Page 1 of 14

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

Posted: Tue Aug 13, 2019 5:23 pm
by willthrill81
[Two very similar discussions have been merged. The first thread starts here, titled "Larry Swedroe: Small Value Stocks are Cheap".

The second thread starts here, titled "Larry Swedroe: Factor Investing Works (Despite What Some May Say)" --admin LadyGeek]


In a recent post at Advisor Perspectives, Larry notes that SCV has underperformed the S&P 500 over the last decade and longer. He reviews Prof. French's data, which indicates that SCV outperformed the S&P 500 by over 4% annually, and DFA's SCV fund's (DFSVX) outperformance of the S&P 500 by 1.9% annually since 1993. But over the last decade, that same fund trailed the S&P 500 by 1.7% annually.

He then reviews data which indicates that it's been common for factors to underperform the broad market for lengthy periods of time. In fact, the equity premium over fixed income itself has underperformed for a decade or longer at several periods in the past. Larry also shows that relative to their P/E ratio averages over the last 20 years, LCG is at 101%, and LCV is at 97%, while SCV is at only 84%; this means that SCV's valuations are significantly more attractive and historically likely to lead to outperformance in the future.

My investment strategy allows me to be ambivalent about factor investing, but I am curious to hear what others think of this.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 5:23 pm
by White Coat Investor
I think he's probably right, but I'm not going to bet my entire portfolio on it.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 5:27 pm
by willthrill81
White Coat Investor wrote:
Tue Aug 13, 2019 5:23 pm
I think he's probably right, but I'm not going to bet my entire portfolio on it.
I don't think that Larry would recommend that either, although he has noted that he personally knows advisors that have their clients 100% in SCV. But if an investor wanted to put all of their equities, at least domestic, into SCV (e.g. the Larry portfolio), that's a different matter.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 5:33 pm
by CoastalWinds
I think he’s right.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 5:48 pm
by megabad
The notion that small value stocks (or any stocks for that matter) are "cheap" seems a bit strange to me. If you believe in the small value strategy, you would already have a section of your asset allocation devoted to this. Assuming this is a constant % allocation, by definition you would be buying more as they underperformed recently relatively to other classes. Conversely, if you really really believed in small value, you would have 100% of portfolio there and you couldn't buy any more than you already have. I guess maybe they are cheap and maybe not, but it just never mattered to me since I am not a market timer.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 5:51 pm
by willthrill81
megabad wrote:
Tue Aug 13, 2019 5:48 pm
The notion that small value stocks (or any stocks for that matter) are "cheap" seems a bit strange to me. If you believe in the small value strategy, you would already have a section of your asset allocation devoted to this. Assuming this is a constant % allocation, by definition you would be buying more as they underperformed recently relatively to other classes. Conversely, if you really really believed in small value, you would have 100% of portfolio there and you couldn't buy any more than you already have. I guess maybe they are cheap and maybe not, but it just never mattered to me since I am not a market timer.
SCV potentially being cheap is not only relevant to market timers. It may be reassuring to those who have a buy-and-hold allocation to SCV but have been considering dumping it due to the decade-plus underperformance. Also, Larry might argue that low valuations shift the expected return distribution to the right, which might be useful for planning purposes. I don't entirely agree with this latter view personally, but I see why Larry might.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 5:54 pm
by nedsaid
Small Value returning 12.5% over the last decade is hardly a disaster. The S&P 500 returned something like 15%. Small Value would be relatively cheap compared to S&P 500 and Total Market but doesn't mean it is cheap. The whole US Stock Market might be expensive depending upon who you listen to. I think Growth to Value rebalancing is in order here. I did put a "buy" on US Large Value, US Mid Value, and US Small Value in June but I blame stlutz for putting me up to it. I got the triple dog dare and my tongue is frozen stuck on the flagpole. This Large Growth market might go on for a while particularly if the economy continues to slow.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 6:05 pm
by megabad
willthrill81 wrote:
Tue Aug 13, 2019 5:51 pm
SCV potentially being cheap is not only relevant to market timers. It may be reassuring to those who have a buy-and-hold allocation to SCV but have been considering dumping it due to the decade-plus underperformance.
Respectfully, I reread those two sentences a few times and it seems to me that the latter is the definition of market timing. I don't necessarily disagree with some of Larry's preferences, but it seems to me either you believe in them or you don't. This is one of the problems I have with some value investors. I sort of agree with much of the analysis (and have some small value holdings), but then I hear someone basically say--"the only reason I am investing in value is because it outperformed in X period". To me, that is perhaps the worst reason to invest in small value. If you don't believe in fundamental reasons why it should outperform in the future, the strategy basically amounts to simple stock picking and guessing in my eyes and your picks can change on a whim. If you feel this way, I would urge you to just market cap index instead since studies have proven time and time again that adjusting investments in an attempt to market time generally result in much less than market cap returns.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 6:19 pm
by 2pedals
willthrill81 wrote:
Tue Aug 13, 2019 5:23 pm
<---- snip ---->
Larry also shows that relative to their P/E ratio averages over the last 20 years, LCG is at 101%, and LCV is at 97%, while SCV is at only 84%; this means that SCV's valuations are significantly more attractive and historically likely to lead to outperformance in the future.
<---- snip ---->
I can find nothing wrong with the statement since his statement is about historical results .... but I will continue to use TSM and not tilt toward SCV. I don't think he has a crystal ball. I am comfortable with getting market returns for the next 20-30 years of my expected life.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 6:22 pm
by whodidntante
Let's all go buy SCV then.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 6:22 pm
by BlueEars
For a Vanguard like set of indexes (historically speaking VG has shifted these) the performance data I have indicates midcap value is the sweet spot. I don't know how the historical PE shapes up for midcap value. It seems that DFA oriented people ignore the midcaps (am I wrong?).

