Why is Large Growth disliked?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
Pepper11
Posts: 79
Joined: Fri Jun 13, 2014 9:22 pm

Why is Large Growth disliked?

Post by Pepper11 »

Why is investing in Growth shunned on this forum? It makes no sense.

If you go 100% VTSAX and no International, the consensus on this forum is that you are owning the entire market, even though its only a slice and you are picking the US as a winner

If you tilt Small Value, the consensus on this forum is that you are just following the data of Fama and French and still just indexing as indexing should be done.

But if you tilt large growth, and tilt the sector that has performed above all others for the last decade, you are nothing but a market timer or a stock picker.

Why is LG so disliked on this forum, despite its success?
livesoft
Posts: 73338
Joined: Thu Mar 01, 2007 8:00 pm

Re: Why is Large Growth disliked?

Post by livesoft »

I like it. I don't think it is shunned at all. Also I don't mind be called a market timer. It's all good.

VTSAX does have a substantial growth component, too.
Wiki This signature message sponsored by sscritic: Learn to fish.
000
Posts: 2716
Joined: Thu Jul 23, 2020 12:04 am

Re: Why is Large Growth disliked?

Post by 000 »

I think there are two main camps:
Salty SCV investors desperately hoping for a turnaround
Wise total market investors cautioning against performance chasing in Large Growth

Of course many bogleheads do like LCG and some have tilted towards it. I've been surprised to hear how many here have individual positions in megacap tech stocks or are using funds like VUG or VGT.
User avatar
Forester
Posts: 1551
Joined: Sat Jan 19, 2019 2:50 pm
Location: UK

Re: Why is Large Growth disliked?

Post by Forester »

Pepper11 wrote: Fri Oct 09, 2020 8:31 pm
Why is LG so disliked on this forum, despite its success?
Worst investing style historically with occasional lost decades. SCV made more money and is more consistent.
alex_686
Posts: 6833
Joined: Mon Feb 09, 2015 2:39 pm

Re: Why is Large Growth disliked?

Post by alex_686 »

Pepper11 wrote: Fri Oct 09, 2020 8:31 pm Why is investing in Growth shunned on this forum? It makes no sense.
The problem with growth is that it is like a sports car. Everybody loves to look at them, they are expensive, they go really fast, and they blow up real good. Nobody likes the poor minivan, delivering great value for the dolar.

On a broader note, I suspect that Value verse Growth fundamental is becoming less fundamental. Companies are becoming asset light. The logic that drove the returns of these 2 groups are becoming less powerful.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
WildBill
Posts: 657
Joined: Wed Jun 29, 2016 10:47 pm
Location: San Antonio, Texas

Re: Why is Large Growth disliked?

Post by WildBill »

Pepper11 wrote: Fri Oct 09, 2020 8:31 pm Why is investing in Growth shunned on this forum? It makes no sense.

If you go 100% VTSAX and no International, the consensus on this forum is that you are owning the entire market, even though its only a slice and you are picking the US as a winner

If you tilt Small Value, the consensus on this forum is that you are just following the data of Fama and French and still just indexing as indexing should be done.

But if you tilt large growth, and tilt the sector that has performed above all others for the last decade, you are nothing but a market timer or a stock picker.

Why is LG so disliked on this forum, despite its success?
Howdy

I think you are setting up a straw man argument. Opinion on the forum is not a monolith, and lots of people like growth stocks. VWUAX and VWILX have been very good to me over the last five years.

Growth is good

W B
"Through chances various, through all vicissitudes, we make our way." Virgil, The Aeneid
UpperNwGuy
Posts: 4096
Joined: Sun Oct 08, 2017 7:16 pm

Re: Why is Large Growth disliked?

Post by UpperNwGuy »

I love large growth, especially when it boosts the returns of my total market portfolio. However, I'm not willing to invest in a separate large growth fund because I don't think the current performance will continue for the long term. I will admit, however, that I am sometimes jealous of my friend who tilts toward large growth and entertains me at lunch with how much more money she is making than me.
User avatar
nisiprius
Advisory Board
Posts: 41957
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Why is Large Growth disliked?

Post by nisiprius »

First of all, John C. Bogle did not believe in tilting in either direction. He said that "the original idea of the index fund" was to "own the entire U.S. stock market, own it at low cost, hang on to it forever." He also wrote an essay that really annoys factor enthusiasts, The Telltale Chart, in which he argued that many things, including value, when they outperformed, were just outperforming for a short time and would revert to the mean.

Vanguard, too, says--at least here--that
Large-, mid-, and small-capitalization stocks should be held in proportions roughly similar to that of the overall U.S. stock market.

Investors should hold both growth and value stocks in similar proportions.
Second, there is a body of thought, somewhat associated with Dimensional Fund Advisors (and also with one particular writer, Paul Merriman), based on the work of Fama and French. It holds that in order to describe the non-idiosyncratic behavior of stocks, it is necessary to use more than one dimension, and that (in 1993) the three dimensions were identified as the market factor, the size factor, and the value factor. It also seemed that some of these factors showed a premium, particularly small size and value, and even more when combined, so that you were selecting not just small-cap stocks and not just value stocks, but small-cap value stocks.

These ideas were formulated in the late 1990s, and magnificently confirmed in 2000-2003, during which small-cap value went up while the market was going down.

During the whole period of time, say 1998-present, when small-cap value was a kind of dogma in some circles, other people were scratching their heads over the fact that despite this supposed superiority of small-cap value stocks, quite a few successful actively-managed stock funds were in the large-cap growth category, i.e. tilted in exactly the wrong direction.

Anyway, that's as much as I wanted to say. The dislike for large-cap growth is rooted in the liking for small-cap value; that, in turn, is rooted in the factor theories developed in the late 1990s, and in their apparent confirmation in 2000-2003.
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.
User avatar
tadamsmar
Posts: 9078
Joined: Mon May 07, 2007 12:33 pm

Re: Why is Large Growth disliked?

Post by tadamsmar »

We don’t like only focusing on the past decade

We like risk-adjusted return.

Given this, there is nothing to suggest that a large growth tilt is a good idea.
Alchemist
Posts: 558
Joined: Sat Aug 30, 2014 6:35 am

Re: Why is Large Growth disliked?

Post by Alchemist »

Forester wrote: Fri Oct 09, 2020 8:57 pm
Pepper11 wrote: Fri Oct 09, 2020 8:31 pm
Why is LG so disliked on this forum, despite its success?
Worst investing style historically with occasional lost decades. SCV made more money and is more consistent.
Except this is not true as measured by real funds available to real investors. From DFA's Small Cap Value fund (DFSVX) inception in 1993, it has lost to Vanguard Growth Index (VIGRX) by more than 1% CAGR. VIGRX also had less volatility and shallower max drawdown. Growth delivered higher returns for less risk than SCV.

As for lost decades, DFSVX was negative/flat for seven years from March 2013 to March 2020. Not quite a decade but hardly much to brag about.

Source for performance in link below. Vanguard's TSM Index Fund (VTSMX) included for comparison. It ties the DFA SCV for the last 27 years, with far lower risk.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

The truth is that if you tilt to growth or value; there will be time periods where you are winning and time periods where you are losing. There is no magic to either one. It is just random chance which time period you are in when you look at the data. What is for certain is that a tilt will inherently incur more risk than a simple TSM portfolio. Risk may pay off or it may not.
000
Posts: 2716
Joined: Thu Jul 23, 2020 12:04 am

Re: Why is Large Growth disliked?

