Why factor investing isn't working

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nedsaid
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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 12:57 pm

HomerJ wrote:
Tue Jul 09, 2019 12:35 pm
larryswedroe wrote:
Tue Jul 09, 2019 10:45 am
Investing is in fact, as I have noted many times, about putting the odds in your favor based on the evidence and logic we have. That criticism is simply not valid.
The criticism is somewhat valid.

We don't actually know the odds. There are very limited data points. There are no repeatable experiments. Human emotions are involved. Human laws and regulations (that change over the time periods with already limited data points) are involved.

Quite often (not always, but often), when a new investing method is discovered, it stops working.

We don't really know the odds... Not enough to make predictions with any precision at all.
Homer, you have a point here but you have overstated your case. We assume an equity risk premium around here otherwise we would all be posting about our Certificate of Deposit portfolios here. We have faith that stocks will outperform bonds over the long term, if we didn't we wouldn't bother with stocks.

We have know how different asset classes and sub-classes have performed over time. One of which is the Low-Volatility stocks, which have such things as Consumer Staples and Utility stocks. These are the so-called defensive stocks and they have over time behaved in rather predictable ways. We know how nominal treasuries with AAA credit perform compared to High Yield Junk Bonds, we know that credit quality makes a difference. We also know that bonds with longer maturities are more volatile than bonds with shorter maturities. We don't know everything with 100% certainty but we have a pretty good idea of how different asset classes and sub-asset classes will act in different market conditions. We know enough that we can make some educated projections into the future.

Again, this isn't precise. Investor preferences change over time. We have seen changes in the economy and the markets over time. So none of us has a crystal ball. But having knowledge of market history gives us context and gives us a pretty good idea of what might happen in the future.

If we took your argument to an extreme, it wouldn't matter what we invested in. We could take a rather fatalistic attitude and say none of this matters. Of course, almost no one here would take that position. Most all of us here have stock/bonds/cash portfolios largely because we have expectations that stocks will outperform bonds over the long term and that bonds have lower volatility than stocks while producing a steady income. We all have expectations and we all, even subconsciously, make predictions about the markets. Otherwise none of us would invest, the rationalization being this is a gamble anyways.
A fool and his money are good for business.

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vineviz
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Re: Why factor investing isn't working

Post by vineviz » Tue Jul 09, 2019 12:57 pm

schooner wrote:
Tue Jul 09, 2019 12:11 pm
Again, who is exactly on the other side of these factor tilts? I honestly don’t know. But unless you can answer that, I’d be worried about any stock picking strategy, even one hatched up at the University of Chicago
The world is literally full of people on the other side of these tilts, many of them knowingly and willingly.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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White Coat Investor
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Re: Why factor investing isn't working

Post by White Coat Investor » Tue Jul 09, 2019 12:59 pm

schooner wrote:
Tue Jul 09, 2019 12:46 pm
White Coat Investor wrote:
Tue Jul 09, 2019 12:41 pm
schooner wrote:
Tue Jul 09, 2019 12:30 pm
White Coat Investor wrote:
Tue Jul 09, 2019 12:19 pm
schooner wrote:
Tue Jul 09, 2019 10:01 am


There may have been a small factor advantage, but the fact that people are chasing it will make it go away.
Not if it is due to higher risk, at least in the long term. Then it's just like equity risk. If it is just a behavioral anomaly, then chasing it will cause it to go away long term.
If we’re using scientific terms, we should use the scientific method. Factor folks put forth a hypothesis. We tested the hypothesis and got a different result.

The repeatable experiment is the bedrock of science. Why not investing?
Because of observer effect. Investing isn't science. It's even less scientific than medicine.

Not sure what "test" you're referring to anyway. I don't recall anyone ever arguing that factor investing would always outperform the overall market, especially over relatively short time periods.
It’s not just returns, it’s volatility and fees. Factor investing has been sub-par on all three counts.

What other metrics should we judge it by?
What time period are you talking about and why?
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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HomerJ
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Re: Why factor investing isn't working

Post by HomerJ » Tue Jul 09, 2019 12:59 pm

9-5 Suited wrote:
Tue Jul 09, 2019 11:03 am
I could be very wrong about this, but I think there's an important psychological element that drives the intense reflexive distaste for all things factors, even causing smart people to jump to illogical arguments to oppose them. One perceived benefit of the Bogle revolution is the idea that the market portfolio is good enough and can't really be improved upon. That provides a sense of comfort that TSM is the right choice, and all the others are playing a fool's game. That comfort is disrupted by the emergence of a potentially persuasive argument that there's another available path. Now one is forced to choose a way. That peace of knowing you are on the one true path is gone, and the unpleasant potential for FOMO is introduced.
This is a very good post. There's a lot of truth in it.

But my problem with factor investing is that people here claim it's scientifically proven, that it's simple math, and if you don't believe in factor investing, you're just dumb or uneducated.

I'm not saying factor investing is wrong.

I'm saying that there's no way people can be that SURE.

Larry (and many other people) have made predictions in the past that, so far, turned out to be wrong.

He claims that the outcome, so far, doesn't prove anything and the strategy is still correct. He may be right. Absolutely, he may be right.

But, and this is important, it is absolutely is REASONABLE for someone to see bad results over many years, and wonder if maybe he's isn't right.

That's NOT the same as saying the factor proponents are wrong.

They should not be so insistent that they are right, and the rest of us just don't understand the academic research.

IMPORTANT: The research and math (using past data points) may be 100% correct, but the future may not be the same as the past.
Last edited by HomerJ on Tue Jul 09, 2019 2:01 pm, edited 1 time in total.
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schooner
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Re: Why factor investing isn't working

Post by schooner » Tue Jul 09, 2019 1:04 pm

YRT70 wrote:
Tue Jul 09, 2019 12:55 pm
schooner wrote:
Tue Jul 09, 2019 12:51 pm
YRT70 wrote:
Tue Jul 09, 2019 12:48 pm
schooner wrote:
Tue Jul 09, 2019 12:39 pm
YRT70 wrote:
Tue Jul 09, 2019 12:29 pm

I can't find the exact link right now but on portfoliocharts.com the portfolio with the lowest drawdown of all tested portfolios was actually the Larry portfolio, if I remember correctly.
Larry’s portfolio had the lowest return, the worst max draw down and the worst year.
I must have seen a very different table than you saw. Do you have the link?
I’ve been wrong more times than right, so it may apply to this one. But I think my analysis is correct.
That's only the last 10 years with 3 portfolios. I wouldn't attach much value to that personally. I found the chart I saw. I did remember it incorrectly though, the Larry portfolio came in in 4th place for lowest drawdown.

https://portfoliocharts.com/2018/12/26/ ... ng-winner/
Whew, that’s a lot of jargon and numbers.

I’m talking about something that was published in Kiplinger’s Magazine in January 2009. Not a white paper or a back test.

A real recommendation to real people. People were actually deciding between a target date fund like Vanguard 2020 and this newish factor strategy.

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HomerJ
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Re: Why factor investing isn't working

Post by HomerJ » Tue Jul 09, 2019 1:10 pm

nedsaid wrote:
Tue Jul 09, 2019 12:57 pm
HomerJ wrote:
Tue Jul 09, 2019 12:35 pm
larryswedroe wrote:
Tue Jul 09, 2019 10:45 am
Investing is in fact, as I have noted many times, about putting the odds in your favor based on the evidence and logic we have. That criticism is simply not valid.
The criticism is somewhat valid.

We don't actually know the odds. There are very limited data points. There are no repeatable experiments. Human emotions are involved. Human laws and regulations (that change over the time periods with already limited data points) are involved.

Quite often (not always, but often), when a new investing method is discovered, it stops working.

We don't really know the odds... Not enough to make predictions with any precision at all.
Homer, you have a point here but you have overstated your case. We assume an equity risk premium around here otherwise we would all be posting about our Certificate of Deposit portfolios here. We have faith that stocks will outperform bonds over the long term, if we didn't we wouldn't bother with stocks.

We have know how different asset classes and sub-classes have performed over time. One of which is the Low-Volatility stocks, which have such things as Consumer Staples and Utility stocks. These are the so-called defensive stocks and they have over time behaved in rather predictable ways. We know how nominal treasuries with AAA credit perform compared to High Yield Junk Bonds, we know that credit quality makes a difference. We also know that bonds with longer maturities are more volatile than bonds with shorter maturities. We don't know everything with 100% certainty but we have a pretty good idea of how different asset classes and sub-asset classes will act in different market conditions. We know enough that we can make some educated projections into the future.

Again, this isn't precise. Investor preferences change over time. We have seen changes in the economy and the markets over time. So none of us has a crystal ball. But having knowledge of market history gives us context and gives us a pretty good idea of what might happen in the future.

If we took your argument to an extreme, it wouldn't matter what we invested in. We could take a rather fatalistic attitude and say none of this matters. Of course, almost no one here would take that position. Most all of us here have stock/bonds/cash portfolios largely because we have expectations that stocks will outperform bonds over the long term and that bonds have lower volatility than stocks while producing a steady income. We all have expectations and we all, even subconsciously, make predictions about the markets. Otherwise none of us would invest, the rationalization being this is a gamble anyways.
But factor investing IS precise. They figure out the exact percentages of each factor that will give the best results.

I submit that level of precision is not possible.

Saying "stocks will give a positive real return over the long run, better than bonds or CDs" is not a precise statement.