FWIW, I have overweighted the midcap's in my portfolio since 2009.

Data for June 1992 through July 2019:

SV 10.9%
MV 11.5%
LV 9.7%

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 6:39 pm
by DecumulatorDoc
willthrill81 wrote:
Tue Aug 13, 2019 5:23 pm
In a recent post at Advisor Perspectives, Larry notes that SCV has underperformed the S&P 500 over the last decade and longer. He reviews Prof. French's data, which indicates that SCV outperformed the S&P 500 by over 4% annually, and DFA's SCV fund's (DFSVX) outperformance of the S&P 500 by 9.4% annually since 1993. But over the last decade, that same fund trailed the S&P 500 by 1.7% annually.

My investment strategy allows me to be ambivalent about factor investing, but I am curious to hear what others think of this.
No ambivalence here, I'm in it for the long haul. My modest tilt to SCV has been in place for over 10 years. SCV investors have NOT been severely punished over the last decade. I haven't lost any sleep over it and I doubt I'll be celebrating when the SCV premium shows up again.

The beauty of a diversified portfolio is that something is usually doing well and something not so well. I imagine at some point, the international portion of the portfolios will perform better as well.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 6:42 pm
by willthrill81
megabad wrote:
Tue Aug 13, 2019 6:05 pm
willthrill81 wrote:
Tue Aug 13, 2019 5:51 pm
SCV potentially being cheap is not only relevant to market timers. It may be reassuring to those who have a buy-and-hold allocation to SCV but have been considering dumping it due to the decade-plus underperformance.
Respectfully, I reread those two sentences a few times and it seems to me that the latter is the definition of market timing. I don't necessarily disagree with some of Larry's preferences, but it seems to me either you believe in them or you don't. This is one of the problems I have with some value investors. I sort of agree with much of the analysis (and have some small value holdings), but then I hear someone basically say--"the only reason I am investing in value is because it outperformed in X period". To me, that is perhaps the worst reason to invest in small value. If you don't believe in fundamental reasons why it should outperform in the future, the strategy basically amounts to simple stock picking and guessing in my eyes and your picks can change on a whim. If you feel this way, I would urge you to just market cap index instead since studies have proven time and time again that adjusting investments in an attempt to market time generally result in much less than market cap returns.
I entirely agree that if you 'believe in SCV', then you should stick with it and be prepared for a decade of underperformance or longer. I've said exactly that here many times. But there are a lot of 'would-be' buy-and-hold investors out there who have a hard time staying the course with an asset class that has been underperforming for they what they believe to be a long time. Perhaps Larry's work will convince them to not bail out.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 6:48 pm
by willthrill81
DecumulatorDoc wrote:
Tue Aug 13, 2019 6:39 pm
SCV investors have NOT been severely punished over the last decade.
I think that this is an important point that's frequently overlooked. Many only look at whether an asset class over- or under-performed the market, but this obfuscates very relevant data. For instance, from Aug., 2009, through Jul., 2019 (e.g. last decade), SCV lagged TSM by 1.00% annually. But over the prior decade, Aug., 1999, through Jul., 2009, SCV outperformed TSM by 5.99%. Based on all the data I've seen, it seems that the upside potential of SCV is substantially greater than the downside risk.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 6:48 pm
by Grt2bOutdoors
He is right. The problem is, they could get cheaper. Right now, I along with others are finding that to be the case with International.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 7:01 pm
by Taylor Larimore
willthrill81 wrote:
Tue Aug 13, 2019 5:23 pm
In a recent post at Advisor Perspectives, Larry notes that SCV has underperformed the S&P 500 over the last decade and longer. --
My investment strategy allows me to be ambivalent about factor investing, but I am curious to hear what others think of this.
willthrill81:

No one knows which stock category will outperform or underperform in the future. Nevertheless, we DO know that total stock market investors will never be in the bottom category of investment returns which allows us to sleep well and not worry about underperformance.

Best wishes.
Taylor
Jack Bogle's Words of Wisdom: "In my view, owning the market and holding it forever is the ultimate strategy for winners."

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 7:38 pm
by whodidntante
Taylor Larimore wrote:
Tue Aug 13, 2019 7:01 pm
No one knows which stock category will outperform or underperform in the future. Nevertheless, we DO know that total stock market investors will never be in the bottom category of investment returns which allows us to sleep well.

Best wishes.
Taylor
And how do you know that, Taylor?

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 7:46 pm
by 3-20Characters
I’ll keep my slice exactly the same as it stands—not adding, not subtracting. Who knows what the future holds?

Total Markets and category averages

Posted: Tue Aug 13, 2019 7:50 pm
by Taylor Larimore
whodidntante wrote:
Tue Aug 13, 2019 7:38 pm
Taylor Larimore wrote:
Tue Aug 13, 2019 7:01 pm
No one knows which stock category will outperform or underperform in the future. Nevertheless, we DO know that total stock market investors will never be in the bottom category of investment returns which allows us to sleep well.

Best wishes.
Taylor
And how do you know that, Taylor?
whodidntante:

We know because the total market is, by definition, average.

We also know because Vanguard Total Market Index Fund (VTSAX) has never had an annual return below its Morningstar category average (Large Blend)*.

* I admit to ignoring costs.

Best wishes.
Taylor

Re: Total Markets and category averages

Posted: Tue Aug 13, 2019 7:57 pm
by whodidntante
Taylor Larimore wrote:
Tue Aug 13, 2019 7:50 pm
whodidntante wrote:
Tue Aug 13, 2019 7:38 pm
Taylor Larimore wrote:
Tue Aug 13, 2019 7:01 pm
No one knows which stock category will outperform or underperform in the future. Nevertheless, we DO know that total stock market investors will never be in the bottom category of investment returns which allows us to sleep well.

Best wishes.
Taylor
And how do you know that, Taylor?
whodidntante:

We know because the total market is, by definition, average.

We also know because Vanguard Total Market Index Fund (VTSAX) has never had an annual return below its Morningstar category average (Large Blend)*.

* I admit to ignoring costs.

Best wishes.
Taylor
So we agree that TSM does not provide factor exposure (other than market beta) then?

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 8:04 pm
by chw
I'm guessing that he's likely right, but if that's the case, why isn't the "smart" money already chasing this factor? I have a slice of SCV as part of my AA, and will buy/sell accordingly when I re-balance next year.

Re: Total Markets and category averages

Posted: Tue Aug 13, 2019 8:16 pm
by nps
whodidntante wrote:
Tue Aug 13, 2019 7:57 pm
Taylor Larimore wrote:
Tue Aug 13, 2019 7:50 pm
whodidntante wrote:
Tue Aug 13, 2019 7:38 pm
Taylor Larimore wrote:
Tue Aug 13, 2019 7:01 pm
No one knows which stock category will outperform or underperform in the future. Nevertheless, we DO know that total stock market investors will never be in the bottom category of investment returns which allows us to sleep well.

Best wishes.
Taylor
And how do you know that, Taylor?
whodidntante:

We know because the total market is, by definition, average.

We also know because Vanguard Total Market Index Fund (VTSAX) has never had an annual return below its Morningstar category average (Large Blend)*.

* I admit to ignoring costs.

Best wishes.
Taylor
So we agree that TSM does not provide factor exposure (other than market beta) then?
I don't think you need to rely upon any claim about factors to understand that the total market cannot return less than its worst performing sub-class, however you slice it.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 8:39 pm
by Forester
Total stock market is too beholden to the biggest names. It is over 3,000 companies but behaves exactly like the index which tracks the 30 largest companies: https://stockcharts.com/freecharts/perf.php?DIA,VTI,ijr. Owning some small cap separately results in a better diversified portfolio.

