Explaining the Demise of Value Investing

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Seasonal
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Explaining the Demise of Value Investing

Post by Seasonal » Fri Sep 06, 2019 12:57 pm

Abstract: "The business press claims that the long-standing and highly popular value investing strategy—investing in low-valued stocks and selling short high-valued equities—lost its edge since 2007. The reasons for this putative sudden demise of value investing elude investors and academics, making it a challenge to assess the likelihood of the return of value investing to its days of glory. Based on extensive data analysis we show that the strategy has, in fact, been unprofitable for almost 30 years, barring a brief resurrection following dotcom bust. We identify two major reasons for the demise of value: (1) accounting deficiencies causing systematic misidentification of value, and particularly of glamour (growth) stocks, and (2) fundamental economic developments which slowed down significantly the reshuffling of value and glamour stocks which drove the erstwhile gains from the value strategy. We end up by speculating on the likelihood of the resurgence of value investing, which seems low."

https://papers.ssrn.com/sol3/papers.cfm ... id=3442539

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Re: Explaining the Demise of Value Investing

Post by Forester » Fri Sep 06, 2019 4:24 pm

The authors only consider book value which was already found to be a poor metric in Quantitative Value (2012).

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Re: Explaining the Demise of Value Investing

Post by firebirdparts » Fri Sep 06, 2019 4:28 pm

I would be curious to know what the fundamental economic developments are. Is that a free site if you give them an email address?

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Re: Explaining the Demise of Value Investing

Post by nisiprius » Fri Sep 06, 2019 4:40 pm

Forester wrote:
Fri Sep 06, 2019 4:24 pm
The authors only consider book value which was already found to be a poor metric in Quantitative Value (2012).
1) What metric was found to be a good metric in 2012?

2) Can you give us the names of some passively-managed mutual funds or ETFs that invest in stocks that are value stocks, according to the 2012 metric, so that we can see how they have performed out-of-sample compared to older, passively-managed value funds?
Last edited by nisiprius on Fri Sep 06, 2019 4:41 pm, edited 1 time in total.
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Re: Explaining the Demise of Value Investing

Post by nisiprius » Fri Sep 06, 2019 4:40 pm

firebirdparts wrote:
Fri Sep 06, 2019 4:28 pm
I would be curious to know what the fundamental economic developments are. Is that a free site if you give them an email address?
SSRN? Yes, it is. I've downloaded the paper and I've skimmed it.

One of the fundamental economic development is said to be the increasing importance of intangible assets:
Image
Accounting rules, still rooted in the industrial era, require the immediate expensing (subtraction from earnings) of all outlays on internally-generated intangibles, which have been, since the late 1980s, the major value-drivers of businesses. Consequently, these crucial corporate investments were missing from companies’ book values. So, a firm investing heavily in R&D, IT, brands, or business processes (e.g., customer recommendation algorithms), may appear to be a glamour (overvalued) company, due to its understated denominator of the market-to-book ratio, whereas in reality its valuation isn’t excessively high when book value is properly measured.
Last edited by nisiprius on Fri Sep 06, 2019 4:48 pm, edited 1 time in total.
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Re: Explaining the Demise of Value Investing

Post by Seasonal » Fri Sep 06, 2019 4:41 pm

Forester wrote:
Fri Sep 06, 2019 4:24 pm
The authors only consider book value which was already found to be a poor metric in Quantitative Value (2012).
DFA, seemingly the home of value stocks, includes in its value prospectus: "Securities are considered value stocks primarily because a company’s shares have a low price in relation to their book value."

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Re: Explaining the Demise of Value Investing

Post by hdas » Fri Sep 06, 2019 4:42 pm

nisiprius wrote:
Fri Sep 06, 2019 4:40 pm

2) Can you give us the names of some passively-managed mutual funds or ETFs that invest in stocks that are value stocks, according to the 2012 metric, so that we can see how they have performed out-of-sample compared to older, passively-managed value funds?
QVAL
VIOV
XSLV

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Re: Explaining the Demise of Value Investing

Post by vineviz » Fri Sep 06, 2019 5:24 pm

Seasonal wrote:
Fri Sep 06, 2019 12:57 pm
Abstract: "The business press claims that the long-standing and highly popular value investing strategy—investing in low-valued stocks and selling short high-valued equities—lost its edge since 2007.
The authors can't even establish that value investing is dead, which it seems to me would be a prerequisite step to explaining how it died.
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Re: Explaining the Demise of Value Investing

Post by Northern Flicker » Fri Sep 06, 2019 5:33 pm

hdas wrote:
Fri Sep 06, 2019 4:42 pm
nisiprius wrote:
Fri Sep 06, 2019 4:40 pm

2) Can you give us the names of some passively-managed mutual funds or ETFs that invest in stocks that are value stocks, according to the 2012 metric, so that we can see how they have performed out-of-sample compared to older, passively-managed value funds?
QVAL
VIOV
XSLV
Did they change their definition of value stock in response to the 2012 paper cited above? When did the change take place for one of them?
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Re: Explaining the Demise of Value Investing

