than Low Beta but actually lower returns. If value was filled with junk companies the low volatility anamoly would say value will continue to under-perform. I don't trust these factors too much but the Beta factor I do trust because it actually works in real life:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

This is with a index that includes profitability criteria. Even with the profitability criteria of the S&P 500 they still under-perform relative to market.

1) Once you control for the investment factor, Fama and French find that the low-volatility anomaly goes away and beta once again has explanatory power. In other words, high beta stocks weren't producing higher returns because they loaded negatively on investment.

2) It's perfectly reasonable for value to outperform today despite the Internet. Think about it: In the bond world, we know the lower the credit of the company, the higher the expected the returns. Bonds from Ford, yielding 8%+, clearly have a higher expected return than Apple bonds yielding ~2%. The lower the Fitch rating of the bond, the higher the risks and returns. The cost of bond capital is much higher for Ford. The cost of capital for US government bonds are the lowest, hence why they're the ones with the lowest returns for investors (and lowest risks).

It would be logical then that Ford's cost of equity capital would also be much higher (and hence, the returns on Ford stock higher than on Apple stock). Otherwise, Ford would only issue stocks, not bonds. But they DO issue bonds.

Let that sink in.

What is going on then? Such high theoretical basis and yet such lousy real world results. You do have to wonder whether the academicians are getting this all wrong. Maybe it is due to them excessively focusing on Price to Book (maybe because Benjamin Graham founder of cigar butt Value investing used it) even though that does not work recently due to rise of intagibilies?

[Steve Reading]

What is going on then? Such high theoretical basis and yet such lousy real world results. You do have to wonder whether the academicians are getting this all wrong. Maybe it is due to them excessively focusing on Price to Book (maybe because Benjamin Graham founder of cigar butt Value investing used it) even though that does not work recently due to rise of intagibilies?

The value premium historically has underperformed already by as long as 15 years. By quite significant amounts too. There's nothing out of the ordinary thus far. It's not a free lunch, there are risks. Guess what? The risks showed up.

Internationally, it has done reasonably well for instance. How can you argue "PB doesn't work in this intangible work"? There it is, in more than half of the world's stock markets, PB-based value is working just fine.


Your comment of "the higher expected returns aren't showing up, something must be going on" is interesting because many expressed it about beta and stocks in general 12 years ago, back when stocks had produced no returns over 20 years.

EDIT: Meant to say **produced no returns over 20 years over bonds (IT). As in, beta was next to zero.

[MotoTrojan]

What is going on then? Such high theoretical basis and yet such lousy real world results. You do have to wonder whether the academicians are getting this all wrong. Maybe it is due to them excessively focusing on Price to Book (maybe because Benjamin Graham founder of cigar butt Value investing used it) even though that does not work recently due to rise of intagibilies?

To Steve’s point about this not being unprecedented, this is an interesting read: https://www.twocenturies.com/blog/2020/ ... er-history

[Steve Reading]

.

By the way, this story isn't specific to stocks. If you are to believe me, it should apply to bonds too right? And it does

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Since inception (1994) to 2011, the intermediate term treasury and intermediate term corporate funds had basically identical returns (treasuries were actually a little better). That's 17 years. Now imagine you were in 2011. For the past 17 years, bonds from corporations simply have not produced higher returns. Do you begin to doubt the credit premium? Would you come to the conclusion of "treasuries have the same expected future return"?

You might look at the credit spreads to answer that. Either the defaults/downgrades were higher, or the market was irrationally bidding down prices (i.e. credit bonds got cheaper/treasuries got more expensive). You might also look at the term premium since treasuries tend to have more convexity (that's a small detail).

https://fred.stlouisfed.org/series/BAA10Y

Look! Credit spreads did widen from 1994 to 2011. Not a ton so certainly risks showed up (more defaults/downgrades) but they widened nonetheless. Those who stayed the course, believing in the fundamentals and convictions, were then well rewarded in the 9 years after, when credit bonds quickly outpaced the safer treasuries.

Today, value spreads are abnormally high. Like I said before, either this will be an amazing opportunity, or it will turn out to be nothing at all!

[Anon9001]

I assume you are from USA considering the thread is "US investors" but even in EAFE Growth beats Value:https://www.portfoliovisualizer.com/bac ... ion2_2=100

It seems like a Global story of Value not working properly. Here locally India Value funds have struggled completely against benchmark index. The only good Value funds were the smart one's not caring about Value vs Growth stock distinction.

[Elysium]

In 1993, if I were told there are two brilliant professors who have come up with a systemic way to achieve above market returns by investing passively in engineered portfolios designed on their groundbreaking research, only for a fee of 1% per annum to get in to this exclusive fund company that has the secret sauce, then fast forward 27 years only to see my balance tied with "dumb" S&P 500 Index available to all, and much behind when fees taken out, I sure will feel swindled.

Hope springs are eternal and so the search for perfect portfolio continues even when evidence shows it doesn't exist.

That's totally unfair to those two professors. They never made such claims. It's their students who did.

Please read the underlined text, it implies told by someone else.