Look at what happened at the Dotcom peak - talk of categories or being spread across factors is meaningless. You are concentrated in a handful of companies for better or worse.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 9:03 pm
by Random Walker
Several people have already commented that the US SV investor over the last decade has underperformed TSM, but done quite well in his own right. This is certainly true. And in a world where meeting one’s own goals is what matters, not beating someone else or some index, this is what matters. The reason this has occurred is that most long only SV funds have exposures to market beta of about 1, same as TSM. The key point is that size and value are weakly or uncorrelated with market beta. When a SV Fund underperforms, the investor still doesn’t do too bad since market beta still dominates the fund. When SV outperforms, I believe it tends to be more significant.

If one “looks at diversification from a different point of view”, the SV fund is more evenly spread across the unique and independent sources of risk that explain equity returns. The TSM fund, while having lots of stocks, has net exposure to only one source of risk, market beta.

Also, as Larry points out, size and value have been alive and well the last decade internationally.

Dave

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 9:24 pm
by jdilla1107
I don't think it makes any sense to determine something is cheap by comparing its relative performance over 10 years to something else. By this reasoning, baseball cards are really due for some outperformance.

I genuinely don't understand how smart people can use backtesting to derive conclusions on factors. The idea that past performance helps predict future performance is so dense, I just don't know where to begin. When newbies come here and tell us about some market seminar selling great investment ideas, the smart people jump on it and say "Why wouldn't everyone do that? And if everyone did it then the opportunity would disappear!". Yet these same people go back to discussing factors.

I always stay out of the factor debates. I slipped this one time.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 9:26 pm
by willthrill81
jdilla1107 wrote:
Tue Aug 13, 2019 9:24 pm
I don't think it makes any sense to determine something is cheap by comparing its relative performance over 10 years to something else.
That's not what Larry did. He compared the 20 year average P/E ratio of SCV and TSM, and TSM is basically equal to its average, but SCV is well below its average.

Re: Total Markets and category averages

Posted: Tue Aug 13, 2019 9:34 pm
by MindBogler
Taylor Larimore wrote:
Tue Aug 13, 2019 7:50 pm
We know because the total market is, by definition, average.
I also know that an average return could end up in the bottom quintile if the distribution of returns has a significant right skew. While that outcome hasn't happened yet, nothing precludes it.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 9:39 pm
by jdilla1107
Forester wrote:
Tue Aug 13, 2019 8:39 pm
Owning some small cap separately results in a better diversified portfolio.
I disagree completely. Let's say I have 50 businesses all making money and let's say I have two options:

1) Create a single large cap corporation to run all 50 businesses under one umbrella.
2) Create 50 separate small cap corporations.

To me, corporate organization makes little difference in diversification. Whether I chose 1 or 2, I am equally diversified.

The idea that #2 is FUNDAMENTALLY different than #1 is silly, in my opinion. It's just corporate structure.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 9:46 pm
by jdilla1107
willthrill81 wrote:
Tue Aug 13, 2019 9:26 pm
jdilla1107 wrote:
Tue Aug 13, 2019 9:24 pm
I don't think it makes any sense to determine something is cheap by comparing its relative performance over 10 years to something else.
That's not what Larry did. He compared the 20 year average P/E ratio of SCV and TSM, and TSM is basically equal to its average, but SCV is well below its average.
So what? You are torturing the data through backtesting. What difference does this make?

- What if small cap companies used to have different sector make up than they do today?
- What if small cap companies have completely different debt structures than they did 10 years ago?
- What if interest rate levels...
- What if energy prices...

and on and on...

It's just mental. I can't handle it.

Re: Total Markets and category averages

Posted: Tue Aug 13, 2019 9:49 pm
by willthrill81
MindBogler wrote:
Tue Aug 13, 2019 9:34 pm
Taylor Larimore wrote:
Tue Aug 13, 2019 7:50 pm
We know because the total market is, by definition, average.
I also know that an average return could end up in the bottom quintile if the distribution of returns has a significant right skew. While that outcome hasn't happened yet, nothing precludes it.
The bigger point, IMHO, is that there is no guarantee that TSM (or any class of stock) will provide you with the returns you need to achieve your goals. It would have been really painful for the last decade of your accumulation, mathematically the most important, was like 1972-1981, when TSM had a real annual return of -1.27%. A SCV tilt would have helped since its real return was 6.75%. Similarly, from 2000-2009, TSM's real return was -2.73%, while SCV's was 5.04%.