Post by petulant » Fri Sep 06, 2019 5:40 pm

hdas wrote:
Fri Sep 06, 2019 4:42 pm
nisiprius wrote:
Fri Sep 06, 2019 4:40 pm

2) Can you give us the names of some passively-managed mutual funds or ETFs that invest in stocks that are value stocks, according to the 2012 metric, so that we can see how they have performed out-of-sample compared to older, passively-managed value funds?
QVAL
VIOV
XSLV

Cheers :greedy
Ummm, no. QVAL is actively managed. VIOV follows the S&P 600 Value, which has P/B as one of three equally weighted metrics. And XSLV is a small-cap low-volatility fund, not a value fund. Literally none of the options you posted are ones that would rely on 2012 research to identify value metrics other than P/B.

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Re: Explaining the Demise of Value Investing

Post by Jags4186 » Fri Sep 06, 2019 5:54 pm

Where’s the article on the demise of international investing?

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Re: Explaining the Demise of Value Investing

Post by stlutz » Fri Sep 06, 2019 6:08 pm

That was a real interesting paper.

I've complained in the past about the extent to which people think running a backtest and some regressions and call it "studying market history". This paper does actually dig into the why of what has happened the past dozen years or so. Would like to see more of this analysis on other periods when particular types of stocks did better/worse than expected.

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Re: Explaining the Demise of Value Investing

Post by asset_chaos » Fri Sep 06, 2019 6:41 pm

Death of equities. Demise of value. Burial of bonds. Unfortunately it's only an academic article. When it's blared from the mastheads of the popular press, I suppose then it'll be about time for the reversal. Recency is a thing. Or am I whistling past the graveyard?
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Re: Explaining the Demise of Value Investing

Post by jdilla1107 » Fri Sep 06, 2019 6:57 pm

Jags4186 wrote:
Fri Sep 06, 2019 5:54 pm
Where’s the article on the demise of international investing?
Does anyone claim that international equities expose a premium which can lead to sustained long term outperformance?
Last edited by jdilla1107 on Fri Sep 06, 2019 7:35 pm, edited 1 time in total.

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Re: Explaining the Demise of Value Investing

Post by Forester » Fri Sep 06, 2019 7:05 pm

petulant wrote:
Fri Sep 06, 2019 5:40 pm
hdas wrote:
Fri Sep 06, 2019 4:42 pm
nisiprius wrote:
Fri Sep 06, 2019 4:40 pm

2) Can you give us the names of some passively-managed mutual funds or ETFs that invest in stocks that are value stocks, according to the 2012 metric, so that we can see how they have performed out-of-sample compared to older, passively-managed value funds?
QVAL
VIOV
XSLV

Cheers :greedy
Ummm, no. QVAL is actively managed. VIOV follows the S&P 600 Value, which has P/B as one of three equally weighted metrics. And XSLV is a small-cap low-volatility fund, not a value fund. Literally none of the options you posted are ones that would rely on 2012 research to identify value metrics other than P/B.
QVAL is quantitative and you're obviously wrong about VIOV... price to book as part of an ensemble is a different proposition.

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Re: Explaining the Demise of Value Investing

Post by Forester » Fri Sep 06, 2019 7:24 pm

Seasonal wrote:
Fri Sep 06, 2019 4:41 pm
Forester wrote:
Fri Sep 06, 2019 4:24 pm
The authors only consider book value which was already found to be a poor metric in Quantitative Value (2012).
DFA, seemingly the home of value stocks, includes in its value prospectus: "Securities are considered value stocks primarily because a company’s shares have a low price in relation to their book value."
So they're setting out the academic basis, and Eugene Fama works with/for them as far as I know. I would be surprised if their value stock screening method is 100% book price.

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Re: Explaining the Demise of Value Investing

Post by sabhen » Fri Sep 06, 2019 7:38 pm

Warren Buffett stopped using Book Value as a metric for Berkshire H. of this year after many many years arguing it has lost its relevance. The champion of value investing is now buying Amazon and Apple after saying he did not understand Tech. Charlie Munger expressed some regret not buying Google. It seems they have woken up to FOMO.

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Re: Explaining the Demise of Value Investing

Post by petulant » Fri Sep 06, 2019 7:42 pm

Forester wrote:
Fri Sep 06, 2019 7:05 pm
petulant wrote:
Fri Sep 06, 2019 5:40 pm
hdas wrote:
Fri Sep 06, 2019 4:42 pm
nisiprius wrote:
Fri Sep 06, 2019 4:40 pm

2) Can you give us the names of some passively-managed mutual funds or ETFs that invest in stocks that are value stocks, according to the 2012 metric, so that we can see how they have performed out-of-sample compared to older, passively-managed value funds?
QVAL
VIOV
XSLV

Cheers :greedy
Ummm, no. QVAL is actively managed. VIOV follows the S&P 600 Value, which has P/B as one of three equally weighted metrics. And XSLV is a small-cap low-volatility fund, not a value fund. Literally none of the options you posted are ones that would rely on 2012 research to identify value metrics other than P/B.
QVAL is quantitative and you're obviously wrong about VIOV... price to book as part of an ensemble is a different proposition.
QVAL is actively managed. It's in the fund summary. The ask was for a passive fund.

