[Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

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willthrill81
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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by willthrill81 » Thu Aug 29, 2019 11:02 pm

Lee_WSP wrote:
Thu Aug 29, 2019 10:57 pm
I suppose the logical follow-up question is "how many times, historically, has value outperformed growth"?
More often than not, or else the premium wouldn't exist.

There are many data sources to confirm the value premium. Go to Google Scholar and search for "value premium." You'll find that very few argue about whether the value premium has existed and that most of the discussion centers around the hypothesized specific causes for it.
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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Lee_WSP » Thu Aug 29, 2019 11:39 pm

Reading the abstracts has been fascinating. However, the more I read about the value premium, the more I'm beginning to wonder if it is indeed able to be arbitraged away now that it's been "outed".

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by vineviz » Fri Aug 30, 2019 12:04 am

Lee_WSP wrote:
Thu Aug 29, 2019 11:39 pm
Reading the abstracts has been fascinating. However, the more I read about the value premium, the more I'm beginning to wonder if it is indeed able to be arbitraged away now that it's been "outed".
There’s an easy way to be completely sure it has not been arbitraged away. Want to guess what that is?
"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: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Lee_WSP » Fri Aug 30, 2019 12:16 am

vineviz wrote:
Fri Aug 30, 2019 12:04 am
Lee_WSP wrote:
Thu Aug 29, 2019 11:39 pm
Reading the abstracts has been fascinating. However, the more I read about the value premium, the more I'm beginning to wonder if it is indeed able to be arbitraged away now that it's been "outed".
There’s an easy way to be completely sure it has not been arbitraged away. Want to guess what that is?
This thread is time stamped. We can check back in ten years. :sharebeer

Me, I'm going to just diversify away the risk & reward and bet the whole small cap index.

But seriously, since the publication of the paper, don't you think all the extra interest in value stocks has driven down their, well, value?

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Day9 » Fri Aug 30, 2019 12:33 am

Factorheads,

Please turn to Chapter 8 of Larry's Factor book "Does Publication Reduce the Size of Premiums?"

"...while premiums do not disappear, they do experience a decay in magnitude of about one-third... Thus you should not automatically assume that future premiums will be as large as the historical record."

I believe what vineviz was referring to would be to check the historical track record of live funds, which is precisely what Larry did in the article that this thread is a discussion of. Here is the captioned image that whodidntante made summarizing the article: https://i.postimg.cc/cHt3jkbx/38nwsd.jpg
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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by james22 » Fri Aug 30, 2019 1:28 am

This very thread proof the factor premiums are going nowhere.

Thanks, doubters! :beer

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by vineviz » Fri Aug 30, 2019 6:47 am

Lee_WSP wrote:
Fri Aug 30, 2019 12:16 am
vineviz wrote:
Fri Aug 30, 2019 12:04 am
Lee_WSP wrote:
Thu Aug 29, 2019 11:39 pm
Reading the abstracts has been fascinating. However, the more I read about the value premium, the more I'm beginning to wonder if it is indeed able to be arbitraged away now that it's been "outed".
There’s an easy way to be completely sure it has not been arbitraged away. Want to guess what that is?
This thread is time stamped. We can check back in ten years. :sharebeer

Me, I'm going to just diversify away the risk & reward and bet the whole small cap index.

But seriously, since the publication of the paper, don't you think all the extra interest in value stocks has driven down their, well, value?
Honestly, no guess? I'd like to hear your thoughts about this.
"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: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by YRT70 » Fri Aug 30, 2019 7:33 am

Elysium wrote:
Thu Aug 29, 2019 8:25 am
YRT70 wrote:
Wed Aug 28, 2019 11:50 pm
Elysium wrote:
Wed Aug 28, 2019 6:44 am
If someone wants to do this with play money then it is a good template to follow Larry, others should take note of their individual situation and the consequences of betting all of their retirement nest egg on value strategy like he follows.
So when it's just play money it's ok to bet on 3 factors (market, size, value), but when it's their nest egg they should bet on 1 factor only (market)?

That doesn't make a whole lot of sense to me.
First, market is not one factor, it is the sum of all. You get market beta in everything.

Second, It doesn't make a whole lot of sense to overweight only Size and Value factors either. Why stop at that, there are six or seven other factors as of today, and who knows how many more they are missing that will be added in a few years from now for completeness (a really convenient term for convering mistakes of past). Why would you overweight Size and Value and leave out Liquidity, Profitability, Momentum, Quality, High Dividend, Volatility, on and on... why not slice and dice your portfolio into 12 different pieces with 5 percent each, and then do this for International and Emerging Markets, then do for fixed income. Now you have 20 different slices with each representing a fully developed factor, and oh, while you were at it you left out Alternatives, we need to include those, because we need other types of risk exposures not just equity and fixed income says some.
On your first point: my point was that TSM is only exposed to the market factor. It's exposure to the other factors is zero. A small cap value fund is exposed to the market, size and value factor.