Post by 000 »

Alchemist wrote: Fri Oct 09, 2020 9:45 pm Except this is not true as measured by real funds available to real investors. From DFA's Small Cap Value fund (DFSVX) inception in 1993, it has lost to Vanguard Growth Index (VIGRX) by more than 1% CAGR. VIGRX also had less volatility and shallower max drawdown. Growth delivered higher returns for less risk than SCV.
Don't forget the 1% AUM advisor charge most investors paid to get into DFSVX. :twisted:
Forester wrote: Fri Oct 09, 2020 8:57 pm Worst investing style historically with occasional lost decades. SCV made more money and is more consistent.
IRL SCV investing has really never lived up to the claims of the promoters.

Much of the historic SCV premium is likely due to (1) mature technology meaning risky "growth" business ventures fail less now than in the past, (2) failure to consider now vs past real world transaction costs for small caps, and (3) failure to consider the dividend tax cost priced in by the market (even higher in the past before qualified dividends and share buybacks).
venkman
Posts: 1191
Joined: Tue Mar 14, 2017 10:33 pm

Re: Why is Large Growth disliked?

Post by venkman »

Pepper11 wrote: Fri Oct 09, 2020 8:31 pm But if you tilt large growth, and tilt the sector that has performed above all others for the last decade, you are nothing but a market timer or a stock picker.
Large growth hasn't outperformed over the last decade; it's outperformed over the last 3+ years.

https://www.portfoliovisualizer.com/bac ... ion6_3=100

From 2010-2016, large growth and large value finished in a dead heat. Small caps as a whole kept it close up through 2018. Since Jan 2019, large growth has returned 36.45% annualized, while large value has returned 6.77% and small cap has returned 10.5%. That's great for people who owned large growth over that period, but it hardly seems sustainable.

A big reason large growth companies are up so much this year is that the market perceives them as safer assets than small and/or value companies, and investors have piled into safer assets during a period of unprecedented uncertainty. It's the same reason long term Treasuries have significantly outperformed long term corporate bonds this year. The problem with safe assets is that, over the long term, they have a lower expected return than riskier assets. And when you start at a point where the safe assets already have high valuations, the future expected return is even lower.

Tilting to an asset class only because it's done well recently is performance-chasing, and it's very likely to backfire sooner or later.
langlands
Posts: 563
Joined: Wed Apr 03, 2019 10:05 pm

Re: Why is Large Growth disliked?

Post by langlands »

venkman wrote: Fri Oct 09, 2020 11:16 pm
Pepper11 wrote: Fri Oct 09, 2020 8:31 pm But if you tilt large growth, and tilt the sector that has performed above all others for the last decade, you are nothing but a market timer or a stock picker.
A big reason large growth companies are up so much this year is that the market perceives them as safer assets than small and/or value companies, and investors have piled into safer assets during a period of unprecedented uncertainty.
I'm not sure I buy this. There's an element of TINA, but that's also obscuring what I believe to be a secular trend exemplified by companies like SQ or NVDA. There are a lot of non-megacap tech stocks that are up a lot more than FAANG this year, which doesn't make sense if this is just a safety play.

I'm not sure if people realize, but there are two very different ways this virus will play out. Either things will go back to the way they were before or they won't. If you think things will just go back, then you load up on the beaten down energy/financial/cruise stocks and expect that all the growth just comes back down to earth as people rotate their asset allocations back. Or maybe this pandemic has accelerated certain trends towards an increasingly digital society that would have normally taken 5-10 years to play out. And certain tech stocks have been repriced to this new reality accordingly.
User avatar
JoMoney
Posts: 9765
Joined: Tue Jul 23, 2013 5:31 am

Re: Why is Large Growth disliked?

Post by JoMoney »

It's a tilt... You'll find many on here advising against tilts, including small-value.
For the people who do follow tilts, they would call 'Large Growth' a "Quality Factor" or "Momentum Factor", which is largely similar... that way they can still pretend they're passively following "factor" investing.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
sc9182
Posts: 367
Joined: Wed Aug 17, 2016 7:43 pm

Re: Why is Large Growth disliked?

Post by sc9182 »

Big companies (aka large cap) - have resources to re-jigger for situations like COVID, online order/transactions/negotiation/delivery models; as you can see in Retail or other large cap model - who adapted well to COVID model of business are becoming highly successful while the companies that are not able to (or doesn't want to, or unable to due to lack of Funding or leadership) are possibly suffering.

With that said, Large Cap companies are getting 0.45% coupon rate Bond issues (allow me say, if Inflation is about 2% -- folks are paying companies 1.5% to participate in buying their bonds, pity !). Its practically FREE money, and then some more for Large Caps.

For small caps, let alone small-cap-value companies - the tool-set (and funding) -- is limited; hence, their chances of success is costly (ie, higher bond/funding costs) - or worse yet, may not have resources or leadership to thrive in Online World (especially since COVID)

Large companies also have ability to manage (or manipulate) some local govts to get best bargains on Land/infra/taxes concessions -- while Small Co.s don't stand much a chance at such bargaining discussions.

In this low-interest/near-zero rate environment, and need to have GREAT online presence, and bargaining for large Tax/Infra/Land concessions -- I see more upside for large Companies than smaller ones.

The only change Smaller Co.s have is - if there is white knight buy-out offer comes in from any large-cap or PE guys -- chances are that they are low-balling your value at the times of near lows of your value. And your premiums tops at 20%-25%-30% of your recently lows stock price. Thats one time 30% TOPs valuation you could have gotten on your recent beaten-up lows.

To make it worse - if you are a great idea/company/or Silicon Valley company that knows how to grow (with VC's financial support that is) -- you are multi billion territory company -- and you are still NOT public yet !! The preferred exit strategy these days is the VC/going-Public/SPAC/hot-topic-of-the-day route -- not by/being a successfully run Small-Cap (or SCV) route ..

BTW - is AT&T great dividend payer, or what appears to be a a value-trap company going to succumb to own debt-servicing load !?

Who is sinking money into Small-Cap or Small-Cap-Value -- to make them Great !?
jginseattle
Posts: 778
Joined: Fri Jul 01, 2011 7:33 pm

Re: Why is Large Growth disliked?

Post by jginseattle »

I don't dislike large growth, but I try to distance myself from asset classes that I believe have outperformed. I have been slowly reducing my exposure.
Doctor Rhythm
Posts: 425
Joined: Mon Jan 22, 2018 3:55 am

Re: Why is Large Growth disliked?

Post by Doctor Rhythm »

Can someone familiar with the Fama-French paper describe the methodology in basic terms? Is there more to it than a multivariate analysis of historical returns? Is there validation beyond the brief window that nisiprius described? I’m coming at this from a field where observational studies are useful for hypothesis-generating but usually approached with skepticism.
User avatar
nisiprius
Advisory Board
Posts: 41957
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Why is Large Growth disliked?