I think you're over-reaching quite a bit claiming I'm "obviously wrong" about VIOV. It's got P/B, he's ask for things other than P/B. Period. And it's not like the other metrics S&P uses are rocket science. They're P/E and P/S, which are both also old school value metrics--not new ones from 2012 research which, again, was the ask. Generally, what I'm seeing from the 2012 information on quantitative value is that it uses a modern enterprise value to EBITDA-type ratio. That's not P/E or P/S or P/B.

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Re: Explaining the Demise of Value Investing

Post by nisiprius » Fri Sep 06, 2019 7:49 pm

S
hdas wrote:
Fri Sep 06, 2019 4:42 pm
nisiprius wrote:
Fri Sep 06, 2019 4:40 pm
2) Can you give us the names of some passively-managed mutual funds or ETFs that invest in stocks that are value stocks, according to the 2012 metric, so that we can see how they have performed out-of-sample compared to older, passively-managed value funds?
...
QVAL
VIOV
XSLV...
(Shrug) OK, I think it is being suggested that the demise of value investing is because the old measure of value isn't accurate, that we understand it better now, and that there is no demise if we use a good metric for value.

Whether or not these are exactly what I asked for, or what Wesley Gray had in mind, they are three attempts to improve on traditional criteria for "value."

I'm looking first at Alpha Architect U.S. Quantitative Value ETF, QVAL, because (a) it has "quantitative value" in the name, because (b) the senior author of the 2012 book Quantitative Value: A Practitioner's Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, Wesley Gray, is associated with Alpha Architect. I see that Morningstar classifies it as "mid-cap value," and that since inception, it (blue) has underperformed the Vanguard Mid-cap Value Index Fund (yellow), the Morningstar Mid-cap Value Category Average (orange), and the S&P 500 (green), and has a Morningstar two-star rating.

Source

Image

The Invesco S&P SmallCap Low Volatility ETF, XSLV, is classified as "small value" and, since inception, has outperformed the Morningstar small-cap value category average (orange), and the Vanguard and DFA small-cap value funds (yellow and maroon), but came in a hair behind the S&P 500. Morningstar gives it five stars.

Source

Image

For VIOV, I'm not sure what to use as a starting point because I don't think it has anything to do with "Quantitative value" or 2012, but it's kind of intriguing to pit an S&P small-cap value index fund against Vanguard's standard CRSP index, and we might as well go back to inception. I assume the idea here is that S&P is using quality screens or something to get some multifactor goodness?

Source

Image

It (blue) handily outperformed the small-cap value category average and got a four-star rating. I would call it a near-tie with the traditional Vanguard small-cap value ETF (yellow), but it did slightly outperform it. It failed to outperform the S&P 500.

So, three "better definition of value" funds. One loss, one win, one near-tie with traditional value. But not one of the three managed to beat the S&P 500.

This does not support the idea that the demise of value is only due to having a bad metric for value. And although we only have five years of data, it's notable that the fund most closely associated with quantitative value has, so far, been the lowest performant.
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Re: Explaining the Demise of Value Investing

Post by Forester » Fri Sep 06, 2019 7:57 pm

QVAL is rules-based just like VOO & USMV. The rules are published on their website and haven't changed since inception. Otherwise ALL value funds are "active" even if they're buying the cheapest slice of stocks on autopilot.

re P/B, if it's used alongside P/E and something else then it's going to result in a similar selection of stocks versus using the enterprise multiple on its own.

The other point is that P/B was dropped by O'Shaughnessy Asset Management in 2010/11 so even back then it was seen as problematic, fresh off a great decade for value.

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Re: Explaining the Demise of Value Investing

Post by columbia » Fri Sep 06, 2019 8:00 pm

Mr. Bernstein (briefly) discusses the potential use of p/b in the latest podcast.

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Re: Explaining the Demise of Value Investing

Post by Forester » Fri Sep 06, 2019 8:06 pm

QVAL holds 40 stocks from a universe of 1,000, IVOV holds 295 stocks from the Mid Cap 400. Also look at the value characteristics. And because one has done worse than the other would make sense if it's a concentrated bet on value. There may be other issues such as overweight certain sectors (in the same way as SPLV gets bogged down with its industry composition vs USMV).