[Steve Reading]

I assume you are from USA considering the thread is "US investors" but even in EAFE Growth beats Value:https://www.portfoliovisualizer.com/bac ... ion2_2=100

It seems like a Global story of Value not working properly. Here locally India Value funds have struggled completely against benchmark index. The only good Value funds were the smart one's not caring about Value vs Growth stock distinction.

I'm not American, no, but not sure why that matters.

That PV link is actually extremely misleading. The years 2000-2005 were fantastic for value. As you can see, you can show anything you want based on picking the right dates.

So we have to be fair on time periods. Most people in this forum are asking "what has been the premium since publication" (1993). For USA, it has been positive, but small enough to be statistically insignificant. For Ex-USA, it has been reasonable, at 2.1% CAGR for the past 26 years (a cumulative 71% growth).

Even if you start at 2000, so that Internet is widely available and any one can analyze stocks, the premium is still positive at 1.7%.

I don't see a "global story of value not working properly" but I'm biased, no doubt about it!.

[Forester]

You do have to question the wisdom of buying cheap stocks because they are cheap. There has to be some reason why they are cheap like they are operating in a cyclical sector like oil and gas or the company is very capital intensive or the company is run by people who don't know what they are doing. Rarely will you get good companies cheaply by doing this quant screen which I assume picks stocks based on how low the P/E,P/B is relative to Market. The good value investors like Warren Buffet don't even care about Value vs Growth stock difference and pick stocks like Amazon which don't feature in any Value index.

This is EXACTLY why it has worked historically. They are junkier companies, thus riskier, introducing a risk-premium for those that believe markets are efficient. Don't believe markets are efficient? Even better! Because they seem much junkier, and it is much more exciting to invest in the Amazons of the universe, people bid the prices of Amazon irrationally higher, and value stocks irrationally lower, which eventually provides a behavioral boost as some value stocks migrate to blend/growth and growth stocks the other direction. If it worked year-after-year then it would not work at all; value investors should be pleased it is going through a rough-patch as that bodes well for a bright future.

As to Buffett, some of the highest returns of his life were made in net-net stocks which trade below their liquidation value (the deepest of deep-value, he called them cigar butts because you could only get one last puff out of them but it was a great one). Yes as he got bigger he started to incorporate quality along with value, and quality came out in the last decade as another factor style which when combined with the value factor explains a significant portion of Buffett's later returns as well.

Is there any reason to believe junk companies should give you good returns in the present time? Mr.Buffet was doing that in a time where the Internet was not available. Now with the much easier way to get data on companies I doubt you could find companies like that any-more. The Fama French factors don't include low volatility although it is giving very important evidence that the higher risk companies as defined by Beta don't give higher returns than Low Beta but actually lower returns. If value was filled with junk companies the low volatility anamoly would say value will continue to under-perform. I don't trust these factors too much but the Beta factor I do trust because it actually works in real life:

https://www.portfoliovisualizer.com/bac ... ion2_2=100

This is with a index that includes profitability criteria. Even with the profitability criteria of the S&P 500 they still under-perform relative to market.

1) Once you control for the investment factor, Fama and French find that the low-volatility anomaly goes away and beta once again has explanatory power. In other words, high beta stocks weren't producing higher returns because they loaded negatively on investment.

2) It's perfectly reasonable for value to outperform today despite the Internet. Think about it: In the bond world, we know the lower the credit of the company, the higher the expected the returns. Bonds from Ford, yielding 8%+, clearly have a higher expected return than Apple bonds yielding ~2%. The lower the Fitch rating of the bond, the higher the risks and returns. The cost of bond capital is much higher for Ford. The cost of capital for US government bonds are the lowest, hence why they're the ones with the lowest returns for investors (and lowest risks).

It would be logical then that Ford's cost of equity capital would also be much higher (and hence, the returns on Ford stock higher than on Apple stock). Otherwise, Ford would only issue stocks, not bonds. But they DO issue bonds.

Let that sink in.

FF 5 factor model is probably curve fit garbage: https://www.robeco.com/uk/insights/201 ... etter.html

[Anon9001]

It is very fascinating that the Growth EAFE Index tilts to Consumer Defensive and HealthCare while the Value EAFE Index tilts to Financials and Industrials. Noticing something? The Value Indexes seem to be doing sector bets and their difference in performance seem to a result of these sectors out-performing the market. Has the Value Premium mainly been due to these sector bets? What would happen if you do a sector neutral value stragerty?

[Wade Garrett]

The Pim Van Vliet portfolio. I like it.

Funnily enough yes, albeit spread across three funds. His book is the only accessible work on low vol investing that I know of.

I do the same. I'm aware of PVV's book but haven't read it.

PVV appeared on Meb Faber's podcast a couple of years ago if that interests you. Or there's a transcript of their conversation on Faber's website if you prefer to read.

[Anon9001]

I did find a local Value index https://www.niftyindices.com/Factsheet/ ... lue_50.pdf

As to be expected 75% of it is in Energy,Financial Services and Metals. They are not using just P/B but P/E,P/S and Dividend Yield yet still doing sector bets. The risks of relying on a Value Index is that these sectors continue to under-perform. I am getting highly suspicious of the Value factor's performance if it is just doing sector bets.