Post by nisiprius »

Doctor Rhythm wrote: Sat Oct 10, 2020 1:27 am Can someone familiar with the Fama-French paper describe the methodology in basic terms? Is there more to it than a multivariate analysis of historical returns? Is there validation beyond the brief window that nisiprius described? I’m coming at this from a field where observational studies are useful for hypothesis-generating but usually approached with skepticism.
The "validation" question first. With many hyped strategies, what has happened is that someone has discovered something impressive in analyzing the past results of asset classes that were mostly non-investible by retail investors. Typically they were accessible only to institutional and wealthy investors who were able to make direct investments in portfolios of small numbers of individually-analyzed, individually-selected assets. They then become available to retail investors in "innovative" mutual funds and ETFs, and the subsequent performance does not live up to the backtest. In other words, it is like the "decline effect" noticed in scientific studies in recent years. Reasons could be hidden preselection of what asset classes to backtest (I think this is a big one), but in at least some cases--notably "commodities" (really collateralized commodity futures)--it is thought that the behavior of the asset class itself changed as a result of the asset being "financialized."

However, unlike some other strategies, the benefit of a "small-cap value tilt" did not vanish immediately. It was being widely advocated by the late 1990s, paid off magnificently in 2000-2003, and then basically roughly matched the market from 2004 through 2019. Up until this year, you could say that small-cap-value tilters were still ahead and had nothing at all to complain about; four years of beating the market and fifteen of matching the market.

I think that even factor enthusiasts are willing to acknowledge that the US stock market from 2009 to the present has been a thorn in their side, as it has been dominated by outperformance by large growth stocks. There seemed to be uneasiness setting in around 2011 with the emergence of a "factor zoo." The dogma had been expressed in the Morningstar style boxes: 1) stocks are described by the size and value factors, and b) portfolios are improved by overweighting small-cap value. But then people announced the discovery and important of other factors, until the number became to large that it became almost a joke. Notably, in 2015, Fama and French themselves published a paper presenting a five-factor model--to "market," "size," and "value" were added "investment" and "profitability" and then noted that the value factor was now "redundant," i.e.--if I understand it--market, size, investment, and profitability were an adequate description and adding "value" did not explain much more.

The two key Fama-French papers can be found on line, and I would in fact be very interested in your impressions. The more important for our purposes is probably the 1993 paper:

Fama, E.F. and French, K.R. (1993) “Common Risk Factors in the Returns on Stocks and Bonds, Journal of Financial Economics, 33 (1): 3–56.“Common Risk Factors in the Returns on Stocks and Bonds", Journal of Financial Economics, 33 (1): 3–56.

Fama. Eugene F. and Kenneth R. French. 1992a, The Cross-Section of Expected Stock Returns, Journal of Finance 47:427-465, and also here

I don't really understand them, but the parts that I do understand I find unsatisfying. For example, the factors are defined a priori, apparently based on intuition and common knowledge, and there are some weird things like dividing the universe of stocks into two size categories (large-cap and small-cap), but three value categories:
We also break NYSE, Amex, and NASDAQ stocks into three book-to- market equity groups based on the breakpoints for the bottom 30% (Low), middle 40% (Mediurn).and top 30% (High) of the ranked values of BE/ME for NYSE stocks.
It's not too clear why they do this--neither why they have two categories for size and three for book-to-market nor why they choose to split book-to-market 30/40/30 rather than in some other way.

There is a certain disconnect between the Fama-French papers, which in my personal interpretation are trying to explain the non-idiosyncratic characteristics of stocks, and the application of these in portfolio construction. That is, you have idea #1, which is that small-cap value stocks as a group behave similarly to each other and differently from the market as a whole; and then you have idea #2 that they are not just different, but better.
Last edited by nisiprius on Sat Oct 10, 2020 7:15 am, edited 4 times in total.
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.
User avatar
LiveSimple
Posts: 1771
Joined: Thu Jan 03, 2013 7:55 am

Re: Why is Large Growth disliked?

Post by LiveSimple »

Wait until some young economist publish a paper, “Why large Growth soared during 2010 - 2020 - 2030 ?"
They will give the reasons why large cap dominated.

This is the new economy, if we look back in 2030 -2050.
Last edited by LiveSimple on Sat Oct 10, 2020 7:11 pm, edited 2 times in total.
User avatar
tadamsmar
Posts: 9078
Joined: Mon May 07, 2007 12:33 pm

Re: Why is Large Growth disliked?

Post by tadamsmar »

Doctor Rhythm wrote: Sat Oct 10, 2020 1:27 am Can someone familiar with the Fama-French paper describe the methodology in basic terms? Is there more to it than a multivariate analysis of historical returns? Is there validation beyond the brief window that nisiprius described? I’m coming at this from a field where observational studies are useful for hypothesis-generating but usually approached with skepticism.
I am pretty sure that all the investing studies are observational. Don't know of any randomized controlled trials.

There is sometimes a effort to look at "out-of-sample" national markets to test an hypothesis to avoid the situation where data supporting an hypothesis is the same data that generated the hypothesis. But it seems to me that other nations markets are not all that independent of the US market.
DesertDiva
Posts: 917
Joined: Thu Mar 01, 2018 12:49 pm
Location: In the desert

Re: Why is Large Growth disliked?

Post by DesertDiva »

Higher expense ratios, higher turnover rates, typically fewer holdings as compared to low-cost index funds.
User avatar
nisiprius
Advisory Board
Posts: 41957
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Why is Large Growth disliked?

Post by nisiprius »

Thinking here of Doctor Rhythm's remark... a huge methodological problem, perhaps the problem of all problems, is that the time scale of temporary investment trends is relatively long compared to a human lifetime... and that the actual behavior of asset values is so badly behaved, so fractal, that it takes way longer to average out fluctuations than it would for something normally distributed.

A chart by Jim Otar may present an illusory view in terms of the line segments, but it is true picture of the problem. It also corresponds to the way some people traditionally thought of investing, as a sequence of "markets" each with an anthopomorphized personality of its own.

Image

If we take this at face value, we see a sequence of eight periods of time, averaging about twelve years in length, with somewhat stable, consistent behavior within the period and then a fairly sudden "corner" and transition to a different period. According to this picture, the stock market is episodic, and the episodes average about twelve years each. This is consistent with the well-known disclaimer, "past performance is no guarantee of future results," which appears on literature that normally covers no more than ten years' time. Temporary trends can easily last five years, a decade, or more.

Averages over a century are not averages of 100 independent years, they are averages over eight or nine episodes, and even if you believe there is a stable, underlying probabilistic model, averaging over eight or nine values doesn't give you narrow confidence limits on the underlying parameters.

But the second problem is that by the time you are getting periods of time that are long enough for the averages to settle down, you now are into periods so long where no sensible person can possibly believe that you are looking at "the same thing" throughout. It seems unlikely that the advent of the 401(k) did not alter the things. Or, consider the stock market before the SEC, when manipulation was assumed--"bulls" and "bears" didn't mean optimists and pessimists, it meant syndicate of investors who were trying to make the market go up or down. It is hard to believe that we should expect the characteristics of that kind of market to be quantitatively the same as that of the current market.
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.
User avatar
nisiprius
Advisory Board
Posts: 41957
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Why is Large Growth disliked?

Post by nisiprius »

DesertDiva wrote: Sat Oct 10, 2020 8:51 am Higher expense ratios, higher turnover rates, typically fewer holdings as compared to low-cost index funds.
For what it's worth, the differences are in the directions you suggest but I don't think they are hugely important.