On your second point: I agree, it does make sense to diversify across the other known factors too. However, achieving effective exposure with low cost funds isn't always straight forward. Small cap value is relatively easy and cheap in that regard.

You mention 12 factors, I would personally rather focus on a few that have the most credible support. For example: I don't think "High dividend" is a factor. From what I've read, if high dividend paying companies have higher returns those returns can largely be explained by the known factors such as value and profitability.
Elysium wrote:
Thu Aug 29, 2019 10:41 am
I do not follow a 3-fund portfolio, but I do believe it is very hard to beat over long periods such as 20 years or more, for a host of reasons.
From what I've read the opposite is more true: the longer the period, the more likely the other factors will outperform TSM. Larry's article contains a couple of examples.

If you meant reasons like it may be harder to stay the course with such a tilted portfolio, I'd agree with you.

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by willthrill81 » Fri Aug 30, 2019 9:34 am

james22 wrote:
Fri Aug 30, 2019 1:28 am
This very thread proof the factor premiums are going nowhere.

Thanks, doubters! :beer
I suspect that there's significant truth in what you say.

After 10 years of underperforming TSM, I'm sure that most 'lay' investors are thinking that SCV is a road to nowhere.

If I was a betting man, I'd bet that SCV will significantly outperform TSM over the next decade.
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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by DaufuskieNate » Fri Aug 30, 2019 10:35 am

Larry has an article on MarketWatch which says that we shouldn't throw in the towel on Warren Buffett just because his recent performance has lagged the S&P 500. He reminds us that Buffett believes that temperament is more important than intelligence in investing. Yes, value has lagged for 10 years. Giving up on value as a strategy, just because it has lagged for 10 years, is an example of not having the temperament to stay the course when inevitable, and fully expected, periods of underperformance show up. I don't think that those investors who throw in the towel view it as a matter of temperament. They rationalize their actions with reasonable-sounding theories. I think that Larry and Buffett would beg to differ.

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Elysium » Fri Aug 30, 2019 10:54 am

YRT70 wrote:
Fri Aug 30, 2019 7:33 am
On your first point: my point was that TSM is only exposed to the market factor. It's exposure to the other factors is zero. A small cap value fund is exposed to the market, size and value factor.
It is really about semantics. Market portfolio does have exposure to all factors just by definition because it is the sum of all. What you are saying is that if you conduct a regression analysis then TSM will show factor load of close to zero for everything else and 1 for market. This is because they cancel each other out and the weight is so low, but it does have exposure since it does contain the deep value stocks along with the large growth stocks. But, we both understand what it is and just look at it differently. Factor proponents think market exposure of neutral for value is not enough and that the market portfolio is wrong, therefore they need to get more of that exposure. This puts the weight on them to prove they are right.
YRT70 wrote:
Fri Aug 30, 2019 7:33 am
On your second point: I agree, it does make sense to diversify across the other known factors too. However, achieving effective exposure with low cost funds isn't always straight forward. Small cap value is relatively easy and cheap in that regard.

You mention 12 factors, I would personally rather focus on a few that have the most credible support. For example: I don't think "High dividend" is a factor. From what I've read, if high dividend paying companies have higher returns those returns can largely be explained by the known factors such as value and profitability.
What is credible support means? who is credible enough to make that claim? is that Fama-French or some other acadmeics, is it wall street, Jack Bogle, who decides what factors are important and what are not. This is the problem. First, they missed it for 22 years, then they added some of it, now they are not sure if it will persist or have been diluted. How do we know back tests will not show something else worked after the fact. I am not sure you can discount Dividend Growth as meaningless concept, same for Low Volatility, and it is also likely Quality, Dividend, and Low Volatility all go together, so there may be case for owning them as opposed to deep value, especially for someone who is concerned about variance risk. I am not saying one should do that, just that when you embrace deep value and reject others you are making an active decision, and have the burden of proof to be right.
YRT70 wrote:
Fri Aug 30, 2019 7:33 am
Elysium wrote:
Thu Aug 29, 2019 10:41 am
I do not follow a 3-fund portfolio, but I do believe it is very hard to beat over long periods such as 20 years or more, for a host of reasons.
From what I've read the opposite is more true: the longer the period, the more likely the other factors will outperform TSM. Larry's article contains a couple of examples.