[Steve Reading]

It is very fascinating that the Growth EAFE Index tilts to Consumer Defensive and HealthCare while the Value EAFE Index tilts to Financials and Industrials. Noticing something? The Value Indexes seem to be doing sector bets and their difference in performance seem to a result of these sectors out-performing the market. Has the Value Premium mainly been due to these sector bets? What would happen if you do a sector neutral value stragerty?

The FF value factor also has sector bias (they don't have sector-neutral construction). So if FF value does poorly, and EFV does poorly, you could say "it's due to the sectors" or "it's due to value underperforming" and they're really one and the same.

FWIW, AQR does value with sector-neutrality and they also have underperformed.

[Steve Reading]

I did find a local Value index https://www.niftyindices.com/Factsheet/ ... lue_50.pdf

As to be expected 75% of it is in Energy,Financial Services and Metals. They are not using just P/B but P/E,P/S and Dividend Yield yet still doing sector bets. The risks of relying on a Value Index is that these sectors continue to under-perform. I am getting highly suspicious of the Value factor's performance if it is just doing sector bets.

Whoah that is a HUGE sector bet, nvm. I don't know anything about that index, can't comment on it. I don't know much about India's value factor.

I can tell you that once, I looked at the sector composition of the FF value factor and it was pretty similar to something like S&P 600 Value's sector composition (once adjusted for value exposure). In other words, the VIOV fund tilts to some sectors, but not really much more or less than the value factor itself would. So I don't have many concerns with VIOV.

I would have some concerns with whatever product follows the index you show above though.

[Wade Garrett]

systemic way to achieve above market returns by investing passively in engineered portfolios designed on their groundbreaking research, only for a fee of 1% per annum to get in to this exclusive fund company that has the secret sauce

I get that you're talking about DFA. But DFA and the requisite advisor fee are unnecessary. Even so, there are ways to access DFA by very low flat annual fee (much lower than 1%) if one still wanted to go this route and knows where to look. Or one could wait another year or two until DFA eventually rolls out their SCV ETFs after first rolling out their core ETFs.

It's easy to reach DFA level factor loads today with ETFs. At a global portfolio ER weight of 20-25 bps/yr. So yeah it's 15-20 bps/yr higher than a TSM cheap beta 3 fund type portfolio. But a far cry from 1%/yr. IMO either approach is reasonable. IMO most approaches are reasonable as long as they're 1) low cost, 2) tax efficient, 3) diversified, 4) rebalanced.

[manlymatt83]

Curious, anyone holding SLYV (or IJS) *and* AVUV?

Yep. AVUV has deeper value exposure. VIOV (tracks same index as SLYV/IJS) has a cheaper ER. So rather than choosing one or the other for my SCV allocation I split the difference and hold both.

That is what I’ve been doing!

I am 25% AVUV, SLYV, AVDV, DGS. I know AVDV and DGS don’t quite complement each other so I’m trying to figure out if I’m in an OK allocation.

Bold strategy, I like it. My SCV allocation (also hold deep-value QVAL which is mid-cap) is split between AVUV and VSIAX (VBR) but only because of 401k constraints. Outside of that I’d favor AVUV and don’t see why you’d hold both. Could use something like VFVA instead of SLYV to get some even deeper value exposure while diversifying market cap. Or perhaps even QVAL which diversifies your weighting metric (enterprise multiple).

Good luck with this ride. If you can hold on I think it’ll serve you well.

Thank you! Appreciate the feedback!

[MotoTrojan]

It is very fascinating that the Growth EAFE Index tilts to Consumer Defensive and HealthCare while the Value EAFE Index tilts to Financials and Industrials. Noticing something? The Value Indexes seem to be doing sector bets and their difference in performance seem to a result of these sectors out-performing the market. Has the Value Premium mainly been due to these sector bets? What would happen if you do a sector neutral value stragerty?

This is the best paper out there showing the growth-value spread over time with countless ways to slice it. Everything from excluding mega-cap, to excluding to tech, to several different sector-neutral examples just as you are describing.

https://www.aqr.com/Insights/Perspectiv ... sting-Dead

Even for the sector-neutral comparison they are all either at the 99th or 100th percentile historically, even when excluding the mega-caps, tech, and 10% most expensive companies. The composite weighting method is 66% higher than the prior all-time-high! Put simply, sector-bets doesn't come close to describing the delta between growth and value today.

[Forester]

O'Shaughnessy shows in WWOWS that all the value metrics work within each sector for example InfoTech & Health.

[MotoTrojan]

I wouldn't mind a sector-neutral value fund if the ER was low but haven't seen any; I would probably hold that as a core holding (say 35%) with deeper tilts around it. I have considered building a small 10% allocation in cheap tech stocks (CSCO, INTC, etc...) to help balance out my sector allocation, but I'd rather let my funds do the work.

[Anon9001]

It is very fascinating that the Growth EAFE Index tilts to Consumer Defensive and HealthCare while the Value EAFE Index tilts to Financials and Industrials. Noticing something? The Value Indexes seem to be doing sector bets and their difference in performance seem to a result of these sectors out-performing the market. Has the Value Premium mainly been due to these sector bets? What would happen if you do a sector neutral value stragerty?