Vanguard [Large-cap] Growth Index Fund, VIGAX: Expense ratio 0.05%, turnover 11%, 269 holdings.
Vanguard Total Stock Market Index Fund, VTSAX: 0.04%, turnover 4%, 3525 holdings.
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.
prairieman
Posts: 336
Joined: Thu Mar 01, 2018 3:17 pm

Re: Why is Large Growth disliked?

Post by prairieman »

LiveSimple wrote: Sat Oct 10, 2020 6:34 am Wait until some young economist publish a paper, “Why large cap wins / won” in 2010 - 2020
They will give the reasons why large cap dominated.

This is the new economy, if we look back in 2030 -2050.
Yes, I agree. I read Tom Friedman’s book, “Thank you for being late” about four years ago and decided to stand firm with a fund that had become outsized in my portfolio (FDGRX). The short version is that the economy had still not caught up to the new technologies. Right or wrong reasoning, or just plain luck, it turned out financially to be the right thing.
But it cannot go on forever so I am uncomfortably weighted invested in large cap growth now. Thinking of rebalancing to SCV.
“As long as the roots are not severed, all is well.” Chauncey Gardner
User avatar
JoMoney
Posts: 9765
Joined: Tue Jul 23, 2013 5:31 am

Re: Why is Large Growth disliked?

Post by JoMoney »

nisiprius wrote: Sat Oct 10, 2020 8:58 am...
Image
...
FWIW, this image appears to be be of broad U.S. stocks price only (represented as the DJIA) without dividends ... which is potentially misleading, especially in decades past where stocks had higher payout ratios and dividends represented a larger part of the return.
Don't mean to imply that the bad decades were rosy for stock returns, but it wasn't as bad as this picture would imply either. If we used charts of bond returns and didn't include the dividends they would look a lot worse than this chart :wink:

Including dividends, an investment in US stocks (S&P 500) from the late 1929 peak had fully recovered by 1945 (this chart implies that didn't happen until about 1955)
From stocks late 1968 peak an investment including dividends had fully recovered by 1971 with a another dip below 1968 levels in 1974 that had recovered above the 1968 levels again in 1975 (this chart implies investment in stocks didn't break above 1968 levels until the 1980s)
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham
User avatar
LiveSimple
Posts: 1771
Joined: Thu Jan 03, 2013 7:55 am

Re: Why is Large Growth disliked?

Post by LiveSimple »

prairieman wrote: Sat Oct 10, 2020 9:24 am
LiveSimple wrote: Sat Oct 10, 2020 6:34 am Wait until some young economist publish a paper, “Why large cap wins / won” in 2010 - 2020
They will give the reasons why large cap dominated.

This is the new economy, if we look back in 2030 -2050.
Yes, I agree. I read Tom Friedman’s book, “Thank you for being late” about four years ago and decided to stand firm with a fund that had become outsized in my portfolio (FDGRX). The short version is that the economy had still not caught up to the new technologies. Right or wrong reasoning, or just plain luck, it turned out financially to be the right thing.
But it cannot go on forever so I am uncomfortably weighted invested in large cap growth now. Thinking of rebalancing to SCV.
Yes I do the same, invested in "technology" for 15+ years ( VGT, Vanguard Technology and FSCSX Fidelity IT Services and Software) now capping the technology to a limit percentage, pouring the returns to Total Stock Market Index and now in Intermediate Treasuries, to capture the returns...
Jack FFR1846
Posts: 12644
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Why is Large Growth disliked?

Post by Jack FFR1846 »

I love large growth. If there's some consensus otherwise, I'm not part of the group.
Bogle: Smart Beta is stupid
Day9
Posts: 988
Joined: Mon Jun 11, 2012 6:22 pm

Re: Why is Large Growth disliked?

Post by Day9 »

Soon Facebook, Amazon, Apple, Google, and Microsoft together will make up over 50% of the world stock market cap (not just US). Bogleheads will justify this by pointing to earlier times where a small handful of railroad companies dominated the indices, or even further back when companies like the South Sea or East India companies were behemoths.
I'm just a fan of the person I got my user name from
Doctor Rhythm
Posts: 425
Joined: Mon Jan 22, 2018 3:55 am

Re: Why is Large Growth disliked?

Post by Doctor Rhythm »

tadamsmar wrote: Sat Oct 10, 2020 8:34 am
Doctor Rhythm wrote: Sat Oct 10, 2020 1:27 am Can someone familiar with the Fama-French paper describe the methodology in basic terms? Is there more to it than a multivariate analysis of historical returns? Is there validation beyond the brief window that nisiprius described? I’m coming at this from a field where observational studies are useful for hypothesis-generating but usually approached with skepticism.
I am pretty sure that all the investing studies are observational. Don't know of any randomized controlled trials.

There is sometimes a effort to look at "out-of-sample" national markets to test an hypothesis to avoid the situation where data supporting an hypothesis is the same data that generated the hypothesis. But it seems to me that other nations markets are not all that independent of the US market.
Thanks - and thanks to nisiprius for the (as always) detailed yet understandable analysis. Again, the papers are too far outside of my roundhouse for me to “journal club” them. However, when doing observational studies and finding correlates of outcomes, the biggest risk is that you have overlooked a confounding variable (eg, buying a luxury car predicts a lower risk of lung cancer, but that’s because smoking is less common in the socioeconomic group that can afford one). So my hot take (and that’s all it is) is that the Fama-French study would have to try to control for a lot of other variables before concluding that small value predicts better returns. Also, are “small” and “value” each individually predictive or is the combination somehow synergistic?
User avatar
nisiprius
Advisory Board
Posts: 41957
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Why is Large Growth disliked?

Post by nisiprius »

Doctor Rhythm wrote: Sat Oct 10, 2020 1:20 pm...Also, are “small” and “value” each individually predictive or is the combination somehow synergistic?...
Well, I'm trying to present points of view that I don't agree with, but I would say that factor mavens suggest they are synergistic. For example, the size factor itself--the idea that small-caps have a higher return (possibly) or a higher risk-adjusted return (much more dubious)--is now acknowledged to be weak and one of the less important factors, but small-cap value is well-regarded. Cliff Asness of AQR has essays in which he says that the size factor itself is practically non-existent, yet the combination of size and "quality" is highly valuable. Really, though, they need to be explained by an advocate, and that isn't me.

I don't know if it is worse in finance than in other scientific fields, but it is very noticeable that a fair number of people who publish attention-getting academic papers either are, or soon become, professionally involved with fund companies that offer products exploiting their discoveries. Fama and French are connected with Dimensional Fund Advisors (DFA), for example.
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.
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: Why is Large Growth disliked?

Post by Steve Reading »

Doctor Rhythm wrote: Sat Oct 10, 2020 1:20 pm However, when doing observational studies and finding correlates of outcomes, the biggest risk is that you have overlooked a confounding variable (eg, buying a luxury car predicts a lower risk of lung cancer, but that’s because smoking is less common in the socioeconomic group that can afford one).
It's important to read about each factor and understand the economic intuition behind their existence and see if it's something you believe makes sense. That should help tremendously against the above.
Doctor Rhythm wrote: Sat Oct 10, 2020 1:20 pm Also, are “small” and “value” each individually predictive or is the combination somehow synergistic?
Each of them is independently predictive. However, that's not to say they are predictive because of the factor itself. It might just be because the factor is a good proxy for the real reason (for instance, size's explanatory power comes significantly from the illiquidity premium of small companies). So depending on what other variables you control for, certain factors might or might not have explanatory power.