Saying small value stocks have an expected return of 5.7% and normal stocks have an expected return of 4.5%, therefore one can allocate 30% on small value stocks, and achieve the same risk-adjusted returns as a standard 50/50 portfolio is pretty precise.

And it may be right. But the future may not repeat exactly like the past, and it may be wrong.

That's all I'm saying... We don't really know the odds that it will work.
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schooner
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Re: Why factor investing isn't working

Post by schooner » Tue Jul 09, 2019 1:14 pm

White Coat Investor wrote:
Tue Jul 09, 2019 12:59 pm
schooner wrote:
Tue Jul 09, 2019 12:46 pm
White Coat Investor wrote:
Tue Jul 09, 2019 12:41 pm
schooner wrote:
Tue Jul 09, 2019 12:30 pm
White Coat Investor wrote:
Tue Jul 09, 2019 12:19 pm


Not if it is due to higher risk, at least in the long term. Then it's just like equity risk. If it is just a behavioral anomaly, then chasing it will cause it to go away long term.
If we’re using scientific terms, we should use the scientific method. Factor folks put forth a hypothesis. We tested the hypothesis and got a different result.

The repeatable experiment is the bedrock of science. Why not investing?
Because of observer effect. Investing isn't science. It's even less scientific than medicine.

Not sure what "test" you're referring to anyway. I don't recall anyone ever arguing that factor investing would always outperform the overall market, especially over relatively short time periods.
It’s not just returns, it’s volatility and fees. Factor investing has been sub-par on all three counts.

What other metrics should we judge it by?
What time period are you talking about and why?
Keynes once quipped, “In the long run, we’re all dead.”

The ordinary investor reading Kiplinger’s is in her 60s I’d say.

10 years is a good time period given life expectancy imho

I didn’t make the prediction or pick where to publish it.

Factor investing may end up working out, but it’s a risky and expensive strategy, at least according to the data

rascott
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Re: Why factor investing isn't working

Post by rascott » Tue Jul 09, 2019 1:23 pm

schooner wrote:
Tue Jul 09, 2019 1:04 pm
YRT70 wrote:
Tue Jul 09, 2019 12:55 pm
schooner wrote:
Tue Jul 09, 2019 12:51 pm
YRT70 wrote:
Tue Jul 09, 2019 12:48 pm
schooner wrote:
Tue Jul 09, 2019 12:39 pm

Larry’s portfolio had the lowest return, the worst max draw down and the worst year.
I must have seen a very different table than you saw. Do you have the link?
I’ve been wrong more times than right, so it may apply to this one. But I think my analysis is correct.
That's only the last 10 years with 3 portfolios. I wouldn't attach much value to that personally. I found the chart I saw. I did remember it incorrectly though, the Larry portfolio came in in 4th place for lowest drawdown.

https://portfoliocharts.com/2018/12/26/ ... ng-winner/
Whew, that’s a lot of jargon and numbers.

I’m talking about something that was published in Kiplinger’s Magazine in January 2009. Not a white paper or a back test.

A real recommendation to real people. People were actually deciding between a target date fund like Vanguard 2020 and this newish factor strategy.


And I already showed you that the factor based portfolio in that article outperformed the same 3 fund portfolio for the 10 years that followed it's publication.

The underperformance you keep pointing to were driven by the higher international allocation in his portfolio. Not the small/value factors.

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vineviz
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Re: Why factor investing isn't working

Post by vineviz » Tue Jul 09, 2019 1:28 pm

HomerJ wrote:
Tue Jul 09, 2019 12:59 pm
But my problem with factor investing is that people here claim it's scientifically proven, that it's simple math, and if you don't believe in factor investing, you're just dumb or uneducated.

I'm not saying factor investing is wrong.

I'm saying that there's no way people can be that SURE.
We can "be that sure", though.

Nothing is every "proven" in science or statistics, but financial economists (and those who are familiar with their methods) have successfully run the tests they need to do to "be that sure": statistical robustness checks, out-of-sample validation, full replication, etc.

Economics and statistics aren't physics, but they aren't astrology either. The role that factors play in explaining the cross-section of asset returns isn't something you "believe in" any more than genetics or chemistry are things you "believe in".

To the extent that factor investing is an application of relatively well-settled economic science, there's certainly room for people to have preferences about how they might want to use factors (if at all) in their investment process. Or even have opinions about how others should used factors in their investment process. Reasonable people can have differing opinions in this realm, no problem IMHO.

If you feel that a market-cap weighted total market investment approach is good enough for you, and meets your needs, I certainly won't say you're wrong and I don't think many others would either.

What shouldn't be acceptable to anyone, I think, are attacks based on emotion, illogical beliefs, or misinterpretations of the data simply to help people justify (to others or themselves) their own personal choices.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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nedsaid
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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 1:31 pm

HomerJ wrote:
Tue Jul 09, 2019 1:10 pm
nedsaid wrote:
Tue Jul 09, 2019 12:57 pm
HomerJ wrote:
Tue Jul 09, 2019 12:35 pm
larryswedroe wrote:
Tue Jul 09, 2019 10:45 am
Investing is in fact, as I have noted many times, about putting the odds in your favor based on the evidence and logic we have. That criticism is simply not valid.
The criticism is somewhat valid.

We don't actually know the odds. There are very limited data points. There are no repeatable experiments. Human emotions are involved. Human laws and regulations (that change over the time periods with already limited data points) are involved.

Quite often (not always, but often), when a new investing method is discovered, it stops working.

We don't really know the odds... Not enough to make predictions with any precision at all.
Homer, you have a point here but you have overstated your case. We assume an equity risk premium around here otherwise we would all be posting about our Certificate of Deposit portfolios here. We have faith that stocks will outperform bonds over the long term, if we didn't we wouldn't bother with stocks.

We have know how different asset classes and sub-classes have performed over time. One of which is the Low-Volatility stocks, which have such things as Consumer Staples and Utility stocks. These are the so-called defensive stocks and they have over time behaved in rather predictable ways. We know how nominal treasuries with AAA credit perform compared to High Yield Junk Bonds, we know that credit quality makes a difference. We also know that bonds with longer maturities are more volatile than bonds with shorter maturities. We don't know everything with 100% certainty but we have a pretty good idea of how different asset classes and sub-asset classes will act in different market conditions. We know enough that we can make some educated projections into the future.

Again, this isn't precise. Investor preferences change over time. We have seen changes in the economy and the markets over time. So none of us has a crystal ball. But having knowledge of market history gives us context and gives us a pretty good idea of what might happen in the future.

If we took your argument to an extreme, it wouldn't matter what we invested in. We could take a rather fatalistic attitude and say none of this matters. Of course, almost no one here would take that position. Most all of us here have stock/bonds/cash portfolios largely because we have expectations that stocks will outperform bonds over the long term and that bonds have lower volatility than stocks while producing a steady income. We all have expectations and we all, even subconsciously, make predictions about the markets. Otherwise none of us would invest, the rationalization being this is a gamble anyways.
But factor investing IS precise. They figure out the exact percentages of each factor that will give the best results.

I submit that level of precision is not possible.

Saying "stocks will give a positive real return over the long run, better than bonds or CDs" is not a precise statement.

Saying small value stocks have an expected return of 5.7% and normal stocks have an expected return of 4.5%, therefore one can allocate 30% on small value stocks, and achieve the same risk-adjusted returns as a standard 50/50 portfolio is pretty precise.

And it may be right. But the future may not repeat exactly like the past, and it may be wrong.

That's all I'm saying... We don't really know the odds that it will work.
I can't speak for anyone else but my investments have been done by eyeballing and educated guesses. There is just no precision in any of this, the best we can do is calculate ranges of expected outcomes. Truthfully, I don't even do that. I have a preference for cheaper assets because I know that over the long term that cheap beats expensive. Low expectations are easier to beat than high expectations. Other folks might have complex, programmed spreadsheets to precisely calculate future expected returns and the optimal efficient frontier but I do not. I also tend not to chase hot investments.

So as of right now, I have been starting a Growth to Value rebalance in my portfolio. The dollar amounts are not large in comparison to my portfolio but I am seeing from Larry's data that the valuation gaps between Growth and Value look a lot like 1999. I will continue this process and may go even bigger if I get bolder. But I will not wholesale abandon Growth stocks. I call this the "Swedroe Shuffle" but it will be a much less ambitious shift than what Larry did in his portfolio back in 1997 or 1998, when he took his stocks to 100% Value.

Homer, you seem to be making claims for factor investing that Larry would not make himself. He has said many times that predictions of future expected returns are in ranges. Don't know why you are making strawman arguments. Pretty easy to knock down arguments that folks who disagree with you would not make themselves.
A fool and his money are good for business.

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nedsaid
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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 2:11 pm

nisiprius wrote:
Tue Jul 09, 2019 12:43 pm
9-5 Suited wrote:
Tue Jul 09, 2019 10:41 am
...To be fair, Larry notes this exact point in multiple books (that the 'science of investing' comes with far more uncertainty than physical sciences)...
And to be fair, John C. Bogle has said "But investing is not a science." That's six words, followed by a period. In italics. His italics. He thought it was important.

Image

One perfectly good dictionary definition of "science" is "a) a department of systematized knowledge as an object of study: the science of theology; b) something (as a sport or technique) that may be studied or learned like systematized knowledge, have it down to a science.

So, sure, boxing is "the sweet science," Ted Williams wrote The Science of Hitting, and Mary Baker Eddy founded Christian Science. All proper uses of the word... in meaning (b). In that meaning, investing is a science. Specifically, it is a social science, MIT, for example, puts economics within the School of Humanities, Arts, and Social Sciences.