This is the best paper out there showing the growth-value spread over time with countless ways to slice it. Everything from excluding mega-cap, to excluding to tech, to several different sector-neutral examples just as you are describing.

https://www.aqr.com/Insights/Perspectiv ... sting-Dead

Even for the sector-neutral comparison they are all either at the 99th or 100th percentile historically, even when excluding the mega-caps, tech, and 10% most expensive companies. The composite weighting method is 66% higher than the prior all-time-high! Put simply, sector-bets doesn't come close to describing the delta between growth and value today.

I would not be over-confident in this despite the great gap that exists. What is cheap can get even cheaper. It is impressive though that sector neutral growth-value gap is still big. This could be due to low interest rates. Thanks for sharing. Did not know about this until today.

[MotoTrojan]

It is very fascinating that the Growth EAFE Index tilts to Consumer Defensive and HealthCare while the Value EAFE Index tilts to Financials and Industrials. Noticing something? The Value Indexes seem to be doing sector bets and their difference in performance seem to a result of these sectors out-performing the market. Has the Value Premium mainly been due to these sector bets? What would happen if you do a sector neutral value stragerty?

This is the best paper out there showing the growth-value spread over time with countless ways to slice it. Everything from excluding mega-cap, to excluding to tech, to several different sector-neutral examples just as you are describing.

https://www.aqr.com/Insights/Perspectiv ... sting-Dead

Even for the sector-neutral comparison they are all either at the 99th or 100th percentile historically, even when excluding the mega-caps, tech, and 10% most expensive companies. The composite weighting method is 66% higher than the prior all-time-high! Put simply, sector-bets doesn't come close to describing the delta between growth and value today.

I would not be over-confident in this despite the great gap that exists. What is cheap can get even cheaper. It is impressive though that sector neutral growth-value gap is still big. This could be due to low interest rates. Thanks for sharing. Did not know about this until today.

Sure thing. At the end there they cover some relative differences in profitability, return on assets, and leverage ratios between value & growth and find that we are right at the median or in some cases looking even better, so there doesn't seem to be a strong reason for the difference in valuation. So yes, what is cheap can get cheaper, but there don't appear to be strong fundamental reasons for it. I've seen some pieces recently disproving the lower-rates story (along with other nations disproving it), believe because in a DCF your discount rate also comes down proportionally, but even if it is the cause that isn't a perpetual driver, just a one-time shift in the "fair-value" spread between value & growth firms.

[Day9]

Curious, anyone holding SLYV (or IJS) *and* AVUV?

Yes I am about 50/50 in both. I jumped into AVUV in taxable due to a tax loss harvesting opportunity (Sell IJS to lock in loss, buy AVUV). But my IRA still has SLYV and I haven't decided yet whether to leave it or replace with AVUV. And in 401ks I wish I had these options but alas do not.

[Taylor Larimore]

Bogleheads:

I read the link with the article by AQR Capital Management. The article does not show its author but I suspect it is Cliff Asness, AQR's Managing Principal.

I went to the AQR website to see the 10-year performance (longest period shown) of all AQR stock funds on (8-12-20) compared with Vanguard Total Market Index Fund (VTSAX) on (8-14-2020):

2.77% AQR DIversified Arbitrage
9.76% AQR Global Equity
5.88% AQR International Momentum Style
14.55% AQR Large Cap Momentum Style
0.77% AQR Managed Futures
12.97% AQR Small Cap Momentum Style

14.22% Vanguard Total U.S. Stock Market

Past performance does not forecast future performance.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom:"Cliff Asness is a brilliant academic and the greatest marketer I've ever met."

[manlymatt83]

Curious, anyone holding SLYV (or IJS) *and* AVUV?

Yes I am about 50/50 in both. I jumped into AVUV in taxable due to a tax loss harvesting opportunity (Sell IJS to lock in loss, buy AVUV). But my IRA still has SLYV and I haven't decided yet whether to leave it or replace with AVUV. And in 401ks I wish I had these options but alas do not.

Do you have any AVDV?

[Day9]

Curious, anyone holding SLYV (or IJS) *and* AVUV?

Yes I am about 50/50 in both. I jumped into AVUV in taxable due to a tax loss harvesting opportunity (Sell IJS to lock in loss, buy AVUV). But my IRA still has SLYV and I haven't decided yet whether to leave it or replace with AVUV. And in 401ks I wish I had these options but alas do not.

Do you have any ADVD?

I assume you mean AVDV Avantis Small Cap Value International. Yes a little bit. But almost all my international allocation is in DFA International funds I have access to in 401ks. AVDV is my only international holding outside of a 401k. EDIT: I forgot about a little DLS in an HSA

[Elysium]

I get that you're talking about DFA. But DFA and the requisite advisor fee are unnecessary. Even so, there are ways to access DFA by very low flat annual fee (much lower than 1%) if one still wanted to go this route and knows where to look. Or one could wait another year or two until DFA eventually rolls out their SCV ETFs after first rolling out their core ETFs.

It's easy to reach DFA level factor loads today with ETFs. At a global portfolio ER weight of 20-25 bps/yr. So yeah it's 15-20 bps/yr higher than a TSM cheap beta 3 fund type portfolio. But a far cry from 1%/yr. IMO either approach is reasonable. IMO most approaches are reasonable as long as they're 1) low cost, 2) tax efficient, 3) diversified, 4) rebalanced.