It can be a little confusing, requires thinking about deeply, and keeping up with literature. Most people are better off and probably should just stick to buying the entire haystack without tilts.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
User avatar
wander
Posts: 3250
Joined: Sat Oct 04, 2008 9:10 am

Re: Why is Large Growth disliked?

Post by wander »

I guess the question is not for me. Although I do not invest in Large Growth the whole lot, I, for one, do not dislike Large Growth.
User avatar
tadamsmar
Posts: 9078
Joined: Mon May 07, 2007 12:33 pm

Re: Why is Large Growth disliked?

Post by tadamsmar »

Doctor Rhythm wrote: Sat Oct 10, 2020 1:20 pm
tadamsmar wrote: Sat Oct 10, 2020 8:34 am
Doctor Rhythm wrote: Sat Oct 10, 2020 1:27 am Can someone familiar with the Fama-French paper describe the methodology in basic terms? Is there more to it than a multivariate analysis of historical returns? Is there validation beyond the brief window that nisiprius described? I’m coming at this from a field where observational studies are useful for hypothesis-generating but usually approached with skepticism.
I am pretty sure that all the investing studies are observational. Don't know of any randomized controlled trials.

There is sometimes a effort to look at "out-of-sample" national markets to test an hypothesis to avoid the situation where data supporting an hypothesis is the same data that generated the hypothesis. But it seems to me that other nations markets are not all that independent of the US market.
Thanks - and thanks to nisiprius for the (as always) detailed yet understandable analysis. Again, the papers are too far outside of my roundhouse for me to “journal club” them. However, when doing observational studies and finding correlates of outcomes, the biggest risk is that you have overlooked a confounding variable (eg, buying a luxury car predicts a lower risk of lung cancer, but that’s because smoking is less common in the socioeconomic group that can afford one). So my hot take (and that’s all it is) is that the Fama-French study would have to try to control for a lot of other variables before concluding that small value predicts better returns. Also, are “small” and “value” each individually predictive or is the combination somehow synergistic?
Another issue has to do with what I call "constant capability" (there may be a better term for it). In Physics, and to some extent in other fields, you can assume that the system under study will have the same characteristics in the future. But beating the stock market is a competitive game. If you publicize information on the best strategy then one would think that others will adopt the strategy and it will no longer beat the market. There is a view the the constant capability is the persistent stupidity of investors and there is some evidence for it. Anyway, with the stock market the observation is not enough, you have to explain why supposedly convincing evidence fails to convince the investors.
User avatar
nedsaid
Posts: 13815
Joined: Fri Nov 23, 2012 12:33 pm

Re: Why is Large Growth disliked?

Post by nedsaid »

I am certainly not against Large Growth and I don't dislike Large Growth at all. It is just that there gets to be too much of a good thing, that is investor enthusiasm. Large Growth, High Tech/Internet, the FAANG stocks have all done very well and for good reason. Certain High Tech companies are generating insane amounts of cash right now, as they say, everything happens for a reason.

What happens is that investor expectations eventually get to be too high and even great companies can become mediocre investments. I admired companies like AIG, GE, Microsoft, and Pfizer for years but never purchased them individually during the 1990's because they didn't meet my Value orientation. In my view, they were just too expensive compared to their actual earnings growth.

I looked for opportunities to buy up these great companies and after the 2000-2002 bear market, I finally bit. Prices for these great companies were down but in retrospect were still too expensive. Hence, my "Four Horsemen of Underperformance" which were AIG, GE, Microsoft, and Pfizer. I still own all 4 stocks but only Microsoft has returned to its former glory, even then it was dead money for seven years until the new CEO came along and re-energized the company. AIG and GE were disasters, I am up somewhat with Pfizer, and of course Microsoft has been amazing.

So I know all about inflated expectations for great companies. Not too long ago, I purchased Coke, it didn't meet my Value criterion but I held my nose and bought it anyways. Like Jimmy Carter, I had lust in my heart, but my lust was for stocks. Coke was something that I wanted to own for a very long time, after all, Warren Buffett owns a bunch of it. Well Coke has done okay, the stock is up somewhat and I reinvest the dividends but it hasn't exactly been a world beater either.
A fool and his money are good for business.
Scooter57
Posts: 1473
Joined: Thu Jan 24, 2013 9:20 am

Re: Why is Large Growth disliked?

Post by Scooter57 »

There were thousands more companies in the public stock market in the 1990s and earlier. Now small, valuable, growing companies are funded by private equity and stay private until the cream has been skimmed off. So the quality of Small Cap companies available to stock investors is not what it was in the past.

The better small companies also get gobbled up by the bigs. So what is left in small cap funds is a mix of regional banks and stodgy smaller companies that plod along, often very cyclical, that excite nobody.
Elysium
Posts: 3209
Joined: Mon Apr 02, 2007 6:22 pm

Re: Why is Large Growth disliked?

Post by Elysium »

Pepper11 wrote: Fri Oct 09, 2020 8:31 pm Why is investing in Growth shunned on this forum? It makes no sense.

If you go 100% VTSAX and no International, the consensus on this forum is that you are owning the entire market, even though its only a slice and you are picking the US as a winner

If you tilt Small Value, the consensus on this forum is that you are just following the data of Fama and French and still just indexing as indexing should be done.

But if you tilt large growth, and tilt the sector that has performed above all others for the last decade, you are nothing but a market timer or a stock picker.

Why is LG so disliked on this forum, despite its success?
It isn't disliked. It could be a case where you may have been noticing a small but disproportionate amount of posts on value/factor investing, leading to this belief. The forum as a whole is heavily oriented towards broad market based portfolio which is by definition large cap growth companies since the market is cap weighted. Therefore it is liked, not disliked. However, since there is no need to create new threads discussing this everyday, because it is already ingrained into the psyche of the forum, there is no "market tilt" discussions. The market and LCG that dominates it is not a tilt, it is the baseline. I see the value/factor tilting posts as providing a healthy space on the forum. We need little bit of everything to make stimulating conversations.
whereskyle
Posts: 1252
Joined: Wed Jan 29, 2020 10:29 am

Re: Why is Large Growth disliked?

Post by whereskyle »

Pepper11 wrote: Fri Oct 09, 2020 8:31 pm Why is investing in Growth shunned on this forum? It makes no sense.

If you go 100% VTSAX and no International, the consensus on this forum is that you are owning the entire market, even though its only a slice and you are picking the US as a winner

If you tilt Small Value, the consensus on this forum is that you are just following the data of Fama and French and still just indexing as indexing should be done.

But if you tilt large growth, and tilt the sector that has performed above all others for the last decade, you are nothing but a market timer or a stock picker.

Why is LG so disliked on this forum, despite its success?
For some reason factor investing gets a ton of attention here even though Jack openly criticized it and never recommended it. I have no idea why it excites people, and I wish people would just listen to Jack. Alas, smart investing is very boring and uneventful. If people aren't careful, they'll get bored, want to do "better than average" and they'll look at past performance and see that it's "totally obvious" that "small value" (whatever in the world that means) outperforms if you just give it however long it needs to outperform. It's really silly and imo an insult to Jack.

The reason why LG does not get attention here is because total-market investing has looked a lot like LG investing for more than 10 years, so there is usually no good reason to talk about LG separately. Just look where my money goes when I buy VTI: 1. Apple, 2. Microsoft, 3. Amazon, 4. Google, 5. Facebook. We're not even out of the top 5 and that's almost 20% of the fund in LG, even though there are over 3000 more companies in the fund.