But "a system of knowledge covering general truths or the operation of general laws especially as obtained and tested through scientific method," no, it is not.

Some parts of investing are about as scientific as the medicine practiced by the (fictional) Dr. Maturin in the Patrick O'Brian novels, a good man to have around if you needed a hernia repair, but perhaps not so useful when bleeding you to balance the four humours. Some investing "science" is probably about as scientific as putting radium in chocolate.
Image
Hmmm. My portfolio does sort of glow in the dark. It must be that radium in the Small/Value ETFs that I purchased.

I have made points about the slipperiness of financial data and time periods and so forth. I have also wondered if the 93 years of reliable market data is long enough to make definitive conclusions. But despite the limitations, I do believe the academic research and have made adjustments to my investment approach. I view all of this as inexact but with good enough data that at least tentative conclusions can be made. But this is not reading tea leaves, or entrails. This is not astrology. Not a hard science but not useless information either.
A fool and his money are good for business.

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nedsaid
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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 2:15 pm

matjen wrote:
Tue Jul 09, 2019 1:11 pm
HomerJ wrote:
Tue Jul 09, 2019 12:59 pm
But my problem with factor investing is that people here claim it's scientifically proven, that it's simple math, and if you don't believe in factor investing, you're just dumb or uneducated.

I'm not saying factor investing is wrong.

I'm saying that there's no way people can be that SURE.
I agree with your general conclusions but I think you are projecting. :P Factor people like to talk about factor investing on factor threads. It is people like you, Nisi, Taylor, etc. who are always barging in it seems to me. I got so tired of it that on a couple of occasions I have posted Robert T.'s portfolio on Three-Fund Threads so I admit guilt. :twisted:

Here's a little secret. One I am sure you agree with. There is nothing wrong with a reasonably constructed factor portfolio. There is nothing wrong with a Three-Fund Portfolio. There is nothing wrong with a Target-Date Fund. And no one knows which will do best over the next 20-50 years. I factor a fair bit, and as Wes Gray says it will take decades of additional data to overturn that decision based on the entirety of the record.

What is wrong is all the FUD that certain people throw out at some of these portfolios IMO.Causing people to switch back and forth is the worst thing for performance.
Father Matjen, I have sinned. I have gone to the 3 fund threads myself and posted about the S&P 500 and Total Stock Market Indexes being a bet on High Tech/Internet and particularly the FAANG stocks. I also have said that the "factors is dead" and the insistence that 3 fund is the only way to go is performance chasing. Also have posted that all you really needed was Google, it has done so well that you could have had the ultimate in simplicity, one stock! I even pointed all this out to Taylor Larimore. By the way, Taylor doesn't say there are many roads to Dublin anymore. I have sinned Father Matjen. What must I do for penance?
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Re: Why factor investing isn't working

Post by Taylor Larimore » Tue Jul 09, 2019 2:20 pm

matjean" wrote: It is people like you, Nisi, Taylor, etc. who are always barging in it seems to me.
matjean:

Sorry, I didn't realize we were "barging in" when trying to remind investors that this forum is about Jack's wisdom - not factor investing which he disapproved.

Best wishes.
Taylor
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Ben Mathew
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Re: Why factor investing isn't working

Post by Ben Mathew » Tue Jul 09, 2019 2:22 pm

Looking at past returns as the sole metric for evaluating strategies is dangerous. If you view stocks as real businesses, there would be no reason to get excited by the fact that a firm that was overpriced yesterday has become even more overpriced today. But that's exactly the mindset that a lot of people adopt because they see only past returns. It's what drives bubbles, and leads to disasters. People's thoughts become topsy turvy: "This firm wasn't a good buy at $100, but at $200, it's starting to look good!" Why? Because the price has doubled in five years!

I've been tilted towards small and value, and have a full dose of international. I'm fine with that decision. These are good, profitable firms, and cheaper than large, domestic, and growth. Maybe the more expensive firms will become even more expensive, and my tilts will lag even more. That's a risk I'm willing to take. Hoping that expensive will become even more expensive is the risk I'm not willing to take.

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Re: Why factor investing isn't working

Post by White Coat Investor » Tue Jul 09, 2019 2:30 pm

schooner wrote:
Tue Jul 09, 2019 1:14 pm
White Coat Investor wrote:
Tue Jul 09, 2019 12:59 pm
schooner wrote:
Tue Jul 09, 2019 12:46 pm
White Coat Investor wrote:
Tue Jul 09, 2019 12:41 pm
schooner wrote:
Tue Jul 09, 2019 12:30 pm


If we’re using scientific terms, we should use the scientific method. Factor folks put forth a hypothesis. We tested the hypothesis and got a different result.

The repeatable experiment is the bedrock of science. Why not investing?
Because of observer effect. Investing isn't science. It's even less scientific than medicine.

Not sure what "test" you're referring to anyway. I don't recall anyone ever arguing that factor investing would always outperform the overall market, especially over relatively short time periods.
It’s not just returns, it’s volatility and fees. Factor investing has been sub-par on all three counts.

What other metrics should we judge it by?
What time period are you talking about and why?
Keynes once quipped, “In the long run, we’re all dead.”

The ordinary investor reading Kiplinger’s is in her 60s I’d say.

10 years is a good time period given life expectancy imho

I didn’t make the prediction or pick where to publish it.

Factor investing may end up working out, but it’s a risky and expensive strategy, at least according to the data
I never expected the small and value factors to beat the overall market in every ten year period. Did you?

Here's the questions to ask yourself when deciding whether to tilt your portfolio to small/value or not:

Do you believe value stocks are riskier than the overall market?

If so, do you believe investors will be paid for taking that risk in the long run?

Do you believe small stocks are riskier than the overall market?

If so, do you believe investors will be paid for taking that risk in the long run?

My answer to those four questions is yes. What is your answer?

If yes, now, you have to decide how much of your portfolio to tilt. The question to ask yourself is:

How sure are you that small and value stocks are riskier than the overall market?

How sure are you that you will be paid for taking that risk in the long run?

If you're really sure, you should tilt a lot. If you are not very sure, you should only tilt a little.

Personally, I think the additional return is likely to outweigh the additional hassle, volatility, and fees enough over my investing horizon to put 15% of my portfolio into small/value stocks opposed to 25% in a very low cost TSM fund.

I haven't seen any data that has caused me to change my mind in the last 15 years since I started investing, but if you have some, I'll take a look at it. Bu I can tell you right now that I don't care all that much about 1, 5, and 10 years returns when it comes to this question.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy | 4) Basic arithmetic works 5) Stick to simplicity 6) Stay the course

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"More than one road to Dublin"

Post by Taylor Larimore » Tue Jul 09, 2019 2:32 pm

Nedsaid wrote: By the way, Taylor doesn't say there are many roads to Dublin anymore.
Nedsaid:

You missed this:
Post by Taylor Larimore » Fri Jun 28, 2019 6:56 pm

There is more than one road to Dublin.
Best wishes.
Taylor
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Re: Why factor investing isn't working

Post by White Coat Investor » Tue Jul 09, 2019 2:34 pm

Taylor Larimore wrote:
Tue Jul 09, 2019 2:20 pm
matjean" wrote: It is people like you, Nisi, Taylor, etc. who are always barging in it seems to me.
matjean:

Sorry, I didn't realize we were "barging in" when trying to remind investors that this forum is about Jack's wisdom - not factor investing which he disapproved.

Best wishes.
Taylor
Here's what Jack said about factor investing in 2014: https://www.etf.com/sections/features/2 ... nopaging=1
Do you believe in the French-Fama factors or do you think they are a distraction?

There is no question those factors, which are largely value and small-cap, have been the winning strategy over the entire period of the CRSP data, 1926-2014. For 90 years, they have been, on balance, the winning factors. There are extended periods when they didn't win, but over the long term, they have won. But is that past prologue to the future? My experience is to be very wary of thinking of the past as prologue in the world of investing.

Think about it: If everybody agreed that value and small-cap were the sure path to excess returns, then investors would bid up the prices of value and small-cap stocks, sell their growth stocks and their large-cap stocks, and get with the trend. But that would drive the relative prices of large-cap stocks down and the price of value and small-cap stocks up. I look at the market as being a great arbitrage medium, and I would make a small bet—$5 is a big bet for me—that over the next 20 years, large-cap and growth would do better than small-cap and value, because the market is such a great arbitrage mechanism between the past and the future.
So yes, I think he did recommend against small value investing, at least for the 2014-2034 period, but that isn't exactly a strong recommendation. I mean, he wasn't even willing to put $5 behind his opinion and he acknowledged that SV investing has been the winning strategy over the entire period of the data we have, even though there have been long periods (perhaps like the one we're in) when it was not the winning strategy.
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Re: Why factor investing isn't working

Post by Howard Donnelly » Tue Jul 09, 2019 2:40 pm

Taylor Larimore wrote:
Tue Jul 09, 2019 2:20 pm
matjean" wrote: It is people like you, Nisi, Taylor, etc. who are always barging in it seems to me.
matjean:

Sorry, I didn't realize we were "barging in" when trying to remind investors that this forum is about Jack's wisdom - not factor investing which he disapproved.