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Re: Explaining the Demise of Value Investing

Post by nedsaid » Fri Sep 06, 2019 8:37 pm

Seasonal wrote:
Fri Sep 06, 2019 4:41 pm
Forester wrote:
Fri Sep 06, 2019 4:24 pm
The authors only consider book value which was already found to be a poor metric in Quantitative Value (2012).
DFA, seemingly the home of value stocks, includes in its value prospectus: "Securities are considered value stocks primarily because a company’s shares have a low price in relation to their book value."
Problem is, book value is of decreasing importance. Much better to focus on cash flows and what price multiple should be assigned to those cash flows taking into account rate of earnings growth and consistency of that earnings growth. For a software company like Microsoft, book value is almost irrelevant as its true value is its going concern value, the value of its intellectual property, and its ability to generate cash. This might be a big reason that DFA doesn't seem to be cutting edge, it is using the wrong metric. The accounting theoreticians have struggled with how to deal with intangible property, no easy answer here.
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Re: Explaining the Demise of Value Investing

Post by Northern Flicker » Fri Sep 06, 2019 10:08 pm

QVAL holds 40 stocks from a universe of 1,000, IVOV holds 295 stocks from the Mid Cap 400. Also look at the value characteristics. And because one has done worse than the other would make sense if it's a concentrated bet on value. There may be other issues such as overweight certain sectors (in the same way as SPLV gets bogged down with its industry composition vs USMV).
All of which are separate properties than what the fund manager’s definition of value might be.

Looking back and saying what would have worked is a weak result at best. If a superior definition of value was articulated at the beginning of some period that ended in 2012, and a 2012 publication said that it worked, then that becomes interesting.
Risk is not a guarantor of return.

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Re: Explaining the Demise of Value Investing

Post by firebirdparts » Fri Sep 06, 2019 10:51 pm

asset_chaos wrote:
Fri Sep 06, 2019 6:41 pm
Death of equities. Demise of value. Burial of bonds. Unfortunately it's only an academic article. When it's blared from the mastheads of the popular press, I suppose then it'll be about time for the reversal. Recency is a thing. Or am I whistling past the graveyard?
That is exactly what I think when I see stuff like this. Back before we had bogle you had to buy when other people were selling and vice-versa.

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Re: Explaining the Demise of Value Investing

Post by Ki_poorrichard » Fri Sep 06, 2019 11:25 pm

Northern Flicker wrote:
Fri Sep 06, 2019 10:08 pm
QVAL holds 40 stocks from a universe of 1,000, IVOV holds 295 stocks from the Mid Cap 400. Also look at the value characteristics. And because one has done worse than the other would make sense if it's a concentrated bet on value. There may be other issues such as overweight certain sectors (in the same way as SPLV gets bogged down with its industry composition vs USMV).
All of which are separate properties than what the fund manager’s definition of value might be.

Looking back and saying what would have worked is a weak result at best. If a superior definition of value was articulated at the beginning of some period that ended in 2012, and a 2012 publication said that it worked, then that becomes interesting.
+1

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Re: Explaining the Demise of Value Investing

Post by rascott » Sat Sep 07, 2019 12:03 am

firebirdparts wrote:
Fri Sep 06, 2019 10:51 pm
asset_chaos wrote:
Fri Sep 06, 2019 6:41 pm
Death of equities. Demise of value. Burial of bonds. Unfortunately it's only an academic article. When it's blared from the mastheads of the popular press, I suppose then it'll be about time for the reversal. Recency is a thing. Or am I whistling past the graveyard?
That is exactly what I think when I see stuff like this. Back before we had bogle you had to buy when other people were selling and vice-versa.
Uhh... you still are buying what other people are selling. Doing it the via mechanism of an index fund doesn't change where your money is going.

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Re: Explaining the Demise of Value Investing

Post by Day9 » Sat Sep 07, 2019 12:07 am

At the final conclusion of the paper the 2 most likely scenarios they give for Value coming back are

(1) If Financial stocks come back or

(2) if there is a tech crash similar to 2000.

They claim both scenarios are unlikely. I agree they are unlikely and that is part of the reason valuations are the way they are, but these are certainly not impossible. However today's situation is not like 1999, even though both were Large Tech bull markets, there are many differences. One important one is back then bond yields were 6% and now they are under 2%. Valuations were high in 1996 but if you bought then you would still come out ahead after the 2000 crash. It is more likely we are in 1996 than 1999.
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Re: Explaining the Demise of Value Investing

Post by Ki_poorrichard » Sat Sep 07, 2019 12:17 am

Day9 wrote:
Sat Sep 07, 2019 12:07 am
At the final conclusion of the paper the 2 most likely scenarios they give for Value coming back are

(1) If Financial stocks come back or

(2) if there is a tech crash similar to 2000.

They claim both scenarios are unlikely. I agree they are unlikely and that is part of the reason valuations are the way they are, but these are certainly not impossible. However today's situation is not like 1999, even though both were Large Tech bull markets, there are many differences. One important one is back then bond yields were 6% and now they are under 2%. Valuations were high in 1996 but if you bought then you would still come out ahead after the 2000 crash. It is more likely we are in 1996 than 1999.
Nor is it like any other situation in history. These times are like no other. Uncharted terrain is an understatement.