We do get new "how much should I put in QQQ?" posts here almost every day. Some people want to chase recent performance, and they are certainly interested in LG. However, LG does not have "exciting" research that "proves" against all odds (what a story!) that regional banks are where all the best returns are.

The truth is that LG has led the market for over a decade, so there's no good reason to discuss it separately these days unless you want to discuss chasing recent performance.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
invest2bfree
Posts: 68
Joined: Sun Jan 12, 2020 9:44 am

Re: Why is Large Growth disliked?

Post by invest2bfree »

Pepper11 wrote: Fri Oct 09, 2020 8:31 pm Why is investing in Growth shunned on this forum? It makes no sense.

If you go 100% VTSAX and no International, the consensus on this forum is that you are owning the entire market, even though its only a slice and you are picking the US as a winner

If you tilt Small Value, the consensus on this forum is that you are just following the data of Fama and French and still just indexing as indexing should be done.

But if you tilt large growth, and tilt the sector that has performed above all others for the last decade, you are nothing but a market timer or a stock picker.

Why is LG so disliked on this forum, despite its success?

If this question was asked in 2009 then it is very valid, it is not valid in 2020.

If you invest in large growth currently you are a performance chaser. Statistically performance chasers have not done well.
rkhusky
Posts: 10179
Joined: Thu Aug 18, 2011 8:09 pm

Re: Why is Large Growth disliked?

Post by rkhusky »

Forester wrote: Fri Oct 09, 2020 8:57 pm
Pepper11 wrote: Fri Oct 09, 2020 8:31 pm
Why is LG so disliked on this forum, despite its success?
Worst investing style historically with occasional lost decades. SCV made more money and is more consistent.
I thought small-growth was the "black hole of investing".
kolder
Posts: 31
Joined: Mon Sep 07, 2020 3:54 pm

Re: Why is Large Growth disliked?

Post by kolder »

I wouldn't recommend LCG, as you are making a strong bet against historical returns.

My stance regarding SCV strategies: claiming SCV is dead is more speculative than claiming it will provide a premium over the long run.

We are currently in the worst 3-year period for value relative to growth in researched history (since ~1926). It's not surprising that some will claim it is dead. I'm sure people claimed that stock investing was dead in 1932. Turned out not to be true, but you had to wait a while, and it probably was not obvious that something that had worked in the past was going to keep working in the future.

Ask yourself this. If not for this 3 year drawdown for value, would you be making the same argument that it was dead? Do your claims only hold if there is recent underperformance? If stocks fall 75% over the next few years, can we claim that stock investing is dead, because you made 0% over the last ~20 years? Obviously, I don't think many would make that claim these days but that appears to be the basis for most of the confidence in SCV's death. More time is needed to see how things play out.

Not to mention it is ignored that SCV has outperformed over the last 25 years if you invested globally (after it was publicized and completely arbitraged away!), which is a period that starts and ends with major drawdowns for SCV relative to LCG.

Personally I try not to assume that the future of the stock market will be wildly different from the past. Of course it is possible that SCV is dead, I don't think many who tilt would argue that that is not a possibility (even if they think it unlikely). But to be very confident that it is, is a very bold position in my opinion.

That being said, I have a lot of respect for those who can recognize the dangers of tracking error regret & the benefits of simplicity, and are able to take a step back and say "SCV is not for me, even if it is likely to be better".

Realistically, people could be doing a lot worse things with their savings than tilting to SCV. I think the efforts to condemn this approach are in vain.

But that's all just my opinion.
Alchemist
Posts: 558
Joined: Sat Aug 30, 2014 6:35 am

Re: Why is Large Growth disliked?

Post by Alchemist »

kolder wrote: Sun Oct 11, 2020 11:38 am I wouldn't recommend LCG, as you are making a strong bet against historical returns.

My stance regarding SCV strategies: claiming SCV is dead is more speculative than claiming it will provide a premium over the long run.
Historical returns are not predictive. You cannot predict the future of stock returns by looking at the past. Stocks are not molecules or atoms, they do not exist in a closed system. The performance of equities is directly linked to actual events in the real economy. The history of the economy is one of constant change. Using backtests to build a model for future behavior of equities is the epitome of 'predicting the past'.

Saying that SCV will provide a premium or that it will not provide a premium, based on past performance, are equally speculative. Now if you have a macroeconomic reason (energy markets, interest rates, innovation, whatever) to believe a set of stocks going forward are primed for under/over performance that could be useful. But driving by looking in the rear view mirror is no more useful in investing than it is in your car. What happened in the past can provide examples of what is possible and is still instructive to look at. But it is not predictive.
kolder wrote:We are currently in the worst 3-year period for value relative to growth in researched history (since ~1926). It's not surprising that some will claim it is dead. I'm sure people claimed that stock investing was dead in 1932. Turned out not to be true, but you had to wait a while, and it probably was not obvious that something that had worked in the past was going to keep working in the future.
This is my point exactly. Looking to the past from 1993, SCV advocates at DFA would not have predicted the next 27 years would fail to provide a premium over TSM when they launched the first SCV fund (DFSVX) . Or even earlier in 1981 when, based on studies of the past up until then, they launched their microcap fund (DFSCX) they would not have predicted it to badly trail the Vanguard 500 fund for for the next 39 years.
kolder wrote:Not to mention it is ignored that SCV has outperformed over the last 25 years if you invested globally (after it was publicized and completely arbitraged away!), which is a period that starts and ends with major drawdowns for SCV relative to LCG.
Given that ex-US stocks have trailed US Total Bond Market for the last 25 years, that is setting the bar so low you could trip over it :P
kolder wrote: That being said, I have a lot of respect for those who can recognize the dangers of tracking error regret & the benefits of simplicity, and are able to take a step back and say "SCV is not for me, even if it is likely to be better".
There is no way to know, based solely on past performance, whether it is more or less likely for SCV to outperform. The answers exist only in the future, not the past. You cannot calculate the probability of the future performance of ANY segment of the market from a back test. You can only examine how it performed in various macroeconomic regimes that existed in the past.
User avatar
Uncorrelated
Posts: 1039
Joined: Sun Oct 13, 2019 3:16 pm

Re: Why is Large Growth disliked?

Post by Uncorrelated »

Investing in large cap growth is the epitome of improper understanding of financial models, extreme recency bias and sector picking. Here are the SmB and HmL factors in various time periods and geographic regions:

Code: Select all

US
time period     SMB      HML
last 5 years   -2.41	-4.24
last 10 years  -0.64	-2.38
last 20 years   2.17	 2.97

developed ex-us
time period     SMB      HML
last 5 years    1.76	-2.18
last 10 years   1.50	-1.21
last 20 years   2.09	 5.45

emerging markets
time period     SMB      HML
last 5 years   -3.10	 3.43
last 10 years  -0.45	 1.64
last 20 years   0.35	9.60

If one observes the last 10 years of US data, then large cap growth wins. If one observes longer time periods (even within the US), the only possible conclusion is that small has outperformed large and value has outperformed growth.

We can debate all day long whether this outperformance is expected to continue in the future, and never reach an answer. But based on the available data, it is abundantly clear that there is no valid data-driven argument to tilt towards large cap growth.
User avatar
Uncorrelated
Posts: 1039
Joined: Sun Oct 13, 2019 3:16 pm

Re: Why is Large Growth disliked?