Best wishes.
Taylor
+1

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Re: Why factor investing isn't working

Post by vineviz » Tue Jul 09, 2019 2:43 pm

White Coat Investor wrote:
Tue Jul 09, 2019 2:34 pm
So yes, I think he did recommend against small value investing, at least for the 2014-2034 period, but that isn't exactly a strong recommendation. I mean, he wasn't even willing to put $5 behind his opinion and he acknowledged that SV investing has been the winning strategy over the entire period of the data we have, even though there have been long periods (perhaps like the one we're in) when it was not the winning strategy.
I think it's also worth mentioning that Bogle's reference to "arbitrage" suggests that his working knowledge of the factor research was less-than-complete.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Why factor investing isn't working

Post by matjen » Tue Jul 09, 2019 2:46 pm

Nedsaid and Taylor,

Never forget that Prophet Asness has instructed that there is nothing wrong with sinning a little. 😀

https://www.aqr.com/-/media/AQR/Documen ... Little.pdf
A man is rich in proportion to the number of things he can afford to let alone.

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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 2:46 pm

Taylor Larimore wrote:
Tue Jul 09, 2019 2:20 pm
matjean" wrote: It is people like you, Nisi, Taylor, etc. who are always barging in it seems to me.
matjean:

Sorry, I didn't realize we were "barging in" when trying to remind investors that this forum is about Jack's wisdom - not factor investing which he disapproved.

Best wishes.
Taylor
Discussion from the 3 fund folks is always welcome even in the factor threads. Healthy disagreement is part of what makes the forum, not only the entertainment value but this discussion can be very informative.

I did have a very unhappy experience with two threads where I attempted to review Larry's factor book. Some folks, not you, went over the line and it deteriorated into a Larry bashing session. I nearly quit the forum over that. I thought that thread would be my Magnus Opus and it turned into an utter disaster. I asked the Mods to combine the threads, clean them up from the worst of the bashing, repost them, and keep it closed which they graciously did. I really appreciated their time and effort to do this.

The thing is, I put considerable effort and research into my posts. I value reasoned discussion and disagreement. Indeed, I have myself made a lot of the points that the critics of factor investing have made. To me, as explained above, I see it more as a proponderance of evidence rather than beyond a reasonable doubt. So plenty to disagree about, even about the data. But it does get discouraging when you put your very best efforts into something to just get snark in return. It can take 1/2 hour or longer to compose a well thought out and edited post, it just takes seconds to snark. Taylor, you are not one of the guilty parties regarding snarkiness, you have always been gentlemanly. But some folks here have crossed the line a bit and I have called a couple folks out.

There does seem to be a change here, I have noticed a change a bit in the tone.

There are times when factor tilted portfolios will outperform the 3 fund but that doesn't mean that 3 fund in that case is dead. It is just the way markets work. ALL market strategies, even the good ones, will experience periods of disappointment.

Will say it here on more time on this thread. Factor tilt if you believe the academic research and go with the 3 fund portfolio if you don't. I have even shown how to factor tilt with just 4-5 funds, factor tilting need not be expensive or complex.

So it isn't a matter of barging in. I will always have reasoned dialogue with folks who disagree. There is a point where the point is made and that should be enough.
Last edited by nedsaid on Tue Jul 09, 2019 3:15 pm, edited 2 times in total.
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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 2:49 pm

matjen wrote:
Tue Jul 09, 2019 2:46 pm
Nedsaid and Taylor,

Never forget that Prophet Asness has instructed that there is nothing wrong with sinning a little. 😀

https://www.aqr.com/-/media/AQR/Documen ... Little.pdf
I believe Prophet Larry has said the same thing. By Boglehead standards, I have "sinned" more than a little though. But that gives me lots of experience to write from.
A fool and his money are good for business.

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Re: Why factor investing isn't working

Post by jbranx » Tue Jul 09, 2019 2:55 pm

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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 2:56 pm

White Coat Investor wrote:
Tue Jul 09, 2019 2:30 pm
schooner wrote:
Tue Jul 09, 2019 1:14 pm
White Coat Investor wrote:
Tue Jul 09, 2019 12:59 pm
schooner wrote:
Tue Jul 09, 2019 12:46 pm
White Coat Investor wrote:
Tue Jul 09, 2019 12:41 pm


Because of observer effect. Investing isn't science. It's even less scientific than medicine.

Not sure what "test" you're referring to anyway. I don't recall anyone ever arguing that factor investing would always outperform the overall market, especially over relatively short time periods.
It’s not just returns, it’s volatility and fees. Factor investing has been sub-par on all three counts.

What other metrics should we judge it by?
What time period are you talking about and why?
Keynes once quipped, “In the long run, we’re all dead.”

The ordinary investor reading Kiplinger’s is in her 60s I’d say.

10 years is a good time period given life expectancy imho

I didn’t make the prediction or pick where to publish it.

Factor investing may end up working out, but it’s a risky and expensive strategy, at least according to the data
I never expected the small and value factors to beat the overall market in every ten year period. Did you?

Here's the questions to ask yourself when deciding whether to tilt your portfolio to small/value or not:

Do you believe value stocks are riskier than the overall market?

If so, do you believe investors will be paid for taking that risk in the long run?

Do you believe small stocks are riskier than the overall market?

If so, do you believe investors will be paid for taking that risk in the long run?

My answer to those four questions is yes. What is your answer?

If yes, now, you have to decide how much of your portfolio to tilt. The question to ask yourself is:

How sure are you that small and value stocks are riskier than the overall market?

How sure are you that you will be paid for taking that risk in the long run?

If you're really sure, you should tilt a lot. If you are not very sure, you should only tilt a little.

Personally, I think the additional return is likely to outweigh the additional hassle, volatility, and fees enough over my investing horizon to put 15% of my portfolio into small/value stocks opposed to 25% in a very low cost TSM fund.

I haven't seen any data that has caused me to change my mind in the last 15 years since I started investing, but if you have some, I'll take a look at it. Bu I can tell you right now that I don't care all that much about 1, 5, and 10 years returns when it comes to this question.
Thank you. You asked a lot of great questions here and they would be a good start for an Investment Policy Statement, something that I advocate for here. You have to know thyself as an investor. Most folks probably should not factor tilt given their answers to the above questions. One reason that I pound it into people that they need a strong belief system and philosophy behind their investment approach. A strong belief system will keep you from switching strategies at the worst possible time which is what a lot of investors do, the "Nedsaid effect" and all of that. Folks do best if they pick to a solid investment approach and stick to it. Performance chasing hurts returns over time and this works for investment strategies as well as hot asset classes and hot individual securities. Hot strategies and investments cool off as many people pile in. Buying high and selling low is not a winning strategy but one that many investors carry out regardless.
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Re: Why factor investing isn't working

Post by CULater » Tue Jul 09, 2019 3:04 pm

I tend toward some aspects of "factor" investing, particularly with respect to small value investing, which has been around and practiced for awhile, and I'm inclined to place a few bets on it; keeping in mind they are bets. The idea that 10 or 20 years is just "noise", and that it might take a couple of decades for patient investors to be rewarded for factor investing doesn't really go far enough. As I've mentioned in other posts, the Nobel prize winner William Sharpe has pointed out that we barely have enough historical data to be reasonably sure about the ordering of arithmetic returns from stocks, bonds, and cash; and the idea that a half century or less of data on "factors" is sufficient to prove their existence is just not statistically convincing -- he thinks probably it's all noise -- or at least we don't really know. I've never heard his argument addressed in this forum.
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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 3:12 pm

Ben Mathew wrote:
Tue Jul 09, 2019 2:22 pm
Looking at past returns as the sole metric for evaluating strategies is dangerous. If you view stocks as real businesses, there would be no reason to get excited by the fact that a firm that was overpriced yesterday has become even more overpriced today. But that's exactly the mindset that a lot of people adopt because they see only past returns. It's what drives bubbles, and leads to disasters. People's thoughts become topsy turvy: "This firm wasn't a good buy at $100, but at $200, it's starting to look good!" Why? Because the price has doubled in five years!

I've been tilted towards small and value, and have a full dose of international. I'm fine with that decision. These are good, profitable firms, and cheaper than large, domestic, and growth. Maybe the more expensive firms will become even more expensive, and my tilts will lag even more. That's a risk I'm willing to take. Hoping that expensive will become even more expensive is the risk I'm not willing to take.
A very good post. This reflects my thinking, just don't believe performance chasing is the optimal strategy.
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Re: Why factor investing isn't working

Post by schooner » Tue Jul 09, 2019 3:21 pm

nedsaid wrote:
Tue Jul 09, 2019 2:56 pm
White Coat Investor wrote:
Tue Jul 09, 2019 2:30 pm
schooner wrote:
Tue Jul 09, 2019 1:14 pm
White Coat Investor wrote:
Tue Jul 09, 2019 12:59 pm
schooner wrote:
Tue Jul 09, 2019 12:46 pm


It’s not just returns, it’s volatility and fees. Factor investing has been sub-par on all three counts.

What other metrics should we judge it by?
What time period are you talking about and why?
Keynes once quipped, “In the long run, we’re all dead.”

The ordinary investor reading Kiplinger’s is in her 60s I’d say.

10 years is a good time period given life expectancy imho

I didn’t make the prediction or pick where to publish it.

Factor investing may end up working out, but it’s a risky and expensive strategy, at least according to the data
I never expected the small and value factors to beat the overall market in every ten year period. Did you?

Here's the questions to ask yourself when deciding whether to tilt your portfolio to small/value or not:

Do you believe value stocks are riskier than the overall market?

If so, do you believe investors will be paid for taking that risk in the long run?

Do you believe small stocks are riskier than the overall market?

If so, do you believe investors will be paid for taking that risk in the long run?

My answer to those four questions is yes. What is your answer?