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Re: Explaining the Demise of Value Investing

Post by Forester » Sat Sep 07, 2019 4:36 am

Northern Flicker wrote:
Fri Sep 06, 2019 10:08 pm
QVAL holds 40 stocks from a universe of 1,000, IVOV holds 295 stocks from the Mid Cap 400. Also look at the value characteristics. And because one has done worse than the other would make sense if it's a concentrated bet on value. There may be other issues such as overweight certain sectors (in the same way as SPLV gets bogged down with its industry composition vs USMV).
All of which are separate properties than what the fund manager’s definition of value might be.

Looking back and saying what would have worked is a weak result at best. If a superior definition of value was articulated at the beginning of some period that ended in 2012, and a 2012 publication said that it worked, then that becomes interesting.
Greenblatt's Magic Formula book was published in 2005, again he used an enterprise multiple (in a double sort with ROC). There is much evidence that book price was disliked by practitioners at the peak of value's 2000s victory lap. Whether that means a different metric will work better or worse than book price when value lags, is a different question. It's reasonable to assume that in the 2010s, a high conviction value fund based on the enterprise multiple would underperform a Vanguard product which is book value & low active share.

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Re: Explaining the Demise of Value Investing

Post by Seasonal » Sat Sep 07, 2019 5:40 am

nedsaid wrote:
Fri Sep 06, 2019 8:37 pm
Seasonal wrote:
Fri Sep 06, 2019 4:41 pm
Forester wrote:
Fri Sep 06, 2019 4:24 pm
The authors only consider book value which was already found to be a poor metric in Quantitative Value (2012).
DFA, seemingly the home of value stocks, includes in its value prospectus: "Securities are considered value stocks primarily because a company’s shares have a low price in relation to their book value."
Problem is, book value is of decreasing importance. Much better to focus on cash flows and what price multiple should be assigned to those cash flows taking into account rate of earnings growth and consistency of that earnings growth. For a software company like Microsoft, book value is almost irrelevant as its true value is its going concern value, the value of its intellectual property, and its ability to generate cash. This might be a big reason that DFA doesn't seem to be cutting edge, it is using the wrong metric. The accounting theoreticians have struggled with how to deal with intangible property, no easy answer here.
Book value clearly has major problems; it's more an accounting artifact than a representation of economic value. Cash flow (or even earnings) has a lot more theoretical justification. My issue is that value advocates have long and vociferously defended book to market, including claims of a persistent history and working out of sample and including some claims of superiority over p/e or p/cf. It's the defining value characteristic in the Fama French three factor model, which has loomed large over the value landscape.

The decreased importance of btm seems to be an exercise in scrambling for new tests in light of values recent performance (and doses of overfitting data because you have the time and computing power, and the desire to publish). If you keep running back-tests on the data you'll find something that works. There are enough factors in the factor zoo to find some with appealing results. We seem to be in the realm of no true Scotsman.

If you torture the data long enough, it will confess.

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Re: Explaining the Demise of Value Investing

Post by Forester » Sat Sep 07, 2019 5:47 am

Seasonal wrote:
Sat Sep 07, 2019 5:40 am
My issue is that value advocates have long and vociferously defended book to market, including claims of a persistent history and working out of sample and including some claims of superiority over p/e or p/cf. It's the defining value characteristic in the Fama French three factor model, which has loomed large over the value landscape.
This is totally opposite to my observations of the 'value investing fraternity'. Again, we have the practitioners trying to make money, and we have the academics talking to themselves.

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Re: Explaining the Demise of Value Investing

Post by nisiprius » Sat Sep 07, 2019 6:21 am

petulant wrote:
Fri Sep 06, 2019 5:40 pm
...QVAL is actively managed...
For the record... as Forester already noted, but not explicitly... the prospectus language is
The Fund employs a “passive management” (or indexing) investment approach designed to track the performance, before fees and expenses, of the Index. The Index is based on a proprietary methodology developed by Empirical Finance, LLC, d/b/a Alpha Architect, and licensed to Empowered Funds, LLC, the Fund’s investment adviser (the “Adviser”) and an indirect subsidiary of Alpha Architect.
As to the general business of proprietary "indexes" created for use by one specific fund, that's an interesting question in itself. But at any rate the fund explicitly says it is passive and follows an index, and even goes so far as to present this among the "principal risks:"
Passive Investment Risk. The Fund is not actively managed and the Adviser will not sell shares of a security due to current or projected underperformance of a security, industry or sector, unless that security is removed from the Index, sold in connection with a reconstitution of the Index as addressed in the Index methodology, or sold to comply with the Fund’s investment limitations (for example, to maintain the Fund’s tax status). Maintaining investments regardless of market conditions or the performance of individual investments could cause the Fund’s return to be lower than if the Fund employed an active strategy.
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Re: Explaining the Demise of Value Investing

Post by Seasonal » Sat Sep 07, 2019 6:24 am

Forester wrote:
Sat Sep 07, 2019 5:47 am
Seasonal wrote:
Sat Sep 07, 2019 5:40 am
My issue is that value advocates have long and vociferously defended book to market, including claims of a persistent history and working out of sample and including some claims of superiority over p/e or p/cf. It's the defining value characteristic in the Fama French three factor model, which has loomed large over the value landscape.
This is totally opposite to my observations of the 'value investing fraternity'. Again, we have the practitioners trying to make money, and we have the academics talking to themselves.
What are your answers to Nisi's questions at viewtopic.php?p=4737449#p4737449 ?