The context is first fund opening up based on the just published research in 1993, 27 years later someone who started in 1993 would have been pretty disappointed after paying all that advisor fees. I would argue that the fees were possibly even higher than 1% back then due to the premium they claimed. Today, does anyone still want DFA? I don't think so. Anyone wants SCV funds/ETFs? they are available dime a dozen. But, the results are out for the pioneers who ventured out, they didn't get the promised excess returns, and after fees lost quite a bit. Future? I predict there will be variance, sometimes value will look better and sometimes growth will look better, although similar results in the long run due to RTM. I wouldn't bet on capturing any excess returns. It's possible to capture it through chance though if someone gets lucky.

[Random Walker]

Future? I predict there will be variance, sometimes value will look better and sometimes growth will look better, although similar results in the long run due to RTM. I wouldn't bet on capturing any excess returns. It's possible to capture it through chance though if someone gets lucky.

The question is what “mean” are you referring to? Do you think that in the long run all stocks have the same mean expected return? Or do you think that riskier SV stocks have a higher mean expected return to revert to? I think TSM and SV should have different mean expected returns. Higher non-diversifiable risk should be associated with higher expected return.

Dave

[MotoTrojan]

Future? I predict there will be variance, sometimes value will look better and sometimes growth will look better, although similar results in the long run due to RTM. I wouldn't bet on capturing any excess returns. It's possible to capture it through chance though if someone gets lucky.

The question is what “mean” are you referring to? Do you think that in the long run all stocks have the same mean expected return? Or do you think that riskier SV stocks have a higher mean expected return to revert to? I think TSM and SV should have different mean expected returns. Higher non-diversifiable risk should be associated with higher expected return.

Dave

Bingo.

[YRT70]

White Coat Investor did a podcast interview with Rick Ferri and Paul Merriman about factor investing. I found it interesting that both Rick and Paul expect SCV to outperform TSM over the next 10 years. I was surprised to hear that from Rick, not from Paul of course.

https://www.whitecoatinvestor.com/rick- ... dcast-169/

[acegolfer]

White Coat Investor did a podcast interview with Rick Ferri and Paul Merriman about factor investing. I found it interesting that both Rick and Paul expect SCV to outperform TSM over the next 10 years. I was surprised to hear that from Rick, not from Paul of course.

https://www.whitecoatinvestor.com/rick- ... dcast-169/

Why is it surprising? Doesn't he believe SCV has more systematic risks and hence provides higher expected return?

[Elysium]

The question is what “mean” are you referring to? Do you think that in the long run all stocks have the same mean expected return? Or do you think that riskier SV stocks have a higher mean expected return to revert to? I think TSM and SV should have different mean expected returns. Higher non-diversifiable risk should be associated with higher expected return.

Dave

It's clear that I am expecting value and growth stocks to return about the same over longer periods, and that there is no excess returns that can be captured in a systemic way. This was all discussed in the Telltale Chart by John C. Bogle almost two decades ago and so far his findings have been been prescient.

[PicassoSparks]

It's clear that I am expecting value and growth stocks to return about the same over longer periods, and that there is no excess returns that can be captured in a systemic way. This was all discussed in the Telltale Chart by John C. Bogle almost two decades ago and so far his findings have been been prescient.

Thanks for this. I’d not seen it before.

[Forester]

Elysium is bagholding his S&P Tech Fund (S&P 500) and cannot help but monitor this thread. He knows he should be more diversified but this internal disonance causes him to question others owning SCV at a generational buying opportunity.

SCV is an open welcoming religion - feel free to join us.

[acegolfer]

The question is what “mean” are you referring to? Do you think that in the long run all stocks have the same mean expected return? Or do you think that riskier SV stocks have a higher mean expected return to revert to? I think TSM and SV should have different mean expected returns. Higher non-diversifiable risk should be associated with higher expected return.

Dave

It's clear that I am expecting value and growth stocks to return about the same over longer periods, and that there is no excess returns that can be captured in a systemic way. This was all discussed in the Telltale Chart by John C. Bogle almost two decades ago and so far his findings have been been prescient.

I disagree. Assets will provide different expected return because of different factor loadings. Simply speaking, riskier assets are compensated with a higher expected return.

[YRT70]

White Coat Investor did a podcast interview with Rick Ferri and Paul Merriman about factor investing. I found it interesting that both Rick and Paul expect SCV to outperform TSM over the next 10 years. I was surprised to hear that from Rick, not from Paul of course.

https://www.whitecoatinvestor.com/rick- ... dcast-169/

Why is it surprising?

It was surprising to me because as far as I know he stopped recommending people to tilt to SCV.

[acegolfer]

White Coat Investor did a podcast interview with Rick Ferri and Paul Merriman about factor investing. I found it interesting that both Rick and Paul expect SCV to outperform TSM over the next 10 years. I was surprised to hear that from Rick, not from Paul of course.

https://www.whitecoatinvestor.com/rick- ... dcast-169/

Why is it surprising?

It was surprising to me because as far as I know he stopped recommending people to tilt to SCV.

Multifactor asset pricing model says SCV has higher expected return than MKT. But that doesn't imply everyone should tilt to SCV.