Post by Uncorrelated »

Alchemist wrote: Fri Oct 09, 2020 9:45 pm
Forester wrote: Fri Oct 09, 2020 8:57 pm
Pepper11 wrote: Fri Oct 09, 2020 8:31 pm
Why is LG so disliked on this forum, despite its success?
Worst investing style historically with occasional lost decades. SCV made more money and is more consistent.
Except this is not true as measured by real funds available to real investors. From DFA's Small Cap Value fund (DFSVX) inception in 1993, it has lost to Vanguard Growth Index (VIGRX) by more than 1% CAGR. VIGRX also had less volatility and shallower max drawdown. Growth delivered higher returns for less risk than SCV.

As for lost decades, DFSVX was negative/flat for seven years from March 2013 to March 2020. Not quite a decade but hardly much to brag about.

Source for performance in link below. Vanguard's TSM Index Fund (VTSMX) included for comparison. It ties the DFA SCV for the last 27 years, with far lower risk.

https://www.portfoliovisualizer.com/bac ... ion3_3=100

The truth is that if you tilt to growth or value; there will be time periods where you are winning and time periods where you are losing. There is no magic to either one. It is just random chance which time period you are in when you look at the data. What is for certain is that a tilt will inherently incur more risk than a simple TSM portfolio. Risk may pay off or it may not.
That is not a valid comparison. The question isn't whether 100% total stock market has outperformed 100% SVC. The question is whether tilting towards SVC results in higher average utility. Did you know that 1000% total stock market underperformed t-bills? Total stock market surely looks bad.

Here is the backwards-looking optimal portfolio, estimated from live fund returns using a 5-factor model in the time period 1993 to mid 2020:

Image

That is, US-centric mean-variance investors who lived from 1993 to 2020 (and did not necessary invest during that entire period), would see the highest realized utility by not allocating anything to total stock market.

For a complete analysis, we should also consider international markets. I'm sure you're aware SVC greatly outperformed broad market in international markets.
langlands
Posts: 563
Joined: Wed Apr 03, 2019 10:05 pm

Re: Why is Large Growth disliked?

Post by langlands »

Uncorrelated wrote: Mon Oct 12, 2020 5:31 am Investing in large cap growth is the epitome of improper understanding of financial models, extreme recency bias and sector picking. Here are the SmB and HmL factors in various time periods and geographic regions:

Code: Select all

US
time period     SMB      HML
last 5 years   -2.41	-4.24
last 10 years  -0.64	-2.38
last 20 years   2.17	 2.97

developed ex-us
time period     SMB      HML
last 5 years    1.76	-2.18
last 10 years   1.50	-1.21
last 20 years   2.09	 5.45

emerging markets
time period     SMB      HML
last 5 years   -3.10	 3.43
last 10 years  -0.45	 1.64
last 20 years   0.35	9.60

If one observes the last 10 years of US data, then large cap growth wins. If one observes longer time periods (even within the US), the only possible conclusion is that small has outperformed large and value has outperformed growth.

We can debate all day long whether this outperformance is expected to continue in the future, and never reach an answer. But based on the available data, it is abundantly clear that there is no valid data-driven argument to tilt towards large cap growth.
I have difficulty reconciling how you can simultaneously have such a negative opinion of almost half the market and also believe that markets are efficient. Your post didn't mention the risk premium once, which leads me to believe you think LCG underperformance is due almost entirely to behavioral mistakes and mispricings by irrational investors. If there is such a giant valuation gap that hasn't been arbed away, how can anyone be confident that individual securities are efficiently priced?
User avatar
Uncorrelated
Posts: 1039
Joined: Sun Oct 13, 2019 3:16 pm

Re: Why is Large Growth disliked?

Post by Uncorrelated »

langlands wrote: Mon Oct 12, 2020 11:00 am
Uncorrelated wrote: Mon Oct 12, 2020 5:31 am Investing in large cap growth is the epitome of improper understanding of financial models, extreme recency bias and sector picking. Here are the SmB and HmL factors in various time periods and geographic regions:

Code: Select all

US
time period     SMB      HML
last 5 years   -2.41	-4.24
last 10 years  -0.64	-2.38
last 20 years   2.17	 2.97

developed ex-us
time period     SMB      HML
last 5 years    1.76	-2.18
last 10 years   1.50	-1.21
last 20 years   2.09	 5.45

emerging markets
time period     SMB      HML
last 5 years   -3.10	 3.43
last 10 years  -0.45	 1.64
last 20 years   0.35	9.60

If one observes the last 10 years of US data, then large cap growth wins. If one observes longer time periods (even within the US), the only possible conclusion is that small has outperformed large and value has outperformed growth.

We can debate all day long whether this outperformance is expected to continue in the future, and never reach an answer. But based on the available data, it is abundantly clear that there is no valid data-driven argument to tilt towards large cap growth.
I have difficulty reconciling how you can simultaneously have such a negative opinion of almost half the market and also believe that markets are efficient. Your post didn't mention the risk premium once, which leads me to believe you think LCG underperformance is due almost entirely to behavioral mistakes and mispricings by irrational investors. If there is such a giant valuation gap that hasn't been arbed away, how can anyone be confident that individual securities are efficiently priced?
I don't have any particular opinion on the market today, I'm mostly concerned with having a consistent framework to evaluate your investment decisions.

From my point of view, CAPM is one such framework, single-factor efficient markets, simple.

Another valid choice is to opt for multi-factor markets. Leaving aside the question whether they are efficient of not, the empirical evidence for such a framework appears fairly strong.

No model is better than the other, they are both partially consistent within their own world. They both have anomalies. Selecting the right model is partially a matter of opinion. Investor A can use a data-driven analysis to show SVC results in higher expected utility, and investor B can invest in total stock market because he believes in a single-factor model. Both investors are right.

So how does an investor end up with a LCG tilt? Certainly, such an investor must believe in a multi-factor framework. On all statistically relevant periods, a SVC tilt results in the highest expected utility than a LCG tilt. If you have drawn any other conclusion, than you have serious methodological errors.

It is possible to argue for a LCG tilt based on arguments provided in "Cochrane - Portfolio advice in a multi factor world". But most/all LCG tilters use simple backtest to support their position, the usage of such backtests is not consistent with Cochrane's framework.

A similar methodological error argument can be made for people that use backtest to show the apparent superiority of TSM over SCV. On all statistically relevant periods, an SCV tilt has resulted in higher average utility than TSM. Therefore, the choice for TSM cannot possibly be the result of correctly performed data-driven analysis.

Personally I'm not sure if value is a risk story or a behavioral story. I think it's a bit of both. I invest in SCV partially because my models show that efficient portfolio's contain large allocations to value/svc, even when those models assume only half or a quarter of the historical factor premia can be realized in the future.
Alchemist
Posts: 558
Joined: Sat Aug 30, 2014 6:35 am

Re: Why is Large Growth disliked?