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Re: Explaining the Demise of Value Investing

Post by nisiprius » Sat Sep 07, 2019 6:45 am

I think I am going to take it that QMOM and IMOM are the answers to my question, being Alpha Architect funds with inception a year or two after the book, and presumably representing the fruits of their more sophisticated approach to "value."

Although Morningstar star ratings do not show persistence and are not predictive, they are a reasonable attempt to measure past performance in a fair and appropriate way that doesn't deceive buyers. Comparisons are always with category averages and are adjusted for risk and style. I decided to look at all of Alpha Architects ETFs while I was at it. On a quick overview of Alpha Architect's ETFs I find:

* * Alpha Architect U.S. Quantitative Value ETF QVAL
* * * Alpha Architect International Quantitative Value ETF IVAL
* * Alpha Architect U.S. Quantitative Momentum ETF QMOM
* * Alpha Architect International Quantitative Momentum ETF IMOM
[Unrated] Alpha Architect Value Momentum Trend ETF VMOT (Inception 5/02/2017)
[Unrated] Alpha Architect Freedom 100 Emerging Markets ETF FRDM (Inception 5/22/2019)

Of the first four, since inception QVAL and QMOM have underperformed the S&P 500, while IVAL and IMOM have (slightly) underperformed the Vanguard Total International Stock Index Fund. (VMOT, with two years of history, has lost money).

With regard specifically to value,

QVAL underperformed the mid-cap value category average.
IVAL tied (very slightly underperformed) the Foreign Large Value category average,
and both, like most if not all value funds, underperformed the S&P 500

The conclusion I come to is there hasn't yet been any payoff from their sophisticated definition of "value," and that it certainly hasn't been able to overcome the underperformance of value generally. Value has indeed been experiencing a period of underperformance, and it isn't just because of a lousy definition of value because QVAL and IVAL have not been able to escape from it.
Last edited by nisiprius on Sat Sep 07, 2019 7:53 am, edited 1 time in total.
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Re: Explaining the Demise of Value Investing

Post by typical.investor » Sat Sep 07, 2019 7:06 am

Interesting, but I don't see that their measure of the value/growth spread is so relevant. The paper shows that the Median Market to Book Ratios of Value and Glamour Stocks (p22) isn't all that different today than the last 20 years. OK.

I understand though that value today is trading in its cheapest quintile, and in emerging markets in it's cheapest decile. So I question how informative their measure really is.

Anyway, book-to-market just plain doesn't work I think. Book measures contain both contributed capital and retained earnings. Contributed capital contributes nothing to predicting the value premium. That's why I think DFA started to incorporate a profitability screen.

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Re: Explaining the Demise of Value Investing

Post by petulant » Sat Sep 07, 2019 7:07 am

nisiprius wrote:
Sat Sep 07, 2019 6:21 am
petulant wrote:
Fri Sep 06, 2019 5:40 pm
...QVAL is actively managed...
For the record... as Forester already noted, but not explicitly... the prospectus language is
The Fund employs a “passive management” (or indexing) investment approach designed to track the performance, before fees and expenses, of the Index. The Index is based on a proprietary methodology developed by Empirical Finance, LLC, d/b/a Alpha Architect, and licensed to Empowered Funds, LLC, the Fund’s investment adviser (the “Adviser”) and an indirect subsidiary of Alpha Architect.
As to the general business of proprietary "indexes" created for use by one specific fund, that's an interesting question in itself. But at any rate the fund explicitly says it is passive and follows an index, and even goes so far as to present this among the "principal risks:"
Passive Investment Risk. The Fund is not actively managed and the Adviser will not sell shares of a security due to current or projected underperformance of a security, industry or sector, unless that security is removed from the Index, sold in connection with a reconstitution of the Index as addressed in the Index methodology, or sold to comply with the Fund’s investment limitations (for example, to maintain the Fund’s tax status). Maintaining investments regardless of market conditions or the performance of individual investments could cause the Fund’s return to be lower than if the Fund employed an active strategy.
Ah, I didn't check the prospectus. I just read the summary on a couple sites that said it was actively managed.

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Re: Explaining the Demise of Value Investing

Post by Forester » Sat Sep 07, 2019 7:20 am

nisiprius wrote:
Sat Sep 07, 2019 6:45 am
Value has indeed been experience and period of underperformance, and it isn't just because of a lousy definition of value because QVAL and IVAL have not been able to escape from it.
Yes but it's possible that a firmer definition of value, in a concentrated portfolio, would perform worse than a milquetoast value fund holding a high % of the market.