[YRT70]

White Coat Investor did a podcast interview with Rick Ferri and Paul Merriman about factor investing. I found it interesting that both Rick and Paul expect SCV to outperform TSM over the next 10 years. I was surprised to hear that from Rick, not from Paul of course.

https://www.whitecoatinvestor.com/rick- ... dcast-169/

Why is it surprising?

It was surprising to me because as far as I know he stopped recommending people to tilt to SCV.

Multifactor asset pricing model says SCV has higher expected than MKT. But that doesn't imply everyone should tilt to SCV.

I was aware of that thanks.

[Day9]

White Coat Investor did a podcast interview with Rick Ferri and Paul Merriman about factor investing. I found it interesting that both Rick and Paul expect SCV to outperform TSM over the next 10 years. I was surprised to hear that from Rick, not from Paul of course.

https://www.whitecoatinvestor.com/rick- ... dcast-169/

Why is it surprising?

It was surprising to me because as far as I know he stopped recommending people to tilt to SCV.

https://www.bogleheads.org/wiki/Histori ... Rick_Ferri

I thought it was interesting to see Ferri's expected return projections he made in 2015. He gave higher expected returns for SCV

[YRT70]

White Coat Investor did a podcast interview with Rick Ferri and Paul Merriman about factor investing. I found it interesting that both Rick and Paul expect SCV to outperform TSM over the next 10 years. I was surprised to hear that from Rick, not from Paul of course.

https://www.whitecoatinvestor.com/rick- ... dcast-169/

Why is it surprising?

It was surprising to me because as far as I know he stopped recommending people to tilt to SCV.

https://www.bogleheads.org/wiki/Histori ... Rick_Ferri

I thought it was interesting to see Ferri's expected return projections he made in 2015. He gave higher expected returns for SCV

Thank you. That's interesting indeed.

[Taylor Larimore]

Bogleheads:

In my opinion "expected returns" are almost meaningless and may be dangerous. No one can forecast stock market returns.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible."

[Elysium]

The question is what “mean” are you referring to? Do you think that in the long run all stocks have the same mean expected return? Or do you think that riskier SV stocks have a higher mean expected return to revert to? I think TSM and SV should have different mean expected returns. Higher non-diversifiable risk should be associated with higher expected return.

Dave

It's clear that I am expecting value and growth stocks to return about the same over longer periods, and that there is no excess returns that can be captured in a systemic way. This was all discussed in the Telltale Chart by John C. Bogle almost two decades ago and so far his findings have been been prescient.

I disagree. Assets will provide different expected return because of different factor loadings. Simply speaking, riskier assets are compensated with a higher expected return.

No. They aren't. Riskier assets can have higher expected returns, there is no guarantee this will be realized anytime within your investing lifetime. As the study linked above shows, growth and value have reverted to the market mean over long cycles. There are things beyond factor loading explanations that drives market cycles. Investor behavior is one of them, that is why momentum exists. RTM (market mean) is a strong force that cannot be dispelled easily.

[acegolfer]

Bogleheads:

In my opinion "expected returns" are almost meaningless and may be dangerous. No one can forecast stock market returns.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible."

You may think expected return is only used for forecast and hence claim it's meaningless. But in corporate finance, expected return is not used for forecasting. It's used for calculating cost of equity, which is a key component for capital budgeting.

[acegolfer]

It's clear that I am expecting value and growth stocks to return about the same over longer periods, and that there is no excess returns that can be captured in a systemic way. This was all discussed in the Telltale Chart by John C. Bogle almost two decades ago and so far his findings have been been prescient.

I disagree. Assets will provide different expected return because of different factor loadings. Simply speaking, riskier assets are compensated with a higher expected return.

No. They aren't. Riskier assets can have higher expected returns, there is no guarantee this will be realized anytime within your investing lifetime. As the study linked above shows, growth and value have reverted to the market mean over long cycles. There are things beyond factor loading explanations that drives market cycles. Investor behavior is one of them, that is why momentum exists. RTM (market mean) is a strong force that cannot be dispelled easily.

But you stated earlier that you "expect" value and growth stocks will return about the same over longer periods. I "expect" value return will be higher because of multi-factor risks. Will the realized return also be higher? Nobody knows.

[MotoTrojan]

Bogleheads:

In my opinion "expected returns" are almost meaningless and may be dangerous. No one can forecast stock market returns.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible."

You're right, I should move all my equity to bonds for more security since the expected outperformance can't be relied on.

[Random Walker]

The question is what “mean” are you referring to? Do you think that in the long run all stocks have the same mean expected return? Or do you think that riskier SV stocks have a higher mean expected return to revert to? I think TSM and SV should have different mean expected returns. Higher non-diversifiable risk should be associated with higher expected return.

Dave

It's clear that I am expecting value and growth stocks to return about the same over longer periods, and that there is no excess returns that can be captured in a systemic way. This was all discussed in the Telltale Chart by John C. Bogle almost two decades ago and so far his findings have been been prescient.