If you meant reasons like it may be harder to stay the course with such a tilted portfolio, I'd agree with you.
Pointing to Larry's articles and logic is making circular reference as someone else also said. We are discussing a thread called Factor investing works and Small value stocks are cheap by Larry and disputing those claims. I do not accept most of what Larry says these days for the simple fact that he has been wrong for so long and on so many counts and his positions keep changing, so I sort of stopped placing any value in his opinions. Nothing personal, as I even read his books in the old days, but he has changed his positions and has recommended so many high risk and complicated strategies that doesn't work for most people. Evidence is the couple of BAM clients who have posted their portfolios recently.

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Elysium » Fri Aug 30, 2019 10:55 am

willthrill81 wrote:
Fri Aug 30, 2019 9:34 am
james22 wrote:
Fri Aug 30, 2019 1:28 am
This very thread proof the factor premiums are going nowhere.

Thanks, doubters! :beer
I suspect that there's significant truth in what you say.

After 10 years of underperforming TSM, I'm sure that most 'lay' investors are thinking that SCV is a road to nowhere.

If I was a betting man, I'd bet that SCV will significantly outperform TSM over the next decade.
Are you not a betting man? I read somewhere you stating you do market timing, so why wouldn't you bet heavily on SCV now?

For the record, I personally do own SCV as a separate allocation, and have had it since mid 2002. But I do not overweight it because I have growth funds that counter weights it to sort of give me a market like exposure for the overall portfolio. I have my reasons to do this instead of holding the 3-fund portfolio, which I will not go into now. So, If SCV makes a come back, I will be happy personally and may even consider getting out of it eventually after a strong performance to make up for the last few years. If not, I will keep holding it as hope it won't make a huge drag and my growth part will compensate for it.

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by YRT70 » Fri Aug 30, 2019 11:32 am

Elysium wrote:
Fri Aug 30, 2019 10:54 am
What you are saying is that if you conduct a regression analysis then TSM will show factor load of close to zero for everything else and 1 for market.
Yes, TSM doesn't have significant loading on any factor besides market.
YRT70 wrote:
Fri Aug 30, 2019 7:33 am
What is credible support means? who is credible enough to make that claim?
You'll have to make that judgement yourself. If I would believe that high dividend yield is a factor that explains returns, I would certainly consider getting more exposure to it.
Elysium wrote:
Thu Aug 29, 2019 10:41 am
Pointing to Larry's articles and logic is making circular reference as someone else also said.
In this case not. I was replying to the claim: "I do believe it is very hard to beat over long periods such as 20 years "

Larry's article mentions several funds that have done exactly that with time periods of >20 years. That's just Morningstar data. You don't have to like Larry for that.

Now one could argue that these funds aren't easily accessible to most people without paying an adviser fee, which is a fair point, but given that the average difference was 2.5%, it could still have paid off.

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Lee_WSP » Fri Aug 30, 2019 11:57 am

vineviz wrote:
Fri Aug 30, 2019 6:47 am
Lee_WSP wrote:
Fri Aug 30, 2019 12:16 am
vineviz wrote:
Fri Aug 30, 2019 12:04 am
Lee_WSP wrote:
Thu Aug 29, 2019 11:39 pm
Reading the abstracts has been fascinating. However, the more I read about the value premium, the more I'm beginning to wonder if it is indeed able to be arbitraged away now that it's been "outed".
There’s an easy way to be completely sure it has not been arbitraged away. Want to guess what that is?
This thread is time stamped. We can check back in ten years. :sharebeer

Me, I'm going to just diversify away the risk & reward and bet the whole small cap index.

But seriously, since the publication of the paper, don't you think all the extra interest in value stocks has driven down their, well, value?
Honestly, no guess? I'd like to hear your thoughts about this.
The paper came out in 92, it caught on sometime between then and 2000 or so. Looking back at only twenty years is not a great sampling. But recently value has not been doing great. But I'm not going to put much weight into that.

If there were any easy way to track where people are weighting their portfolios that would be a better measure of whether value is over bought, but we don't have that data.

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Day9 » Fri Aug 30, 2019 12:07 pm

Lee_WSP wrote:
Fri Aug 30, 2019 11:57 am
vineviz wrote:
Fri Aug 30, 2019 6:47 am
Lee_WSP wrote:
Fri Aug 30, 2019 12:16 am
vineviz wrote:
Fri Aug 30, 2019 12:04 am
Lee_WSP wrote:
Thu Aug 29, 2019 11:39 pm
Reading the abstracts has been fascinating. However, the more I read about the value premium, the more I'm beginning to wonder if it is indeed able to be arbitraged away now that it's been "outed".
There’s an easy way to be completely sure it has not been arbitraged away. Want to guess what that is?
This thread is time stamped. We can check back in ten years. :sharebeer

Me, I'm going to just diversify away the risk & reward and bet the whole small cap index.