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Re: Explaining the Demise of Value Investing

Post by Forester » Sat Sep 07, 2019 7:31 am

QMOM, MTUM, SPY https://stockcharts.com/freecharts/perf ... M,MTUM,spy

QMOM isn't that sophisticated, I don't know about MTUM. QMOM might be an argument against a naive academic factor approach. It goes to show that Value or Momentum in the abstract is not the same thing as a Value or Momentum fund.

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Re: Explaining the Demise of Value Investing

Post by nisiprius » Sat Sep 07, 2019 7:56 am

Forester wrote:
Sat Sep 07, 2019 7:20 am
nisiprius wrote:
Sat Sep 07, 2019 6:45 am
Value has indeed been experiencing a period of underperformance, and it isn't just because of a lousy definition of value because QVAL and IVAL have not been able to escape from it.
Yes but it's possible that a firmer definition of value, in a concentrated portfolio, would perform worse than a milquetoast value fund holding a high % of the market.
Would you agree that QVAL and IVAL, going forward, will be a fair test of the "quantitative value" methodology?
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Re: Explaining the Demise of Value Investing

Post by flossmoor » Sat Sep 07, 2019 8:21 am

Ki_poorrichard wrote:
Sat Sep 07, 2019 12:17 am

Nor is it like any other situation in history. These times are like no other. Uncharted terrain is an understatement.
Yeah, I cannot see how we can predict much of anything when all of a sudden, what is it, 45% of non-US bonds are at negative interest rates. It's like 1905 when Einstein first came out with his theories. Made the older physicists look silly opposing him, which many of them did, violently.

Much of the stuff you read about investing does not mention the subtext "as long as everything else stays relatively constant."

I recall my Econ 101 textbook saying it was literally impossible for interest rates to go below zero, because otherwise everyone would go to currency and stick it in a vault rather than buy bonds. Guess Nobel-prizewinners are not always right.
Last edited by flossmoor on Sat Sep 07, 2019 8:25 am, edited 2 times in total.

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Re: Explaining the Demise of Value Investing

Post by Forester » Sat Sep 07, 2019 8:25 am

nisiprius wrote:
Sat Sep 07, 2019 7:56 am
Forester wrote:
Sat Sep 07, 2019 7:20 am
nisiprius wrote:
Sat Sep 07, 2019 6:45 am
Value has indeed been experiencing a period of underperformance, and it isn't just because of a lousy definition of value because QVAL and IVAL have not been able to escape from it.
Yes but it's possible that a firmer definition of value, in a concentrated portfolio, would perform worse than a milquetoast value fund holding a high % of the market.
Would you agree that QVAL and IVAL, going forward, will be a fair test of the "quantitative value" methodology?
Yes, as every stock is from the cheapest decile, of a large cap universe, and it is using the one value metric that arguably has the broadest industry support & evidence behind it.

I don't like that it's not sector constained but if somebody points to QVAL in 2025 and says "well, value still isn't working" then that would be hard to argue.

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Re: Explaining the Demise of Value Investing

Post by larryswedroe » Sat Sep 07, 2019 9:15 am

To be helpful here, some perspective and history might help

First, the original research on value looked at other metrics like E/P. Fama -French summarized the research, they didn't discover anything new, and having found that multiple measures of cheap vs. expensive worked they settled on p/b as THEIR measure for the simple reason (not that it worked better, or had higher premium) but it was more stable as a historical figure vs E/P which is based only on current earnings which are more volatile than book value. BTW, that's one way that minimizes the risks of data mining is that value has been robust to many definitions including p/e, p/cf, p/ebidta, p/s, p/d and more. They could just as easily chosen p/CF (which avoids lots of accounting issues/shenanigans). But the lower turnover for BTM meant lower execution costs, so they went with that.

Second, in I think about 06 Fama/French did work on profitability and building on that Novy Marx wrote his now big paper on gross profitability/quality finding it added significant power to value, and shortly thereafter we got the quality factor, which is related. In 2013, DFA for example added profitability screen.

Third, lots of problems with BtM have been pointed out with anomalies like accruals and how intellectual capital is handled (now have to expense vs. capitalize but if ACQUIRE same asset it goes on balance sheet as goodwill). So many years value practitioners were using other metrics or perhaps better still multiple ones since some do better in some industries and worse in others. Bridgeway and AQR have been using multiple metrics for long time, as have others, and even indices use them.Note that using metrics like p/cf and even p/e provide exposures to both profitability and quality factors.

Also the explanatory power of price-to-book by sector by sector, sectors that tend to involve more intangibles assets such as technology, finance and healthcare, is still there, perhaps though not as strong as other value metrics.

Valuations spreads are now wider than they were when FF paper published, and they are best predictor we have.

The failure of the paper is that it doesn't address at all the other value metrics, and how things like p/cf are not impacted by the issues they raise. That IMO is serious flaw in the paper.