If yes, now, you have to decide how much of your portfolio to tilt. The question to ask yourself is:

How sure are you that small and value stocks are riskier than the overall market?

How sure are you that you will be paid for taking that risk in the long run?

If you're really sure, you should tilt a lot. If you are not very sure, you should only tilt a little.

Personally, I think the additional return is likely to outweigh the additional hassle, volatility, and fees enough over my investing horizon to put 15% of my portfolio into small/value stocks opposed to 25% in a very low cost TSM fund.

I haven't seen any data that has caused me to change my mind in the last 15 years since I started investing, but if you have some, I'll take a look at it. Bu I can tell you right now that I don't care all that much about 1, 5, and 10 years returns when it comes to this question.
Thank you. You asked a lot of great questions here and they would be a good start for an Investment Policy Statement, something that I advocate for here. You have to know thyself as an investor. Most folks probably should not factor tilt given their answers to the above questions. One reason that I pound it into people that they need a strong belief system and philosophy behind their investment approach. A strong belief system will keep you from switching strategies at the worst possible time which is what a lot of investors do, the "Nedsaid effect" and all of that. Folks do best if they pick to a solid investment approach and stick to it. Performance chasing hurts returns over time and this works for investment strategies as well as hot asset classes and hot individual securities. Hot strategies and investments cool off as many people pile in. Buying high and selling low is not a winning strategy but one that many investors carry out regardless.
I'm sorry if I came across as trolling. That truly wasn't my intention. I just like a lively debate. Here is a paper which may challenge both of our opinions:

https://www.researchaffiliates.com/en_u ... sting.html

"The risks of factor investing are usually understated (perhaps, severely so), and the diversification benefits tend to be overstated."

"Factor investing, for patient investors who understand the risks, has the potential to improve a portfolio’s long-term risk-adjusted return, especially when strategies used are transparent, use sufficiently researched factors, and have low management fees and good implementation characteristics."

I'd echo Bogle's analysis that patterns such as factors may be ephemeral, mirages. But I may be totally wrong. And I freely admit that :-)

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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 3:38 pm

Schooner, I welcome lively debate and I am at peace that reasonable people can disagree over issues. I try to be objective and dispassionate and have raised a lot of the points that critics of factor investing have raised. Again, I see it as a preponderance of evidence and not evidence beyond a reasonable doubt. There are a lot of objections that can be raised about academic research but I still conclude they are correct. I can't make an airtight case but more of a more probable than not argument. We just don't have enough years of reliable data to be 100% certain on absolutely everything. We also don't know for certain what will happen in the future.

There is a certain nuance to these arguments and a need for precise language. One example is the discussion if factor investing is really stock picking or a form of active management. I don't live in a black and white world, I regard factor investing in a continuum between passive and active. I would say that it is much more passive than active but not really passive either. That is part of the problem in discussing this, the data is slippery as are definitions as is the language. We even have problems agreeing on the definition of factors. We have to consider the nuances or we just wind up shouting past each other. I am reminded of G K Chesterton's comment that he would not debate someone unless there was something they could agree on. The thing is, I can see both sides of this. It is also that I lean towards the factor arguments recognizing the strengths and the flaws of my position.

Another thing you hinted at is the problem of subconscious bias. In other words, we tend to see what we want to see. There gets to be a point where looking at data and interpreting it seems like looking at inkblots, the Rohrschach test. It can be really hard to be objective.

Beliefs affect perception. I call it the Subaru Outback effect. My neighbor pulled up in an Outback station wagon one day, I had never seen a Subaru Outback station wagon before and before didn't even know what one was. Guess what, after that I saw those darned things all over the place, in fact it seemed that every other car was a Subaru Outback station wagon. It was like my eyes were opened and that my perception changed.

Stick around and listen to those with whom you disagree and you will learn something even if you don't change your mind. This is a free country, after all, folks still have the freedom to disagree over issues.
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Re: Why factor investing isn't working

Post by HomerJ » Tue Jul 09, 2019 3:45 pm

schooner wrote:
Tue Jul 09, 2019 3:21 pm
https://www.researchaffiliates.com/en_u ... sting.html

"The risks of factor investing are usually understated (perhaps, severely so), and the diversification benefits tend to be overstated."

"Factor investing, for patient investors who understand the risks, has the potential to improve a portfolio’s long-term risk-adjusted return, especially when strategies used are transparent, use sufficiently researched factors, and have low management fees and good implementation characteristics."

I'd echo Bogle's analysis that patterns such as factors may be ephemeral, mirages. But I may be totally wrong. And I freely admit that :-)
Note that phrase.

That's that kind of slippery language I don't like.

20 years later - "Oh, it didn't work? It was researched, but I guess just not enough".

:)
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Re: Why factor investing isn't working

Post by schooner » Tue Jul 09, 2019 3:54 pm

nedsaid wrote:
Tue Jul 09, 2019 3:38 pm
Schooner, I welcome lively debate and I am at peace that reasonable people can disagree over issues. I try to be objective and dispassionate and have raised a lot of the points that critics of factor investing have raised. Again, I see it as a preponderance of evidence and not evidence beyond a reasonable doubt. There are a lot of objections that can be raised about academic research but I still conclude they are correct. I can't make an airtight case but more of a more probable than not argument. We just don't have enough years of reliable data to be 100% certain on absolutely everything. We also don't know for certain what will happen in the future.

There is a certain nuance to these arguments and a need for precise language. One example is the discussion if factor investing is really stock picking or a form of active management. I don't live in a black and white world, I regard factor investing in a continuum between passive and active. I would say that it is much more passive than active but not really passive either. That is part of the problem in discussing this, the data is slippery as are definitions as is the language. We even have problems agreeing on the definition of factors. We have to consider the nuances or we just wind up shouting past each other. I am reminded of G K Chesterton's comment that he would not debate someone unless there was something they could agree on. The thing is, I can see both sides of this. It is also that I lean towards the factor arguments recognizing the strengths and the flaws of my position.

Stick around and listen to those with whom you disagree and you will learn something even if you don't change your mind. This is a free country, after all, folks still have the freedom to disagree over issues.
True, and you do have some real, hard academic research in your camp! Hard to argue with a Nobel Prize :-)

I agree on the active-passive continuum too. Even the S&P 500 exists along that line.

But like Bogle, my argument is part behavioral. A market-cap index may not be perfect. But it's cheap and it has worked (when combined with safe bonds) for millions of ordinary investors.

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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 4:17 pm

schooner wrote:
Tue Jul 09, 2019 3:54 pm
nedsaid wrote:
Tue Jul 09, 2019 3:38 pm
Schooner, I welcome lively debate and I am at peace that reasonable people can disagree over issues. I try to be objective and dispassionate and have raised a lot of the points that critics of factor investing have raised. Again, I see it as a preponderance of evidence and not evidence beyond a reasonable doubt. There are a lot of objections that can be raised about academic research but I still conclude they are correct. I can't make an airtight case but more of a more probable than not argument. We just don't have enough years of reliable data to be 100% certain on absolutely everything. We also don't know for certain what will happen in the future.

There is a certain nuance to these arguments and a need for precise language. One example is the discussion if factor investing is really stock picking or a form of active management. I don't live in a black and white world, I regard factor investing in a continuum between passive and active. I would say that it is much more passive than active but not really passive either. That is part of the problem in discussing this, the data is slippery as are definitions as is the language. We even have problems agreeing on the definition of factors. We have to consider the nuances or we just wind up shouting past each other. I am reminded of G K Chesterton's comment that he would not debate someone unless there was something they could agree on. The thing is, I can see both sides of this. It is also that I lean towards the factor arguments recognizing the strengths and the flaws of my position.

Stick around and listen to those with whom you disagree and you will learn something even if you don't change your mind. This is a free country, after all, folks still have the freedom to disagree over issues.
True, and you do have some real, hard academic research in your camp! Hard to argue with a Nobel Prize :-)

I agree on the active-passive continuum too. Even the S&P 500 exists along that line.

But like Bogle, my argument is part behavioral. A market-cap index may not be perfect. But it's cheap and it has worked (when combined with safe bonds) for millions of ordinary investors.
I have posted a lot about factor investing including my frustrations about implementation. Some factor products are better than others. I had some success with this even with imperfect products.

I did some factor tilting during the 2000's and even with my imperfect products, I was rather pleased with my portfolio performance from 2000-2007. I didn't even start Small Value tilting until later in 2007. For example, I was very pleased with the performance of American Century Value (a Large Value fund) during this time period and also a couple of Mid/Small Cap growth funds which were American Century Vista and Heritage. Value and Mid/Small-Caps did better than the S&P 500 during that period. The American Century funds were all active and had 1% expense ratios. The bubble in stocks built in the late 1990's were mostly in the Large Growth area of the market.

By the time 2008-2009 rolled around, I had added Small-Cap Value, Micro-Cap, and International Mid/Small-Cap. I mostly used the lower cost ETF products to do this. The tilts that would have helped in 2000-2007 didn't help in 2008-2009, in fact they might have increased my losses a bit. So the factor tilting helped during the 2000-2002 bear market but not during the 2008-2009 bear. Factor tilts have trailed the market since the 2008-2009 financial crisis even though I am now using better products than I had during 2000-2007. Size and Value worked great as factors during the 2000-2007 period.

So what I am saying is that there is nuance to the implementation as well. But what I had seemed to be good enough at the time. Problem is, we are in a Large Growth stock market and have been for a decade, but no matter how good my factor products, I will trail the broad market. Small/Value factor investing just won't work in this environment, no matter how hard you try. History suggests that the Large Growth trend in the market won't continue forever, Value will have its day in the sun again.

