all value portfolio to gain better returns per Paul Merriman?

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$questions
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all value portfolio to gain better returns per Paul Merriman?

Post by $questions » Mon Mar 23, 2020 8:17 am

Hi all,

I'm new to investing...

Any credence to Paul Merriman's approach that an all value portfolio will offer considerably better returns than a total market or s&p index?

https://paulmerriman.com/best-in-class- ... lios-2019/

I trust that you all know much more about this stuff than me....:)

TIA

theorist
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Re: all value portfolio to gain better returns per Paul Merriman?

Post by theorist » Mon Mar 23, 2020 8:36 am

There is an idea that beaten up companies in unfashionable areas can be systematically undervalued. People don’t expect much from them, so their shares lose less value on bad news, but increase more when there is an upside surprise. Investing in these companies is called “value investing.” It was made famous by Ben Graham and a modern adherent, in the early part of his career at least, was Warren Buffett.

This word idea turns into a quantitative scheme by purchasing stocks with low price to book or price to earnings ratio. Typically the high flying growth stocks are bid up by expectations of large future earnings going out many years; value stocks are valued for immediately visible future earnings and trade at lower P/B and P/E ratios.

This general idea finds its modern expression in the theory of “factors” ala Fama and French, explained nicely in e.g. this book

https://www.amazon.com/Your-Complete-Gu ... oks&sr=1-3

You can find a large number of discussions of Fama French and factors on this site.

Other factors include size, quality, etc. The combination of size and value factors leads to Merriman’s emphasis on “small value” in many of his portfolios and podcasts.

You can judge for yourself using the historical record how convincing the case is for value investing in index funds. Comparing the performance of the large value and small value Vanguard funds, VIVAX and VSIAX, to e.g. total market VTSAX, shows that value investing has been in a tough period for the past few years. Whether it comes back big after the current market shake up or remains in a slump, is anyone’s guess.

livesoft
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Re: all value portfolio to gain better returns per Paul Merriman?

Post by livesoft » Mon Mar 23, 2020 8:40 am

$questions wrote:
Mon Mar 23, 2020 8:17 am
Any credence to Paul Merriman's approach that an all value portfolio will offer considerably better returns than a total market or s&p index?
That was certainly true, but hasn't been true for a few years now. Of course, perhaps over the long-term (i.e. longer than you will live) it is true.

I tilt to small-cap and value per the Merriman ideas, but I am not blinded by his work. Nor am I blinded by anybody else. I go into all these things with my eyes wide open. I reallze that many people cannot do that.

Besides if "better returns" mean 0.01% better, does it even matter?

Bottom line: Don't put 100% of your faith in anybody.
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David Jay
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Re: all value portfolio to gain better returns per Paul Merriman?

Post by David Jay » Mon Mar 23, 2020 8:48 am

Market weight investing is the default. Any “tilt” away from market weight will guarantee under-or-over performance. Will value outperform in the future? Maybe. Will value underperform? Maybe. Here is my regular reply to any tilt (including a value tilt):
“ You need to believe in your tilt enough to convince yourself to stay the course through a decade or more of underperformance”. If you don’t have that kind of belief, stay with total market.
So, how much belief do you have in the value proposition? Will you continue to hold through years of under-performance based on what some guy (Paul Merriman) said? I held a small-value tilt for about 5 years but I “surrendered” after years of SCV underperformance, so I failed the above test.
Last edited by David Jay on Mon Mar 23, 2020 8:51 am, edited 1 time in total.
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dbr
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Re: all value portfolio to gain better returns per Paul Merriman?

Post by dbr » Mon Mar 23, 2020 8:51 am

As theorist explained this is just Fama-French which has been around for decades. Their results have seemed to be robust, but one should consider that like any other comparison of one portfolio design to another outperforming or underperforming in actual results can persist for a long time.

As recommended, read Swedroe.

FWIW at one time Boglheheads was surveyed (we don't run surveys in the Forum anymore) and at that time more than half the posters here claimed to be tilters to small and value.

I am not a tilter and have no recommendation either way. I would suggest that anyone who reads Merriman imagining that there is a secret sauce here that one should indulge in think twice and understand what it is before investing.

caklim00
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Re: all value portfolio to gain better returns per Paul Merriman?

Post by caklim00 » Mon Mar 23, 2020 8:54 am

You will get varying responses on here. Whatever you do stick to your plan. I tilt to small cap and value very hard. All that said if you are like me you will have to work within the constraints of your 401k. I don't have (cheap) access to Value or International Small so there is no way for me to be 100% anyway.

sharukh
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Re: all value portfolio to gain better returns per Paul Merriman?