I went back and read the above Bogle lecture; certainly time very well spent. He looks at returns with two types of graphs. The first is total dollars accumulated versus an S&P 500 fund. Tilting to size and value clearly win over long periods. The second chart type shows the ratio of total accumulated returns for the selected style versus S&P500 at different points in time. On this graph the slopes of the line represent periods where the given style is outperforming or underperforming. The paths to the peaks and valleys can be very long. To me the takeaway from the charts is that one can well potentially benefit from tilting to size and value. But he must necessarily be willing to tolerate increased volatility and very long periods of underperformance. Moreover, the periods of outperformance occur in short bursts with long periods of underperformance or roughly equal performance. Of course there is no certainty we will see more of those short bursts in the future.

Not mentioned in the lecture is the importance in belief in one’s game plan. We can only invest looking forward. And it’s very important to have strong risk based and/or behavioral based rationale behind one’s investing plan. Those downward sloping segments on the right sided graphs are long.

Dave

[acegolfer]

Bogleheads:

In my opinion "expected returns" are almost meaningless and may be dangerous. No one can forecast stock market returns.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible."

You're right, I should move all my equity to bonds for more security since the expected outperformance can't be relied on.

lol. that's a good one. expected return is meaningless. /s

[Elysium]

I went back and read the above Bogle lecture; certainly time very well spent. He looks at returns with two types of graphs. The first is total dollars accumulated versus an S&P 500 fund. Tilting to size and value clearly win over long periods. The second chart type shows the ratio of total accumulated returns for the selected style versus S&P500 at different points in time. On this graph the slopes of the line represent periods where the given style is outperforming or underperforming. The paths to the peaks and valleys can be very long. To me the takeaway from the charts is that one can well potentially benefit from tilting to size and value. But he must necessarily be willing to tolerate increased volatility and very long periods of underperformance. Moreover, the periods of outperformance occur in short bursts with long periods of underperformance or roughly equal performance. Of course there is no certainty we will see more of those short bursts in the future.

I have underlined the parts I think summarizes the issues. This is the closest we have ever come in these debates. I completely agree with all of those underlined parts.

I have read this multiple times, as I have nearly everything coming out of Fama-French on the topic, each time I have doubts I go back and read both sides to make sure my thoughts are consistent. I think Fama and Bogle are in agreement. There can be no argument that there has been a premium for small vs large and value vs growth, however as shown by the data and charts, this premium has been highly elusive, coming in very short bursts, over very long periods, with long periods of underperformance, greater volatility, with no predictability whatsoever when and how this may occur.

The very long period is in excess of 50 years in these charts, with long periods as far as 32 years going by without any difference. We now have 27 years since the inception of DFSVX with almost no difference in returns but having suffered increased volatility. Add to that access to this type of funds weren't available to retail investors until after the 2000-04 short burst.

Bogle says this about S&D portfolio vs S&P 500 Index:
Note, for example, how much of its success came in the 1942-45 bull market, when it rose by 410%(!), nearly three times the 150% return of the S&P Index—doubtless a non-recurring event. Note too that the returns of the Index and S&D portfolios were virtually identical (13.8% and 14.0% annual return) for the next two decades, ending in 1964.

He then goes on to show how both portfolios performed in other periods, with one winning some cycles and the other at different times.

He says this about the decision to tilt...
So Slice and Dice is what you make it. Like all other investment strategies ever devised by the mind of man, sometimes it works and sometimes it doesn’t. Uncertainty rules. Even if the overall program appears to outpace the Index, over a long inevitably period-dependent span of
years, don’t forget how little (!) it costs to emulate the total stock market in the real world nor how much (!) it costs to use active funds to fill the S&D boxes, and even to use passive funds to do so. If we take the extra risk into account, there’s a real question about whether the game is
worth the candle.

... with a plea to consider an alternative:
And even if you don’t accept my challenge to S&D, I urge you, before you plunge into a 4x25 portfolio, to put more than 25% in the total market—say 55%. Then put just 15% in the three slices that you dice, thereby taking much of the risk out of your decision. Think
then, about a 1 x 55% + 3 x 15% portfolio. If it is true, as Dr. Fama (and most other academics, to say nothing of many, many practitioners) says, that “for most people, the market portfolio is the most sensible decision,” you might as well make the most of it.

This below is my general thoughts, aimed at no one in particular.

Perhaps, for the true believer, and I must say less than 1% of the posters here on BH may qualify for this title, this may be worth the effort. If you are willing to be wrong for 30 or more years, and even for a lifetime as Rick Ferri recently said. This is not what most investors are signing up for when they look at Fama-French data that says Value outperforms Growth. We get these simplistic views that Value stocks are risky so they must have higher expected returns, therefore tilting is a fine strategy, without any considerations to the issues listed in the paper.

Will anyone sign up for tilting if they were told you could go for 30 years without seeing any real difference, but would have to endure greater volatility and higher risks. That said I am also willing to concede that this could all be much easier than that, depending on whether you get lucky in the correct market cycle, but then that isn't a reliable strategy. Current live data shows it hasn't been very easy for the tilters, it could change, but personally I don't want to bet my retirement future on that. I am sure there are true believers here that has no issues with any of this, and to those I say you do you, but also give fair warning to those coming on-board what is expected of them to become successful with tilting.