According to Portfolio Visualizer, the rolling returns of SCV were higher than TSM for 1, 3, 5, 7, 10, and 15 year periods for the average, high, and low. That sounds pretty consistent to me.

The past may be very different, but it would have to be very different to make SCV not an appealing asset class to at least tilt toward in my view.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 9:50 pm
by willthrill81
jdilla1107 wrote:
Tue Aug 13, 2019 9:46 pm
willthrill81 wrote:
Tue Aug 13, 2019 9:26 pm
jdilla1107 wrote:
Tue Aug 13, 2019 9:24 pm
I don't think it makes any sense to determine something is cheap by comparing its relative performance over 10 years to something else.
That's not what Larry did. He compared the 20 year average P/E ratio of SCV and TSM, and TSM is basically equal to its average, but SCV is well below its average.
So what? You are torturing the data through backtesting. What difference does this make?
Then to what extent are you comfortable with using historic data to make investment decisions?

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 9:54 pm
by jdilla1107
willthrill81 wrote:
Tue Aug 13, 2019 9:50 pm
jdilla1107 wrote:
Tue Aug 13, 2019 9:46 pm
willthrill81 wrote:
Tue Aug 13, 2019 9:26 pm
jdilla1107 wrote:
Tue Aug 13, 2019 9:24 pm
I don't think it makes any sense to determine something is cheap by comparing its relative performance over 10 years to something else.
That's not what Larry did. He compared the 20 year average P/E ratio of SCV and TSM, and TSM is basically equal to its average, but SCV is well below its average.
So what? You are torturing the data through backtesting. What difference does this make?
Then to what extent are you comfortable with using historic data to make investment decisions?
I think none whatsoever. I think it's silly to think the history tells you anything (other than what happened in the past). Aren't the guys at Goldman going to jump on whatever you see anyway? Isn't that what we tell all the newbies?

- I buy bonds because its contractual agreement between two parties that can be enforced in a court. They have a high probability of principal return and predictable returns.
- I buy stocks to benefit from the earnings growth of a business by taking more risk, because there is no guarantee.
- In the public markets, I let the market tell me the value. 100%.

Why is 50 small caps, better than 1 large cap with 50 business units? Because over certain time periods we can see patterns in the noise?

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 10:15 pm
by willthrill81
jdilla1107 wrote:
Tue Aug 13, 2019 9:54 pm
willthrill81 wrote:
Tue Aug 13, 2019 9:50 pm
jdilla1107 wrote:
Tue Aug 13, 2019 9:46 pm
willthrill81 wrote:
Tue Aug 13, 2019 9:26 pm
jdilla1107 wrote:
Tue Aug 13, 2019 9:24 pm
I don't think it makes any sense to determine something is cheap by comparing its relative performance over 10 years to something else.
That's not what Larry did. He compared the 20 year average P/E ratio of SCV and TSM, and TSM is basically equal to its average, but SCV is well below its average.
So what? You are torturing the data through backtesting. What difference does this make?
Then to what extent are you comfortable with using historic data to make investment decisions?
I think none whatsoever. I think it's silly to think the history tells you anything (other than what happened in the past). Aren't the guys at Goldman going to jump on whatever you see anyway? Isn't that what we tell all the newbies?
The "past performance is not necessarily indicative of future performance" warning was mandated by the SEC to caution investors to not buy mutual funds based solely on their performance over the last 1, 3, 5, 10 years, etc. It was never intended by them nor do many, perhaps most, here believe it to mean "historical performance is worthless." If we don't use historic data at all, how do we determine what AA to use? How do retirees determine how much to withdraw?

But if that's your take on the issue, then there's probably no need in discussing it further. We can agree to disagree. :beer

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 10:24 pm
by jdilla1107
willthrill81 wrote:
Tue Aug 13, 2019 10:15 pm
jdilla1107 wrote:
Tue Aug 13, 2019 9:54 pm
willthrill81 wrote:
Tue Aug 13, 2019 9:50 pm
jdilla1107 wrote:
Tue Aug 13, 2019 9:46 pm
willthrill81 wrote:
Tue Aug 13, 2019 9:26 pm


That's not what Larry did. He compared the 20 year average P/E ratio of SCV and TSM, and TSM is basically equal to its average, but SCV is well below its average.
So what? You are torturing the data through backtesting. What difference does this make?
Then to what extent are you comfortable with using historic data to make investment decisions?
I think none whatsoever. I think it's silly to think the history tells you anything (other than what happened in the past). Aren't the guys at Goldman going to jump on whatever you see anyway? Isn't that what we tell all the newbies?
The "past performance is not necessarily indicative of future performance" warning was mandated by the SEC to caution investors to not buy mutual funds based solely on their performance over the last 1, 3, 5, 10 years, etc. It was never intended by them nor do many, perhaps most, here believe it to mean "historical performance is worthless." If we don't use historic data at all, how do we determine what AA to use? How do retirees determine how much to withdraw?