Post by sharukh » Mon Mar 23, 2020 8:55 am

David Jay wrote:
Mon Mar 23, 2020 8:48 am
Market weight investing is the default. Any “tilt” away from market weight will guarantee under-or-over performance. Will value outperform in the future? Maybe. Will value underperform? Maybe. Here is my regular reply to any tilt (including a value tilt):
“ You need to believe in your tilt enough to convince yourself to stay the course through a decade or more of underperformance”. If you don’t have that kind of belief, stay with total market.
So, how much belief do you have in the value proposition? Will you continue to hold through years of under-performance based on what some guy (Paul Merriman) said? I held a small-value tilt for about 5 years but I “surrendered” after years of SCV underperformance, so I failed the above test.
I have the same experience with REIT, gave up after weak performance. Learned that I don't have moxie to hold on to anything other than simple index funds.

P.S. having difficulty to hold on to international index funds due to its weak performance. But I still think I can hold on to it as I strongly believe in simple indexing and wide diversification.


No tilt here.

dkturner
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Re: all value portfolio to gain better returns per Paul Merriman?

Post by dkturner » Mon Mar 23, 2020 9:13 am

theorist wrote:
Mon Mar 23, 2020 8:36 am
There is an idea that beaten up companies in unfashionable areas can be systematically undervalued. People don’t expect much from them, so their shares lose less value on bad news, but increase more when there is an upside surprise. Investing in these companies is called “value investing.” It was made famous by Ben Graham and a modern adherent, in the early part of his career at least, was Warren Buffett.

This word idea turns into a quantitative scheme by purchasing stocks with low price to book or price to earnings ratio. Typically the high flying growth stocks are bid up by expectations of large future earnings going out many years; value stocks are valued for immediately visible future earnings and trade at lower P/B and P/E ratios.

This general idea finds its modern expression in the theory of “factors” ala Fama and French, explained nicely in e.g. this book

https://www.amazon.com/Your-Complete-Gu ... oks&sr=1-3

You can find a large number of discussions of Fama French and factors on this site.

Other factors include size, quality, etc. The combination of size and value factors leads to Merriman’s emphasis on “small value” in many of his portfolios and podcasts.

You can judge for yourself using the historical record how convincing the case is for value investing in index funds. Comparing the performance of the large value and small value Vanguard funds, VIVAX and VSIAX, to e.g. total market VTSAX, shows that value investing has been in a tough period for the past few years. Whether it comes back big after the current market shake up or remains in a slump, is anyone’s guess.
So far this year value stocks have definitely not declined less than growth stocks. The Russell 3000 Growth index is down 24.5% YTD (3/20) while the Russell 3000 Value Index index is down 35.2%. So much for the old theory that value stocks act as a buffer during equity market declines.

Scooter57
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Re: all value portfolio to gain better returns per Paul Merriman?

Post by Scooter57 » Mon Mar 23, 2020 9:49 am

The problem with investing in "value" stocks is that there are as many definitions of value as there are value investors. The mutual funds and ETFs that call themselves "Value" funds use very simple easily screened parameters to determine what is value, and as a result many of their holdings are, by more sophisticated value parameters, not value-y at all. Many screens use analysts' forecasts of future earnings, which I have tracked and studied and found to be completely wrong for months and then adjusted within days of a company's quarterly reporting so that they look accurate.

If you read Benjamin Graham, the grandfather of value investing, or extracts from Buffett's letters to shareholders from years back when he was at his best, you will see that true value investing requires going through a company's annual reports with a good understanding of corporate accounting, assessing the quality of a company's management, looking into their market and competitors and a host of factors that no automated screen can accomplish.

When I applied a fairly simple screen to the Vanguard Small Cap Value Fund some years ago and looked at the annual reports for several of the companies with the largest share of those fund's monies and read up on what had been going on in the companies' businesses, I did NOT see true value stocks at all. I saw poorly managed companies in industries that were declining that were carrying a lot of debt and were priced at levels far higher than a thoughtful person would estimate for their future earnings.

So while I agree that Merriman's theory is correct, finding true value companies in an inflated market like the one we have had since QE has been extremely hard and requires far more thought and research than index fund investors are willing or, even able to put in.

dbr
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Re: all value portfolio to gain better returns per Paul Merriman?

Post by dbr » Mon Mar 23, 2020 9:54 am

On the other hand the Fama-French analysis regarding "value" involves a factor loading that can be computed for any portfolio. Probably for following Merriman the best thing is to go to Portfolio Visualizer and look at the factor analysis for the investment in question. It is true that what funds are named and what they are can be two different things.

Also note that this whole "loading" concept in Fama-French is departure from the total market. The size and value loading of the market is zero, but that does not mean there are no small cap or value stocks in a total market fund.

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