Consider Jack Bogle's suggestion to allocate more than 50% of your allocation to the Market portfolio, with the other 45% perhaps towards tilting in 15% equal parts to the dices. I would add one twist to it, make one of the 15% your Intl allocation, instead of the 35%-40% Intl allocation suggested by some including Vanguard. It may look like 55% TSM, 15% Large Value, 15% Small Value, and 15% Total Intl. If that was good for Jack Bogle, that is good enough for me!

[Steve Reading]

Bogleheads:

In my opinion "expected returns" are almost meaningless and may be dangerous. No one can forecast stock market returns.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: "Absolutely no one knows what the stock market is going to do tomorrow, let alone next year. Nor which sector, style or region will lead and which will lag. Given this absolute uncertainty, the most logical strategy is to invest as broadly as possible."

Have you read Common Sense on Mutual Funds Taylor?

[Uncorrelated]

I went back and read the above Bogle lecture; certainly time very well spent. He looks at returns with two types of graphs. The first is total dollars accumulated versus an S&P 500 fund. Tilting to size and value clearly win over long periods. The second chart type shows the ratio of total accumulated returns for the selected style versus S&P500 at different points in time. On this graph the slopes of the line represent periods where the given style is outperforming or underperforming. The paths to the peaks and valleys can be very long. To me the takeaway from the charts is that one can well potentially benefit from tilting to size and value. But he must necessarily be willing to tolerate increased volatility and very long periods of underperformance. Moreover, the periods of outperformance occur in short bursts with long periods of underperformance or roughly equal performance. Of course there is no certainty we will see more of those short bursts in the future.

I have underlined the parts I think summarizes the issues. This is the closest we have ever come in these debates. I completely agree with all of those underlined parts.

I have read this multiple times, as I have nearly everything coming out of Fama-French on the topic, each time I have doubts I go back and read both sides to make sure my thoughts are consistent. I think Fama and Bogle are in agreement. There can be no argument that there has been a premium for small vs large and value vs growth, however as shown by the data and charts, this premium has been highly elusive, coming in very short bursts, over very long periods, with long periods of underperformance, greater volatility, with no predictability whatsoever when and how this may occur.

Just like market returns. For example in the paper "volatility lessons", there isn't much difference between the return distributions on market and value. Value can under perform for a long time (they say 10-year probability of negative performance is 9%), so can market (they say 10-year probability of negative performance is 15.6%). 1-month returns for value are close to a normal distribution, so are market returns.

There is no evidence that value/size returns are more elusive than market returns.

The very long period is in excess of 50 years in these charts, with long periods as far as 32 years going by without any difference. We now have 27 years since the inception of DFSVX with almost no difference in returns but having suffered increased volatility. Add to that access to this type of funds weren't available to retail investors until after the 2000-04 short burst.

You have the wrong definition of excess returns. The average monthly return of TSM was 0.86% per month. 0.93% for DFSVX. An investor with a modest tilt, say 70/30, has seen a higher ending balance over that time period.

Don't forget about international returns. i.e., evaluate all available evidence.

Bogle says this about S&D portfolio vs S&P 500 Index:

I urge you to ignore everything bogle has said in factor investing, his arguments are always cherry picked. I don't blame him, during most of his lifetime the correct evidence just wasn't available, but there is no reason to refer back to him right now.

Perhaps, for the true believer, and I must say less than 1% of the posters here on BH may qualify for this title, this may be worth the effort. If you are willing to be wrong for 30 or more years, and even for a lifetime as Rick Ferri recently said. This is not what most investors are signing up for when they look at Fama-French data that says Value outperforms Growth. We get these simplistic views that Value stocks are risky so they must have higher expected returns, therefore tilting is a fine strategy, without any considerations to the issues listed in the paper.

If size/value has higher expected returns and variance in a way that fits your risk tolerance, then investing in small/value results in higher expected utility even if you only invest in it for one month. You may need to wait for 30 years to capture any outperformance, but you may need to wait that long to capture market returns, too. The higher expected utility either exists or doesn't exist. It can't depend on your time horizon.

The 30 year argument only works if they are market timing or when returns are mean-reverting over long horizons (which is a form of market timing, if returns are mean-reverting then it is possible to do much better than a constant allocation). As far as I'm aware of it has not been shown that value returns are mean reverting.

[Taylor Larimore]

Have you read Common Sense on Mutual Funds Taylor?

Steve:

Mr. Bogle personally sent me both the 1999 edition and the 2010 edition. I have read both. In the second edition he asked me to read page 569 about the Bogleheads.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: “It is the power of words and books—explaining and dramatizing great ideas and articulating high ideals—that is the greatest weapon in the missionary’s arsenal.”

[Steve Reading]

Have you read Common Sense on Mutual Funds Taylor?

Steve:

Mr. Bogle personally sent me both the 1999 edition and the 2010 edition. I have read both. In the second edition he asked me to read page 569 about the Bogleheads.

Best wishes.
Taylor

Jack Bogle's Words of Wisdom: “It is the power of words and books—explaining and dramatizing great ideas and articulating high ideals—that is the greatest weapon in the missionary’s arsenal.”

Nice! While we are on the topic of forecasting returns, what did you think of Chapter 2, "On the Nature of Returns"?

In that chapter, Jack Bogle attempts to forecast the following 10 years of stock and bond market returns, using a model he named "Occam's Razor".