I am also saying that you have to pay attention to what is happening in the market as a whole. As I said, Small/Value tilting will not outperform in a Large Growth environment no matter how hard you try or how good your factor products. The trend is not your friend here.

Also saying that one has to look longer term when you make factor arguments. Almost anything can happen in the shorter term. Some things for you to consider.
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Re: Why factor investing isn't working

Post by nedsaid » Tue Jul 09, 2019 4:23 pm

HomerJ wrote:
Tue Jul 09, 2019 3:45 pm
schooner wrote:
Tue Jul 09, 2019 3:21 pm
https://www.researchaffiliates.com/en_u ... sting.html

"The risks of factor investing are usually understated (perhaps, severely so), and the diversification benefits tend to be overstated."

"Factor investing, for patient investors who understand the risks, has the potential to improve a portfolio’s long-term risk-adjusted return, especially when strategies used are transparent, use sufficiently researched factors, and have low management fees and good implementation characteristics."

I'd echo Bogle's analysis that patterns such as factors may be ephemeral, mirages. But I may be totally wrong. And I freely admit that :-)
Note that phrase.

That's that kind of slippery language I don't like.

20 years later - "Oh, it didn't work? It was researched, but I guess just not enough".

:)
Sadly Homer, in the area of investing we have to work with incomplete information and slippery data and definitions. We aren't even certain that the equity risk premium will persist, though the evidence is pretty strong that it will persist. If we waited for 100% certitude, we never would do anything. I am willing to accept imperfection. It is just the best we can do. We don't know everything but we know (or suspect) some things and that will have to be good enough.
A fool and his money are good for business.

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Re: Why factor investing isn't working

Post by Miriam2 » Tue Jul 09, 2019 4:39 pm

I am an ordinary investor and I don't factor invest because it is too complicated for me for too little benefit, and it would take up too much time in my already busy days taking care of family, work, home, community, and life's problems to create and maintain a portfolio with factors - plus I would kick myself for even attempting it if the portfolio did worse than a common index or low cost active portfolio (which it is certainly possible to do) over long periods of my time on this great earth.

The only way I (and many other ordinary investors) could factor invest is - by hiring an advisor who knows and believes in factor portfolios.

Please note I do not consider a small cap value tilt to be a serious factor problem for the common investor. I do not do it because I could not bear watching that factor tilt south for years on end while my years are moving on.

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Re: Why factor investing isn't working

Post by CULater » Tue Jul 09, 2019 4:58 pm

White Coat Investor wrote:
Tue Jul 09, 2019 2:34 pm
Taylor Larimore wrote:
Tue Jul 09, 2019 2:20 pm
matjean" wrote: It is people like you, Nisi, Taylor, etc. who are always barging in it seems to me.
matjean:

Sorry, I didn't realize we were "barging in" when trying to remind investors that this forum is about Jack's wisdom - not factor investing which he disapproved.

Best wishes.
Taylor
Here's what Jack said about factor investing in 2014: https://www.etf.com/sections/features/2 ... nopaging=1
Do you believe in the French-Fama factors or do you think they are a distraction?

There is no question those factors, which are largely value and small-cap, have been the winning strategy over the entire period of the CRSP data, 1926-2014. For 90 years, they have been, on balance, the winning factors. There are extended periods when they didn't win, but over the long term, they have won. But is that past prologue to the future? My experience is to be very wary of thinking of the past as prologue in the world of investing.

Think about it: If everybody agreed that value and small-cap were the sure path to excess returns, then investors would bid up the prices of value and small-cap stocks, sell their growth stocks and their large-cap stocks, and get with the trend. But that would drive the relative prices of large-cap stocks down and the price of value and small-cap stocks up. I look at the market as being a great arbitrage medium, and I would make a small bet—$5 is a big bet for me—that over the next 20 years, large-cap and growth would do better than small-cap and value, because the market is such a great arbitrage mechanism between the past and the future.
So yes, I think he did recommend against small value investing, at least for the 2014-2034 period, but that isn't exactly a strong recommendation. I mean, he wasn't even willing to put $5 behind his opinion and he acknowledged that SV investing has been the winning strategy over the entire period of the data we have, even though there have been long periods (perhaps like the one we're in) when it was not the winning strategy.
Yes, thanks for the reminder of what Jack had to say. He was quite aware of the data didn't deny the data. But it sounds like he and Bill Sharpe would agree that even 90 years of data didn't convince him that we'd see the same thing going forward that we see in the rearview mirror. Humble man with humble suggestions.
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Re: Why factor investing isn't working

Post by HomerJ » Tue Jul 09, 2019 5:04 pm

schooner wrote:
Tue Jul 09, 2019 3:54 pm
nedsaid wrote:
Tue Jul 09, 2019 3:38 pm
Schooner, I welcome lively debate and I am at peace that reasonable people can disagree over issues. I try to be objective and dispassionate and have raised a lot of the points that critics of factor investing have raised. Again, I see it as a preponderance of evidence and not evidence beyond a reasonable doubt. There are a lot of objections that can be raised about academic research but I still conclude they are correct. I can't make an airtight case but more of a more probable than not argument. We just don't have enough years of reliable data to be 100% certain on absolutely everything. We also don't know for certain what will happen in the future.

There is a certain nuance to these arguments and a need for precise language. One example is the discussion if factor investing is really stock picking or a form of active management. I don't live in a black and white world, I regard factor investing in a continuum between passive and active. I would say that it is much more passive than active but not really passive either. That is part of the problem in discussing this, the data is slippery as are definitions as is the language. We even have problems agreeing on the definition of factors. We have to consider the nuances or we just wind up shouting past each other. I am reminded of G K Chesterton's comment that he would not debate someone unless there was something they could agree on. The thing is, I can see both sides of this. It is also that I lean towards the factor arguments recognizing the strengths and the flaws of my position.

Stick around and listen to those with whom you disagree and you will learn something even if you don't change your mind. This is a free country, after all, folks still have the freedom to disagree over issues.
True, and you do have some real, hard academic research in your camp! Hard to argue with a Nobel Prize :-)
Technically, the prize for economics isn't really a Nobel prize. It was added later, in 1969.

Hate to nitpick like that, but this quote really underscores the point some of us are making about Economics as a "science".
In his speech at the 1974 Nobel Prize banquet, Friedrich Hayek stated that had he been consulted on the establishment of a Nobel Prize in economics, he would "have decidedly advised against it" primarily because, "The Nobel Prize confers on an individual an authority which in economics no man ought to possess.... This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally."
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Re: Why factor investing isn't working

Post by schooner » Tue Jul 09, 2019 5:08 pm

HomerJ wrote:
Tue Jul 09, 2019 5:04 pm
schooner wrote:
Tue Jul 09, 2019 3:54 pm
nedsaid wrote:
Tue Jul 09, 2019 3:38 pm
Schooner, I welcome lively debate and I am at peace that reasonable people can disagree over issues. I try to be objective and dispassionate and have raised a lot of the points that critics of factor investing have raised. Again, I see it as a preponderance of evidence and not evidence beyond a reasonable doubt. There are a lot of objections that can be raised about academic research but I still conclude they are correct. I can't make an airtight case but more of a more probable than not argument. We just don't have enough years of reliable data to be 100% certain on absolutely everything. We also don't know for certain what will happen in the future.

There is a certain nuance to these arguments and a need for precise language. One example is the discussion if factor investing is really stock picking or a form of active management. I don't live in a black and white world, I regard factor investing in a continuum between passive and active. I would say that it is much more passive than active but not really passive either. That is part of the problem in discussing this, the data is slippery as are definitions as is the language. We even have problems agreeing on the definition of factors. We have to consider the nuances or we just wind up shouting past each other. I am reminded of G K Chesterton's comment that he would not debate someone unless there was something they could agree on. The thing is, I can see both sides of this. It is also that I lean towards the factor arguments recognizing the strengths and the flaws of my position.

Stick around and listen to those with whom you disagree and you will learn something even if you don't change your mind. This is a free country, after all, folks still have the freedom to disagree over issues.
True, and you do have some real, hard academic research in your camp! Hard to argue with a Nobel Prize :-)
Technically, the prize for economics isn't really a Nobel prize. It was added later, in 1969.

Hate to nitpick like that, but this quote really underscores the point some of us are making about Economics as a "science".
In his speech at the 1974 Nobel Prize banquet, Friedrich Hayek stated that had he been consulted on the establishment of a Nobel Prize in economics, he would "have decidedly advised against it" primarily because, "The Nobel Prize confers on an individual an authority which in economics no man ought to possess.... This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally."
Ha, that is a nitpick! I’m in the Sharpe camp, but there is serious research on the other side

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Re: Why factor investing isn't working

Post by nisiprius » Tue Jul 09, 2019 5:21 pm

HomerJ wrote:
Tue Jul 09, 2019 3:45 pm
schooner wrote:
Tue Jul 09, 2019 3:21 pm
..."Factor investing, for patient investors who understand the risks, has the potential to improve a portfolio’s long-term risk-adjusted return, especially when strategies used are transparent, use sufficiently researched factors, and have low management fees and good implementation characteristics."...
Note that phrase. That's that kind of slippery language I don't like. 20 years later - "Oh, it didn't work? It was researched, but I guess just not enough".
And don't forget "potential" and "good implementation." Alibi-compliant wording.
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Re: Why factor investing isn't working

Post by BrklynMike » Tue Jul 09, 2019 6:39 pm

For what it's worth, I want to thank all of you for your thoughtful and spirited posts. I learn alot reading these threads, even though they can be snarky sometimes. I hope you all continue posting on this topic.
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Re: Why factor investing isn't working

Post by 9-5 Suited » Tue Jul 09, 2019 6:46 pm

HomerJ wrote:
Tue Jul 09, 2019 12:59 pm
9-5 Suited wrote:
Tue Jul 09, 2019 11:03 am
I could be very wrong about this, but I think there's an important psychological element that drives the intense reflexive distaste for all things factors, even causing smart people to jump to illogical arguments to oppose them. One perceived benefit of the Bogle revolution is the idea that the market portfolio is good enough and can't really be improved upon. That provides a sense of comfort that TSM is the right choice, and all the others are playing a fool's game. That comfort is disrupted by the emergence of a potentially persuasive argument that there's another available path. Now one is forced to choose a way. That peace of knowing you are on the one true path is gone, and the unpleasant potential for FOMO is introduced.
This is a very good post. There's a lot of truth in it.