But seriously, since the publication of the paper, don't you think all the extra interest in value stocks has driven down their, well, value?
Honestly, no guess? I'd like to hear your thoughts about this.
The paper came out in 92, it caught on sometime between then and 2000 or so. Looking back at only twenty years is not a great sampling. But recently value has not been doing great. But I'm not going to put much weight into that.

If there were any easy way to track where people are weighting their portfolios that would be a better measure of whether value is over bought, but we don't have that data.
In the article that this thread is a discussion of, Larry shows that valuation spreads have not tightened, indicating the Value premium is not over bought.

Or maybe it was this article: https://thebamalliance.com/blog/is-the- ... ally-dead/
"Based on the logical, risk-based explanations for the value premium, and the lack of evidence pointing to shrinking valuation spreads, my conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative."
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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Lee_WSP » Fri Aug 30, 2019 12:09 pm

Again, citing Larry to prove your argument is circular logic.

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by vineviz » Fri Aug 30, 2019 12:15 pm

Lee_WSP wrote:
Fri Aug 30, 2019 11:57 am
The paper came out in 92, it caught on sometime between then and 2000 or so. Looking back at only twenty years is not a great sampling. But recently value has not been doing great. But I'm not going to put much weight into that.

If there were any easy way to track where people are weighting their portfolios that would be a better measure of whether value is over bought, but we don't have that data.
Okay, I'll help you out.

If the value factor had been "arbitraged away", which is what you asked about earlier, what you'd observe stocks with different valuations would all have the same returns. In other words, cheap stocks would have the same returns as expensive stocks.

That's what happens when a mispricing is arbitraged: the "factor returns" go to zero.

That's not what's happened with the value factor: factor returns haven't gone to zero. Ergo, it cannot be true that the value factor has been arbitraged away.

The logical consequence, then, is that the value factor wasn't a misplacing but rather a source a systematic risk. One characteristic of systematic risk factor premia is that vary over time: in some periods the premium is positive, while in others it is negative.

So not only is it not appropriate to look at a period of recent factor underperformance as evidence that a factor is dead, doing so is actually completely backwards: a period of recent underperformance is positive evidence that the factor is alive and well.

That's no guarantee that the premium will turn positive in any particular time period, since that's the very nature of a systematic risk.
"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: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Day9 » Fri Aug 30, 2019 12:21 pm

Lee_WSP wrote:
Fri Aug 30, 2019 12:09 pm
Again, citing Larry to prove your argument is circular logic.
It's circular when someone says "Larry believes in the value premium. To back it up, Larry says the value premium exists". But it is not circular when we say "Larry believes in the value premium. To back up his own belief he put out the hypothesis that if the value premium were to be overbought, valuation spreads would tighten. Valuation spreads have not tightened, therefore the valuation premium is not dead".

Now you can poke holes in the argument or disagree with parts or all of it but try to be more charitable when interpreting others' posts. Try to judge the argument on its merit, do not simply judge the argument based on the fact that Larry calculated the historical numbers.
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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Elysium » Fri Aug 30, 2019 12:33 pm

vineviz wrote:
Fri Aug 30, 2019 12:15 pm
That's no guarantee that the premium will turn positive in any particular time period, since that's the very nature of a systematic risk.
Exactly. There are no guarantees there will be positive premium ever, because there is a good reason those stocks are valued the way they are, and those businesses could cease to exist and/or not make enough earnings to justify realizing a premium.

Now, this same logic is applied by factor proponents to suggest the same could be said of the market premium. However, the market is not made up of only a sub-set of companies screened using factor models. The large companies that make up the market are the back bone of U.S businesses and they will always remain so, if and when a few dies off others will take their place. There are far too many people vested in the success of these businesses.

If a tree falls in the forest no one really cares, but if the forest catches on fire everyone works hard to put that off.
Last edited by Elysium on Fri Aug 30, 2019 12:34 pm, edited 1 time in total.

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by Lee_WSP » Fri Aug 30, 2019 12:34 pm

Day9 wrote:
Fri Aug 30, 2019 12:21 pm
Lee_WSP wrote:
Fri Aug 30, 2019 12:09 pm
Again, citing Larry to prove your argument is circular logic.
It's circular when someone says "Larry believes in the value premium. To back it up, Larry says the value premium exists". But it is not circular when we say "Larry believes in the value premium. To back up his own belief he put out the hypothesis that if the value premium were to be overbought, valuation spreads would tighten. Valuation spreads have not tightened, therefore the valuation premium is not dead".