But if that's your take on the issue, then there's probably no need in discussing it further. We can agree to disagree. :beer
These are different:

1) Using historical data to come up with a range of probabilistic outcomes. (4% rule is a version of this)
2) Using historical data to find investment edge for outsized returns.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 10:29 pm
by willthrill81
jdilla1107 wrote:
Tue Aug 13, 2019 10:24 pm
willthrill81 wrote:
Tue Aug 13, 2019 10:15 pm
jdilla1107 wrote:
Tue Aug 13, 2019 9:54 pm
willthrill81 wrote:
Tue Aug 13, 2019 9:50 pm
jdilla1107 wrote:
Tue Aug 13, 2019 9:46 pm


So what? You are torturing the data through backtesting. What difference does this make?
Then to what extent are you comfortable with using historic data to make investment decisions?
I think none whatsoever. I think it's silly to think the history tells you anything (other than what happened in the past). Aren't the guys at Goldman going to jump on whatever you see anyway? Isn't that what we tell all the newbies?
The "past performance is not necessarily indicative of future performance" warning was mandated by the SEC to caution investors to not buy mutual funds based solely on their performance over the last 1, 3, 5, 10 years, etc. It was never intended by them nor do many, perhaps most, here believe it to mean "historical performance is worthless." If we don't use historic data at all, how do we determine what AA to use? How do retirees determine how much to withdraw?

But if that's your take on the issue, then there's probably no need in discussing it further. We can agree to disagree. :beer
These are different:

1) Using historical data to come up with a range of probabilistic outcomes. (4% rule is a version of this)
2) Using historical data to find investment edge for outsized returns.
Yes, those are two different uses of historic data. But they are both based on historic data, and since you said "none whatsoever" when I asked if you are comfortable using historic data to make investment decisions, I thought that's what you meant.

There's no theory to support the '4% rule'. It's purely a data-mined artifact, and there's actually nothing probabilistic about it. It's simply the highest starting withdrawal rate, given the requirements laid out by Bill Bengen in his 1994 article, that survived for all 30 year periods he investigated until that time. Many here would put greater credence in the long-term out-performance of SCV over TSM than the '4% rule' continuing to 'succeed'.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 10:39 pm
by Sandtrap
nedsaid wrote:
Tue Aug 13, 2019 5:54 pm
Small Value returning 12.5% over the last decade is hardly a disaster. The S&P 500 returned something like 15%. Small Value would be relatively cheap compared to S&P 500 and Total Market but doesn't mean it is cheap. The whole US Stock Market might be expensive depending upon who you listen to. I think Growth to Value rebalancing is in order here. I did put a "buy" on US Large Value, US Mid Value, and US Small Value in June but I blame stlutz for putting me up to it. I got the triple dog dare and my tongue is frozen stuck on the flagpole. This Large Growth market might go on for a while particularly if the economy continues to slow.
+1
Agreed.
j

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 10:44 pm
by retiredflyboy
I find it best to just own the market. TSM is inexpensive, diversified, and tax efficient.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 10:44 pm
by Northern Flicker
I entirely agree that if you 'believe in SCV', then you should stick with it and be prepared for a decade of underperformance or longer.
I think secular overperformance of value or growth has lasted as long as 30 years in the past.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 11:07 pm
by nedsaid
Northern Flicker wrote:
Tue Aug 13, 2019 10:44 pm
I entirely agree that if you 'believe in SCV', then you should stick with it and be prepared for a decade of underperformance or longer.
I think secular overperformanxe of value or growth has lasted as long as 30 years in the past.
Not so sure I will still be here in 30 years, sure hope so but no guarantees.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 11:13 pm
by willthrill81
Northern Flicker wrote:
Tue Aug 13, 2019 10:44 pm
I entirely agree that if you 'believe in SCV', then you should stick with it and be prepared for a decade of underperformance or longer.
I think secular overperformanxe of value or growth has lasted as long as 30 years in the past.
The small premium has been negative 30 years, but value hasn't had that bad of a run, TMK.