But my problem with factor investing is that people here claim it's scientifically proven, that it's simple math, and if you don't believe in factor investing, you're just dumb or uneducated.

I'm not saying factor investing is wrong.

I'm saying that there's no way people can be that SURE.

Larry (and many other people) have made predictions in the past that, so far, turned out to be wrong.

He claims that the outcome, so far, doesn't prove anything and the strategy is still correct. He may be right. Absolutely, he may be right.

But, and this is important, it is absolutely is REASONABLE for someone to see bad results over many years, and wonder if maybe he's isn't right.

That's NOT the same as saying the factor proponents are wrong.

They should not be so insistent that they are right, and the rest of us just don't understand the academic research.

IMPORTANT: The research and math (using past data points) may be 100% correct, but the future may not be the same as the past.
You're right - those are good builds. If I recall, some posters have been fairly overt about viewing TSM investors as simpletons who just don't get it. That's pompous and unfortunate and must be frustrating to hear. I think the fairest way to say this is that if you do the basic reading on the mainstream factors and come away unconvinced or don't think it's right for you, that's a perfectly valid conclusion. I love the advice of a lot of TSM advocates including Bogle himself, Nisiprius, JoMoney, and others. Very disciplined and discerning investors. And it definitely is a point well taken that one should have healthy skepticism about any non-TSM strategy, and invest in it only up to the degree of their certainty. That's why I don't go as far as others or as far as Larry might recommend with my small/value investments. A little voice of Bogle sings in the back of my head periodically.

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Re: Why factor investing isn't working

Post by White Coat Investor » Tue Jul 09, 2019 6:56 pm

CULater wrote:
Tue Jul 09, 2019 3:04 pm
I tend toward some aspects of "factor" investing, particularly with respect to small value investing, which has been around and practiced for awhile, and I'm inclined to place a few bets on it; keeping in mind they are bets. The idea that 10 or 20 years is just "noise", and that it might take a couple of decades for patient investors to be rewarded for factor investing doesn't really go far enough. As I've mentioned in other posts, the Nobel prize winner William Sharpe has pointed out that we barely have enough historical data to be reasonably sure about the ordering of arithmetic returns from stocks, bonds, and cash; and the idea that a half century or less of data on "factors" is sufficient to prove their existence is just not statistically convincing -- he thinks probably it's all noise -- or at least we don't really know. I've never heard his argument addressed in this forum.
I think that's the best argument there is against factor investing- that it's just statistical noise.
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Re: Why factor investing isn't working

Post by TropikThunder » Tue Jul 09, 2019 11:46 pm

YRT70 wrote:
Tue Jul 09, 2019 12:55 pm
schooner wrote:
Tue Jul 09, 2019 12:51 pm
YRT70 wrote:
Tue Jul 09, 2019 12:48 pm
schooner wrote:
Tue Jul 09, 2019 12:39 pm
YRT70 wrote:
Tue Jul 09, 2019 12:29 pm

I can't find the exact link right now but on portfoliocharts.com the portfolio with the lowest drawdown of all tested portfolios was actually the Larry portfolio, if I remember correctly.
Larry’s portfolio had the lowest return, the worst max draw down and the worst year.
I must have seen a very different table than you saw. Do you have the link?
I’ve been wrong more times than right, so it may apply to this one. But I think my analysis is correct.
That's only the last 10 years with 3 portfolios. I wouldn't attach much value to that personally. I found the chart I saw. I did remember it incorrectly though, the Larry portfolio came in in 4th place for lowest drawdown.

https://portfoliocharts.com/2018/12/26/ ... ng-winner/
Also, the three portfolios were essentially tied through Jun 2014 [$19,179 v $19,244 v $19, 256], so it's really only differed over the last 5 years, not 10. What's that saying about torturing the data?

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Re: Why factor investing isn't working

Post by schooner » Wed Jul 10, 2019 9:20 am

TropikThunder wrote:
Tue Jul 09, 2019 11:46 pm
YRT70 wrote:
Tue Jul 09, 2019 12:55 pm
schooner wrote:
Tue Jul 09, 2019 12:51 pm
YRT70 wrote:
Tue Jul 09, 2019 12:48 pm
schooner wrote:
Tue Jul 09, 2019 12:39 pm

Larry’s portfolio had the lowest return, the worst max draw down and the worst year.
I must have seen a very different table than you saw. Do you have the link?
I’ve been wrong more times than right, so it may apply to this one. But I think my analysis is correct.
That's only the last 10 years with 3 portfolios. I wouldn't attach much value to that personally. I found the chart I saw. I did remember it incorrectly though, the Larry portfolio came in in 4th place for lowest drawdown.

https://portfoliocharts.com/2018/12/26/ ... ng-winner/
Also, the three portfolios were essentially tied through Jun 2014 [$19,179 v $19,244 v $19, 256], so it's really only differed over the last 5 years, not 10. What's that saying about torturing the data?
That's the silly thing about all of this. It's really just reading the tea leaves imho. My question for the factor investing crowd is: If 5 or 10 years is a silly metric that doesn't tell you anything, what makes 50 or 100 years of spotty data more reliable?

Can the price movements of US Leather before 1929 (which was an actual company on the Dow) provide evidence for factors? Are we really going to base an entire investment philosophy on a few patterns we see in the data that tilt one way or the other?

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Re: Why factor investing isn't working

Post by CULater » Wed Jul 10, 2019 9:44 am

The problem I'm having is that "10 or 20" years of returns is "just noise" according to Larry (and I agree). But the longer the time period, the greater the degree of uncertainty that is introduced. And uncertainty is a much greater concern than statistical "noise." So we're on the horns of a dilemma: "noise" or "uncertainty?"
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Re: Why factor investing isn't working

Post by larryswedroe » Wed Jul 10, 2019 9:47 am

Schooner
That's the silly thing about all of this. It's really just reading the tea leaves imho. My question for the factor investing crowd is: If 5 or 10 years is a silly metric that doesn't tell you anything, what makes 50 or 100 years of spotty data more reliable?
The answer to this question is pretty simple and well written about.

First, there must be the risk of any factor, including market beta, underperforming for long periods, even forever, or there would be no risk and no risk premium.

Second, while we don't know for certain the future, you can gain confidence in a metric when there is substantial body of evidence that it has persisted over long periods of time and across economic regimes, it is pervasive around the globe and even across asset classes, is robust to various definitions (like value works whatever metric used over price), it is implementable (survives transactions costs) and is intuitive (has risk or behavioral explanations for you to believe it will persist). Before one invests in anything it should pass those tests. That we don't know the future (and which is why I don't make predictions about markets, noting my crystal ball is always cloudy) we can make judgments based on historical evidence that meets all the criteria. And IMO that judgment leads the prudent decision to be to diversify risks, not concentrate them.

With investing we are dealing with uncertainty, which means the best we can do is ESTIMATE the odds, not know them. But when dealing with uncertainty the safest port is diversification, not concentration.

There are a number of factors (small number) that meet all of the tests. Which demonstrates that they are not just statistical noise as white coat DECLARES, Most of them in the factor zoo are noise because they don't meet all the tests, but white coat IMO is throwing the baby out with the bath water. If you are actually interested in the literature on the subject and learning why metrics might not be noise you might read Your Complete Guide to Factor Based Investing.

Again, I note that the TSM portfolio has underperformed totally riskless tbills for periods of much longer than 10 years and yet you insist that 10 years is long enough to judge a strategy--its' surprising that you cannot see the contradiction. I would also note that for a globally diversified portfolio factor tilting has had almost no impact over the last 10 years, hurting a bit in US but helping overseas, as was pointed out to you. And the periods before that factor tilting helped massively, enough so that the 8 DFA funds I noted outperformed by about 2.5 percent per year over 20 plus year periods (which doesn't sound like statistical noise to me, just saying)

Larry

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Re: Why factor investing isn't working

Post by schooner » Wed Jul 10, 2019 9:54 am

larryswedroe wrote:
Wed Jul 10, 2019 9:47 am
Schooner
That's the silly thing about all of this. It's really just reading the tea leaves imho. My question for the factor investing crowd is: If 5 or 10 years is a silly metric that doesn't tell you anything, what makes 50 or 100 years of spotty data more reliable?
The answer to this question is pretty simple and well written about.

First, there must be the risk of any factor, including market beta, underperforming for long periods, even forever, or there would be no risk and no risk premium.