Now you can poke holes in the argument or disagree with parts or all of it but try to be more charitable when interpreting others' posts. Try to judge the argument on its merit, do not simply judge the argument based on the fact that Larry calculated the historical numbers.
If you had said that in the first place, I wouldn't have been so curt.

This argument is logical and make sense.

This quote does not since it excludes the premise: that "if the value premium were to be overbought, valuation spreads would tighten"
"Based on the logical, risk-based explanations for the value premium, and the lack of evidence pointing to shrinking valuation spreads, my conclusion is that the most recent 10 years of performance is likely just another of those occasionally occurring but fairly long periods in which the value premium is negative."
Also, I'm always going to point to circular logic when someone just links to Larry and expects me to read the article instead of laying it out as a logical argument without having to link to Larry because unless it is an actual statement, you're just telling me to go read Larry, and as I've already said, you can't cite Larry when Larry is being questioned.

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Re: Larry Swedroe: Small Value Stocks are Cheap

Post by Dottie57 » Fri Aug 30, 2019 12:44 pm

stlutz wrote:
Wed Aug 14, 2019 10:32 pm
Larry's article wrote:

For example, from inception in April 1993 through June 2019, the first passively managed fund to provide systematic exposure to the asset class, the DFA US Small Value Fund (DFSVX), returned 11.0% per annum (the Fama-French US Small Value Research Index returned 12.4% per annum), outperforming the Vanguard 500 Index Fund (VFINX) return of 9.4% per annum by 1.6 percentage points per annum.
Let's look at 2 portfolios that equalize volatility:

A 60/40 Total Stock / Total Bond
A 46/54 DFA SV / Total Bond

This produced almost exactly the same return with the same volatility. Even the max drawdown which is supposed to be so much better under the later portfolio isn't.

The way you got from point A to point B was slightly different, but both have ended up in the same place.

https://www.portfoliovisualizer.com/bac ... 0&total3=0
But I don’t think the DfA advisor fee is included.

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by vineviz » Fri Aug 30, 2019 12:52 pm

Elysium wrote:
Fri Aug 30, 2019 12:33 pm

Now, this same logic is applied by factor proponents to suggest the same could be said of the market premium. However, the market is not made up of only a sub-set of companies screened using factor models. The large companies that make up the market are the back bone of U.S businesses and they will always remain so, if and when a few dies off others will take their place. There are far too many people vested in the success of these businesses.
This is a non-sequitur.

Equity risk factors have nothing to do with how important companies are to the economy, but rather how much (if any) compensation investors demand for taking on a particular source of systematic risk.
"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: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by willthrill81 » Fri Aug 30, 2019 1:08 pm

Elysium wrote:
Fri Aug 30, 2019 10:55 am
willthrill81 wrote:
Fri Aug 30, 2019 9:34 am
james22 wrote:
Fri Aug 30, 2019 1:28 am
This very thread proof the factor premiums are going nowhere.

Thanks, doubters! :beer
I suspect that there's significant truth in what you say.

After 10 years of underperforming TSM, I'm sure that most 'lay' investors are thinking that SCV is a road to nowhere.

If I was a betting man, I'd bet that SCV will significantly outperform TSM over the next decade.
Are you not a betting man?
To some degree, we're all placing 'bets' and just contending over the odds.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: [Larry Swedroe: Small Value Stocks are Cheap, Factor Investing Works]

Post by dcabler » Fri Aug 30, 2019 2:11 pm

vineviz wrote:
Thu Aug 29, 2019 9:08 pm
Lee_WSP wrote:
Thu Aug 29, 2019 8:36 pm
So a single premia isn't good enough? That's my question really.
"Good enough" is a subjective evaluation, so that's a question only you can answer for yourself.

My suspicion is that many investors might reasonably conclude that a total stock market approach (which is a single factor strategy) may very well be a "good enough" approach. It has a lot going for it, not the least of which of the fact that is should be a very low-cost approach to investing.

However a portfolio with exposure to multiple less-than-perfectly correlated factors will be more diversified than a single factor strategy, and offers the possibility of higher expected return and/or lower expected volatility as a result. Some investors might reasonably prefer such a portfolio, don't you think?
Agree 100%. Minor pet peeve when I see broad statements here and elsewhere about what might be "good enough" for everyone (including me).

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