This issue came up a couple of months ago, and I made the post below, but I failed to cite the data source. Darn me! :oops:
willthrill81 wrote:
Sun Jun 23, 2019 6:02 pm
From 1926-1940, 1974-1981, and 1989-2001, the value premium was zero or negative. The small premium was even more haphazard, being zero from 1946-1977, over 30 years. We've known all along that factors have underperformed for years at a time, sometimes more than a decade. What we've seen since 2006 is little different.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 11:14 pm
by willthrill81
nedsaid wrote:
Tue Aug 13, 2019 11:07 pm
Northern Flicker wrote:
Tue Aug 13, 2019 10:44 pm
I entirely agree that if you 'believe in SCV', then you should stick with it and be prepared for a decade of underperformance or longer.
I think secular overperformanxe of value or growth has lasted as long as 30 years in the past.
Not so sure I will still be here in 30 years, sure hope so but no guarantees.
I smile when I think about you "crying in your root beer" after having only had 12.5% returns over the last decade with SCV. What a train wreck of an investment. :mrgreen:

Re: Total Markets and category averages

Posted: Tue Aug 13, 2019 11:21 pm
by MindBogler
willthrill81 wrote:
Tue Aug 13, 2019 9:49 pm
The bigger point, IMHO, is that there is no guarantee that TSM (or any class of stock) will provide you with the returns you need to achieve your goals.
Yes, this is exactly why we must hold a variety of assets. I split my US equity 50-50 between LCG and SCV for this reason. :sharebeer

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 11:25 pm
by FIREchief
willthrill81 wrote:
Tue Aug 13, 2019 5:23 pm
In a recent post at Advisor Perspectives, Larry notes that SCV has underperformed the S&P 500 over the last decade and longer.t

this means that SCV's valuations are significantly more attractive and historically likely to lead to outperformance in the future.
What was he recommending at the beginning of that last decade? Was it SCV? (fool me once.....)

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 11:28 pm
by whodidntante
FIREchief wrote:
Tue Aug 13, 2019 11:25 pm
What was he recommending at the beginning of that last decade? Was it SCV? (fool me once.....)
But now it's cheap. And who doesn't like a good sale? Stock investors, that's who.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 11:30 pm
by willthrill81
FIREchief wrote:
Tue Aug 13, 2019 11:25 pm
willthrill81 wrote:
Tue Aug 13, 2019 5:23 pm
In a recent post at Advisor Perspectives, Larry notes that SCV has underperformed the S&P 500 over the last decade and longer.t

this means that SCV's valuations are significantly more attractive and historically likely to lead to outperformance in the future.
What was he recommending at the beginning of that last decade? Was it SCV? (fool me once.....)
Without delving into the data, I'll bet that TSM had more attractive valuations than SCV a decade ago. I don't know what Larry was recommending back then, but he's been pro-SCV for quite a while.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 11:32 pm
by nedsaid
willthrill81 wrote:
Tue Aug 13, 2019 11:14 pm
nedsaid wrote:
Tue Aug 13, 2019 11:07 pm
Northern Flicker wrote:
Tue Aug 13, 2019 10:44 pm
I entirely agree that if you 'believe in SCV', then you should stick with it and be prepared for a decade of underperformance or longer.
I think secular overperformanxe of value or growth has lasted as long as 30 years in the past.
Not so sure I will still be here in 30 years, sure hope so but no guarantees.
I smile when I think about you "crying in your root beer" after having only had 12.5% returns over the last decade with SCV. What a train wreck of an investment. :mrgreen:
I cried in my root beer over the 2018 New Year's weekend when my retirement portfolio returned "only" 15.01% but then found a simple 3 fund portfolio would have done even better. In a similar fashion, Bogleheads would be delighted with a 12.5% return from stocks for a decade until they found out that they could have done better with Total Stock Market. Coulda, woulda, shoulda.

Had quite a conversion with Larry Swedroe about benchmarking and "resulting." I was benchmarking against a 3-fund portfolio and Larry said I was using the wrong benchmarks. It was so good that I summarized and reposted it in my thread where I detail the progress of my investment portfolio.