Second, while we don't know for certain the future, you can gain confidence in a metric when there is substantial body of evidence that it has persisted over long periods of time and across economic regimes, it is pervasive around the globe and even across asset classes, is robust to various definitions (like value works whatever metric used over price), it is implementable (survives transactions costs) and is intuitive (has risk or behavioral explanations for you to believe it will persist). Before one invests in anything it should pass those tests. That we don't know the future (and which is why I don't make predictions about markets, noting my crystal ball is always cloudy) we can make judgments based on historical evidence that meets all the criteria. And IMO that judgment leads the prudent decision to be to diversify risks, not concentrate them.

There are a number (small number) that meet all of the tests. Which demonstrates that they are not just statistical noise as white coat DECLARES, Most of them in the factor zoo are noise because they don't meet all the tests, but white coat IMO is throwing the baby out with the bath water.

Again, I note that the TSM portfolio has underperformed totally riskless tbills for periods of much longer than 10 years and yet you insist that 10 years is long enough to judge a strategy--its' surprising that you cannot see the contradiction. I would also note that for a globally diversified portfolio factor tilting has had almost no impact over the last 10 years, hurting a bit in US but helping overseas, as was pointed out to you. And the periods before that factor tilting helped massively, enough so that the 8 DFA funds I noted outperformed by about 2.5 percent per year over 20 plus year periods (which doesn't sound like statistical noise to me, just saying)

Larry
I'm fine with the continued academic inquiry into factors. It's fascinating from an intellectual point of view. But it's the practice that confuses me. You just sloughed off 10 years of (admittedly minor under performance) while pointing to a 20 year track record as evidence that factor investing works.

What makes 20 years reliable but 10 years unreliable?

I'll add that TSM under performance over 10 year periods is well documented. That's why Bogle advocated bonds. That's why Bogleheads suggest a 3 fund portfolio of low cost, market cap index funds.

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Re: Why factor investing isn't working

Post by nedsaid » Wed Jul 10, 2019 10:07 am

Here's the deal. No one here is making anyone else take up factor investing. If you are satisfied with the 3 fund portfolio, that is just fine. No guns being pointed at anybody here making them do anything. Others talk about complexity, if the implementation of factor investing seems too complex, give it a pass. Thing is, you can factor tilt pretty effectively with 4-5 funds.

Someone else posted here that it seemed weird that while Bogleheads love cheap fees, they don't seem to like cheap stocks. I agree with that. If I read an advertisement that toilet paper is 50% off, I will stock up, particularly if it is good quality. It seems Bogleheads would rather argue over the efficiency of toilet paper markets than getting 50% off. Weird.
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Re: Why factor investing isn't working

Post by schooner » Wed Jul 10, 2019 10:14 am

nedsaid wrote:
Wed Jul 10, 2019 10:07 am
Here's the deal. No one here is making anyone else take up factor investing. If you are satisfied with the 3 fund portfolio, that is just fine. No guns being pointed at anybody here making them do anything. Others talk about complexity, if the implementation of factor investing seems too complex, give it a pass. Thing is, you can factor tilt pretty effectively with 4-5 funds.

Someone else posted here that it seemed weird that while Bogleheads love cheap fees, they don't seem to like cheap stocks. I agree with that. If I read an advertisement that toilet paper is 50% off, I will stock up, particularly if it is good quality. It seems Bogleheads would rather argue over the efficiency of toilet paper markets than getting 50% off. Weird.
I agree that investing is obviously a choice. But a lot of investing happens at an institutional level (as the OP's link pointed out). If your pension fund (or alma mater's endowment) is playing factors, you have little choice in the matter. And it's totally legitimate to educate yourself and advocate for or against factor investing in those cases. So I think it's worth while to discuss the merits of factor investing over the traditional market-cap index approach.

Again, I'm totally cool with an individual investor beating the market. More power to them!

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Re: Why factor investing isn't working

Post by larryswedroe » Wed Jul 10, 2019 10:15 am

Schooner
I
'm fine with the continued academic inquiry into factors. It's fascinating from an intellectual point of view. But it's the practice that confuses me. You just sloughed off 10 years of (admittedly minor under performance) while pointing to a 20 year track record as evidence that factor investing works.
To answer the question is simple, the longer the period the more likely it is that the expected will occur. And that includes for market beta or any other factor. So we want to look at the longest data we have. Which is what I did in each case, using live funds, not indices, I used the longest data which showed it HAD worked. I did not claim that it WILL work in future, though I clearly believe the odds favoring it will work for the same reasons I believe market beta will be positive in the long term.

And since you agree that market beta can be negative for ten years and agree that is not long enough to abandon belief in market beta premium, the same should hold for the other factors we have been discussing. Otherwise you are just contradicting yourself. Either 10 years is enough (which you were claiming) or it isn't?
And it's not just an intellectual exercise as it has important implications. The factors with premiums allow you to lower exposure to market beta and add more safe bonds and that is what creates more of a risk parity portfolio. And if you believe markets are efficient than you should logically prefer more of a risk parity portfolio because you are not making a concentrated bet on one risk asset when all have about the same risk-adjusted returns. But of course you must accept tracking variance, a deadly disease

Again I will note the research shows that institutional investors overweight the left side (good side) of factors and individuals overweight the right side (the bad). Which by the way also helps explain why there are limits to arbitrage that correct the mispricing that white coat claims would disappear. The institutions are the ones who lend out the stocks that are needed to short (to correct the overpricing of the short side), but they underweight them leading to shortage of supply of lending securities and thus very high costs of shorting (plus the risks of shorting).

Larry

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Re: Why factor investing isn't working

Post by schooner » Wed Jul 10, 2019 10:34 am

larryswedroe wrote:
Wed Jul 10, 2019 10:15 am
Schooner
I
'm fine with the continued academic inquiry into factors. It's fascinating from an intellectual point of view. But it's the practice that confuses me. You just sloughed off 10 years of (admittedly minor under performance) while pointing to a 20 year track record as evidence that factor investing works.
To answer the question is simple, the longer the period the more likely it is that the expected will occur. And that includes for market beta or any other factor. So we want to look at the longest data we have. Which is what I did in each case, using live funds, not indices, I used the longest data which showed it HAD worked. I did not claim that it WILL work in future, though I clearly believe the odds favoring it will work for the same reasons I believe market beta will be positive in the long term.

And since you agree that market beta can be negative for ten years and agree that is not long enough to abandon belief in market beta premium, the same should hold for the other factors we have been discussing. Otherwise you are just contradicting yourself. Either 10 years is enough (which you were claiming) or it isn't?
And it's not just an intellectual exercise as it has important implications. The factors with premiums allow you to lower exposure to market beta and add more safe bonds and that is what creates more of a risk parity portfolio. And if you believe markets are efficient than you should logically prefer more of a risk parity portfolio because you are not making a concentrated bet on one risk asset when all have about the same risk-adjusted returns. But of course you must accept tracking variance, a deadly disease

Again I will note the research shows that institutional investors overweight the left side (good side) of factors and individuals overweight the right side (the bad). Which by the way also helps explain why there are limits to arbitrage that correct the mispricing that white coat claims would disappear. The institutions are the ones who lend out the stocks that are needed to short (to correct the overpricing of the short side), but they underweight them leading to shortage of supply of lending securities and thus very high costs of shorting (plus the risks of shorting).

Larry
My understanding is that factor investing starts with a market-cap index and then overweights/underweights certain stocks based on certain factor metrics.

It’s not separate from a market-cap index, it’s an add on. And just like any add on (where you are asking people to buy something), you really need to show me how it improves what I already have - TSM.

Maybe it increases return, maybe it lowers volatility. Maybe something else. But the burden is on you to prove that factors add value. And I don’t think the track record is there. Maybe in a few decades, I’ll change my mind

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Re: Why factor investing isn't working

Post by larryswedroe » Wed Jul 10, 2019 11:20 am

schooner
I have shown you how it is improved results in both articles and my books. As I said, just read Reducing the Risk of Black Swans to find the historical evidence, using live funds, not indices. I've also shown you that over the past 20+ years factor based funds that are well designed have significantly outperformed TSM counterparts, but of course that will not be true over all periods, nor is it a guarantee it will in future, but based on the evidence, and IMO the logic it definitely puts the odds in your favor.

If not familiar I suggest you run the following as a simple test using the portfoliovisualizer tool you are familiar with
Portfolio A Vanguard US TSM 60%/Vanguard Intermediate Treasury 40%
Portfolio B DFSVX 40%/Vanguard Intermediate Treasury 60%

Run it from inception of DFSVX so you have the longest period possible, now over 25 years. Check the returns/SD, SR, factor loadings and best and worst case years. Then ask yourself which portfolio you would rather have owned.

Again, this is just example. I would not own such a portfolio as would do it globally including EM. But it's example of moving toward risk parity.
Then you can decide if you believe benefits of TSM (lowest costs and most tax efficient) more than the benefits of the other portfolio. And you cannot argue A is simpler, they both are just two fund portfolios, and globally can also do with just two equity funds.

Again, no right answer, because there are trade offs.

BTW, Note I have tried patiently to answer all your questions but I note you almost never answer the simple ones I ask you. Like why you believe 10 years is not long enough to give up on market beta but thought 10 years demonstrated value and size were not real factors. Just asking (:-)) It appears to me there are many inconsistencies in your explanations, like you believe markets are efficient but the much more volatile small and value stocks should not be expected to have higher returns, not higher risk adjusted returns, but higher returns? And the inconsistency on the 10 year issue.

Larry

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