FWIW, IMO the best explanation for value recent underperformance, and it's really only been mostly since 2017 is that rates have collapsed and growth stocks being longer duration benefit from falling rates more than short duration stocks. Add to that we have had basically a deflationary environment and value stocks with more leverage get harmed more by that. And on top of that the very low rates and inverted curves (both "unexpected"l) have severely hampered banking and insurance industries which have been in value regime. These things help explain value underperformance far more than proposed by the authors IMO. And neither should be expected to continue---zero to negative real rates and inverted curves.

Like all factors/asset classes value has had long periods of poor performance in past, just like market beta. Which argues for diversifcation across unique sources of risk, not abandoning value. Nothing new here and yet so many people are ready (based on small recency sample) to abandon strategies that have worked for many decades, across many asset classes, and many metrics. Will value outperform in future? I don't know, but IMO the odds certainly favor it and investing is all about putting odds in your favor. I think Buffett would agree.

Hope above is helpful
Larry

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Re: Explaining the Demise of Value Investing

Post by typical.investor » Sat Sep 07, 2019 9:24 am

Forester wrote:
Sat Sep 07, 2019 8:25 am
nisiprius wrote:
Sat Sep 07, 2019 7:56 am
Forester wrote:
Sat Sep 07, 2019 7:20 am
nisiprius wrote:
Sat Sep 07, 2019 6:45 am
Value has indeed been experiencing a period of underperformance, and it isn't just because of a lousy definition of value because QVAL and IVAL have not been able to escape from it.
Yes but it's possible that a firmer definition of value, in a concentrated portfolio, would perform worse than a milquetoast value fund holding a high % of the market.
Would you agree that QVAL and IVAL, going forward, will be a fair test of the "quantitative value" methodology?
Yes, as every stock is from the cheapest decile, of a large cap universe, and it is using the one value metric that arguably has the broadest industry support & evidence behind it.

I don't like that it's not sector constained but if somebody points to QVAL in 2025 and says "well, value still isn't working" then that would be hard to argue.
QVAL isn’t simply value though. They also run a quality screen and absent an economic moat, I don’t think they see even a cheap stock as investible.

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Re: Explaining the Demise of Value Investing

Post by heyyou » Sat Sep 07, 2019 10:04 am

“The reports of my death are greatly exaggerated.” Mark Twain
Since we are a decade into a bull market, let's wait another decade to see if Value is truly dead, while others need to publish or perish on a tighter schedule.

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Re: Explaining the Demise of Value Investing

Post by hdas » Sat Sep 07, 2019 11:05 am

vineviz wrote:
Fri Sep 06, 2019 5:24 pm
Seasonal wrote:
Fri Sep 06, 2019 12:57 pm
Abstract: "The business press claims that the long-standing and highly popular value investing strategy—investing in low-valued stocks and selling short high-valued equities—lost its edge since 2007.
The authors can't even establish that value investing is dead, which it seems to me would be a prerequisite step to explaining how it died.
Yet, extreme value people are in the awful predicament of having lost ~130% in last 10 years vs LG....all they can do is hope that the future conforms to their model at this point. Cheers :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Re: Explaining the Demise of Value Investing

Post by Day9 » Sat Sep 07, 2019 2:26 pm

Thank you very much Larry for that helpful post. We learn a lot from you.

And thank you to the 3-fund Bogleheads for their civility. They could be spiking the football much harder than they have been and I appreciate their restraint.
I'm just a fan of the person I got my user name from

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Re: Explaining the Demise of Value Investing

Post by nisiprius » Sat Sep 07, 2019 2:35 pm

larryswedroe wrote:
Sat Sep 07, 2019 9:15 am
...FWIW, IMO the best explanation for value recent underperformance, and it's really only been mostly since 2017...
Swedroe: Value Premium Goes Missing, is dated May 01, 2015.
...I’ve been getting a lot of questions about the recent disappearance of the value premium... As you can see, in terms of annualized returns, there has been, on average, no realized value premium over the last 10 calendar years.
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Re: Explaining the Demise of Value Investing

Post by larryswedroe » Sat Sep 07, 2019 3:21 pm

Nisi, might want to go back and look at the data, there was no value UNDERPERFORMANCE in that 10 years. And really wasn't negative in next 2 either if memory serves. Almost all the underperformance is really since 2017. And the big underperformance is really last 12 months.

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Re: Explaining the Demise of Value Investing

Post by nisiprius » Sat Sep 07, 2019 4:58 pm

larryswedroe wrote:
Sat Sep 07, 2019 3:21 pm
Nisi, might want to go back and look at the data, there was no value UNDERPERFORMANCE in that 10 years. And really wasn't negative in next 2 either if memory serves. Almost all the underperformance is really since 2017. And the big underperformance is really last 12 months.
You are correct, my apologies. What you said in 2015 was that there had been no realized value premium, and you noted that there hadn't been any underperformance. I was mixing up "absence of premium" and "underperformance."

Image
As you can see, in terms of annualized returns, there has been, on average, no realized value premium over the last 10 calendar years. While this certainly has been a disappointment to investors who expected higher returns from value stocks, there was also no harm done to those who “tilted” their portfolios toward value. There was no annualized premium, but there wasn’t any underperformance either.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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