Yep, 12.5% returns over a decade are hardly the Hindenburg disaster. Oh the humanity! I suppose that I should be crying over not having had all my money in Microsoft from the time the company went public in about 1986. I would be long retired. I should be crying in my root beer over not having put all my money into Google when it went public. As Dandy Don Meredith famously said to Howard Cosell on Monday Night Football, "If if and buts were candy and nuts, we would all have a Merry Christmas." Lots of ifs and buts.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 11:42 pm
by FIREchief
willthrill81 wrote:
Tue Aug 13, 2019 11:30 pm
FIREchief wrote:
Tue Aug 13, 2019 11:25 pm
willthrill81 wrote:
Tue Aug 13, 2019 5:23 pm
In a recent post at Advisor Perspectives, Larry notes that SCV has underperformed the S&P 500 over the last decade and longer.t

this means that SCV's valuations are significantly more attractive and historically likely to lead to outperformance in the future.
What was he recommending at the beginning of that last decade? Was it SCV? (fool me once.....)
Without delving into the data, I'll bet that TSM had more attractive valuations than SCV a decade ago. I don't know what Larry was recommending back then, but he's been pro-SCV for quite a while.
I appreciate that, but it really doesn't matter unless you place great faith in "valuations" as an input to investment decisions. If somebody gave me bad advice ten years ago, and tries to give me the same advice today, I'll likely pay no attention.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 11:43 pm
by stlutz
When we first started talking about low volatility investing on this board back around 2011/2012 or so, Swedroe argued that the good days for this strategy were in the rear view mirror because low vol stocks were overpriced. Over the succeeding 6 or 7 years, low vol. has done extremely well. Not sure which year this was, but Swedroe argued that international was due for a great run because it was undervalued. That hasn't come even close to working. Back in 2012 we starting hearing warnings about how CAPE was showing the US market to overvalued and that poor returns were coming. That didn't pan out either.

At some point, I'm sure that value will outperform, as will international, and low vol will underperform. Even Taylor would agree with that. The problem with market timing is that you have to get that timing part correct.

I think what we've seen time and time again is that valuation-based timing strategies just don't work.

Swedroe has explained in many posts over the years that there is never a time when he would say that value "is expected" to underperform the market. Not usually, but never. If so, then why should I care about what value looks like right now?

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Tue Aug 13, 2019 11:51 pm
by nedsaid
stlutz wrote:
Tue Aug 13, 2019 11:43 pm
When we first started talking about low volatility investing on this board back around 2011/2012 or so, Swedroe argued that the good days for this strategy were in the rear view mirror because low vol stocks were overpriced. Over the succeeding 6 or 7 years, low vol. has done extremely well. Not sure which year this was, but Swedroe argued that international was due for a great run because it was undervalued. That hasn't come even close to working. Back in 2012 we starting hearing warnings about how CAPE was showing the US market to overvalued and that poor returns were coming. That didn't pan out either.

At some point, I'm sure that value will outperform, as will international, and low vol will underperform. Even Taylor would agree with that. The problem with market timing is that you have to get that timing part correct.

I think what we've seen time and time again is that valuation-based timing strategies just don't work.

Swedroe has explained in many posts over the years that there is never a time when he would say that value "is expected" to underperform the market. Not usually, but never. If so, then why should I care about what value looks like right now?
Well, at least you can avoid piling into such things as the FAANG stocks, Large Growth, REITs, High Tech/Internet, Low Volatility after recent hot performance. What you are pointing out is the being right too early problem.

Re: Larry Swedroe: Small Value Stocks are Cheap

Posted: Wed Aug 14, 2019 10:03 am
by willthrill81
FIREchief wrote:
Tue Aug 13, 2019 11:42 pm
willthrill81 wrote:
Tue Aug 13, 2019 11:30 pm
FIREchief wrote:
Tue Aug 13, 2019 11:25 pm
willthrill81 wrote:
Tue Aug 13, 2019 5:23 pm
In a recent post at Advisor Perspectives, Larry notes that SCV has underperformed the S&P 500 over the last decade and longer.t

this means that SCV's valuations are significantly more attractive and historically likely to lead to outperformance in the future.
What was he recommending at the beginning of that last decade? Was it SCV? (fool me once.....)
Without delving into the data, I'll bet that TSM had more attractive valuations than SCV a decade ago. I don't know what Larry was recommending back then, but he's been pro-SCV for quite a while.
I appreciate that, but it really doesn't matter unless you place great faith in "valuations" as an input to investment decisions. If somebody gave me bad advice ten years ago, and tries to give me the same advice today, I'll likely pay no attention.
I don't personally put much stock in valuations (pun intended :P ) when it comes to making AA decisions; valuations have not been reliably mean reverting enough to make such a strategy work. Where I think that valuations appear to potentially be useful is for long-term planning purposes, such as using 1/CAPE as an estimate for future market returns in a TVM withdrawal approach.

Your point regarding the consistency of Larry's advice is well taken. Perhaps others here who are more familiar with his recommendations over the years can comment on that.