Post by Alchemist »

Uncorrelated wrote: Mon Oct 12, 2020 6:35 am
That is not a valid comparison. The question isn't whether 100% total stock market has outperformed 100% SVC. The question is whether tilting towards SVC results in higher average utility. Did you know that 1000% total stock market underperformed t-bills? Total stock market surely looks bad.
DFA's SCV advocates said SCV would outperform over the long term. Well, 27 years is pretty long. It didn't outperform, it tied TSM with far higher risk. If we go to a tilt, say 80/20 TSM/SCV, then the picture doesn't really change. The tilted portfolio ties the TSM portfolio (within 17 basis points) with slightly higher risk.

https://www.portfoliovisualizer.com/bac ... tion2_1=20
Uncorrelated wrote:Here is the backwards-looking optimal portfolio, estimated from live fund returns using a 5-factor model in the time period 1993 to mid 2020:

Image

That is, US-centric mean-variance investors who lived from 1993 to 2020 (and did not necessary invest during that entire period), would see the highest realized utility by not allocating anything to total stock market.
I genuinely do not know what point you are trying to make with these graphs. What portfolio of actual funds are you arguing for here?
Uncorrelated wrote:For a complete analysis, we should also consider international markets. I'm sure you're aware SVC greatly outperformed broad market in international markets.
That might matter for some. I do not invest internationally so it is a non-issue to me. However, DFA's International SCV Fund DISVX underperformed VTSAX by more than 3% CAGR for its entire 25 year history. Hardly compelling.

I am not trying to argue that SCV doomed to failure or is a terrible idea to invest in. My point is that trying to predict what any segment of the market will do (LCG or SCV) by looking at the past does not work.
User avatar
Uncorrelated
Posts: 1039
Joined: Sun Oct 13, 2019 3:16 pm

Re: Why is Large Growth disliked?

Post by Uncorrelated »

Alchemist wrote: Tue Oct 13, 2020 4:34 am
Uncorrelated wrote: Mon Oct 12, 2020 6:35 am
That is not a valid comparison. The question isn't whether 100% total stock market has outperformed 100% SVC. The question is whether tilting towards SVC results in higher average utility. Did you know that 1000% total stock market underperformed t-bills? Total stock market surely looks bad.
DFA's SCV advocates said SCV would outperform over the long term. Well, 27 years is pretty long. It didn't outperform, it tied TSM with far higher risk. If we go to a tilt, say 80/20 TSM/SCV, then the picture doesn't really change. The tilted portfolio ties the TSM portfolio (within 17 basis points) with slightly higher risk.

https://www.portfoliovisualizer.com/bac ... tion2_1=20
Expected return is measured by arithmetic average, not geometric average. Over the past 27 years, HmL and SmB (and funds implementing them) did deliver positive average returns, which was all that was claimed by the academics.

CAGR is equivalent to the expected utility if you have a log utility function. There is no need to say "X difference in CAGR with slightly higher risk", the CAGR figure is already adjusted for risk. Investors that choose 100% TSM do not have a log utility function, therefore comparing this asset allocation by CAGR is completely meaningless.

I genuinely do not know what point you are trying to make with these graphs. What portfolio of actual funds are you arguing for here?
I'm not arguing for any particular portfolio. I'm simply showing that a investor with perfect hindsight in the period 1993-2020 that had access to IJS and IUSV (relatively plain SVC/value funds), would invest 0% of their portfolio in TSM.

SmB did deliver by providing on average 0.6% higher annual returns in the US since 1993, about 4x that in developed ex-us/emerging. HmL did deliver by providing on average 2.5% higher annual returns in the US since 1993, about 2x that in developed ex-us and 4x that in emerging markets.


If you want to show that predicting the market by looking at the past doesn't work, then show me that the difference between expected and realized SmB/HmL returns is statistically significant. Fama and French looked at this in their 2020 paper "The value premium", and concluded that small/value performed as expected. The problem here isn't that SCV didn't deliver as expected, it's that you have unrealistic expectations of what was actually expected to happen, and that the tools that you use to show that are unfit for this specific purpose.
Alchemist
Posts: 558
Joined: Sat Aug 30, 2014 6:35 am

Re: Why is Large Growth disliked?

Post by Alchemist »

Uncorrelated wrote: Tue Oct 13, 2020 7:26 am Expected return is measured by arithmetic average, not geometric average. Over the past 27 years, HmL and SmB (and funds implementing them) did deliver positive average returns, which was all that was claimed by the academics.

CAGR is equivalent to the expected utility if you have a log utility function. There is no need to say "X difference in CAGR with slightly higher risk", the CAGR figure is already adjusted for risk. Investors that choose 100% TSM do not have a log utility function, therefore comparing this asset allocation by CAGR is completely meaningless.
You are just simply wrong here. Arithmetic average is absolutely meaningless for an investor. An investment with 100% return the first year and -50% return the second year has an arithmetic average return of +50%. Yet the return for the investor was *zero*. The effect of compounding is what generates meaningful investment returns and is measured by geometric mean also called Compound Average Growth Rate (CAGR).

Uncorrelated wrote:I'm not arguing for any particular portfolio. I'm simply showing that a investor with perfect hindsight in the period 1993-2020 that had access to IJS and IUSV (relatively plain SVC/value funds), would invest 0% of their portfolio in TSM.
Those funds did not exist in 1993....
SmB did deliver by providing on average 0.6% higher annual returns in the US since 1993, about 4x that in developed ex-us/emerging. HmL did deliver by providing on average 2.5% higher annual returns in the US since 1993, about 2x that in developed ex-us and 4x that in emerging markets.
Then why did the premier SCV designed to capture the premium for investors fail to provide this premium to those who paid DFA for that exposure?

Uncorrelated wrote:If you want to show that predicting the market by looking at the past doesn't work, then show me that the difference between expected and realized SmB/HmL returns is statistically significant. Fama and French looked at this in their 2020 paper "The value premium", and concluded that small/value performed as expected. The problem here isn't that SCV didn't deliver as expected, it's that you have unrealistic expectations of what was actually expected to happen, and that the tools that you use to show that are unfit for this specific purpose.
You seem to want to obfuscate the basic facts here. The SCV fund, designed with help from Fama and French, failed to outperform TSM over its current entire 27 year history of existence. The prediction of Swedroe, Merriman, and DFA's many sales folks was simply wrong. It was not disastrous as they still tied the market (well...until you count the required advisor fee). But their attempt to predict the future by using the past was an abject failure. And not their only one. DFSCX is a more stark example of failing to predict the future via the rear view mirror with the case of commodities futures via PCRIX being a complete dumpster fire (along side the more recent liquid-alts recommendation).

I do not need to prove you cannot predict the future. A model has to prove it can. What is the expected premium for a DFSVX investor vs a VTSAX only investor between now and 2030 or 2040?

We all have some expectation on what our investments will do in the future. I am just trying to warn people from the very seductive habit among the investing community to attempt to feel scientific and precise by calculating past events and extrapolating them into the future. Studying history is a good thing and can help build perspective. But the danger is in thinking it contains all the possible or likely outcomes in the future, leading to dangerous levels of overconfidence.
User avatar
Uncorrelated
Posts: 1039
Joined: Sun Oct 13, 2019 3:16 pm

Re: Why is Large Growth disliked?

Post by Uncorrelated »

Alchemist wrote: Wed Oct 14, 2020 5:20 am
Uncorrelated wrote: Tue Oct 13, 2020 7:26 am Expected return is measured by arithmetic average, not geometric average. Over the past 27 years, HmL and SmB (and funds implementing them) did deliver positive average returns, which was all that was claimed by the academics.

CAGR is equivalent to the expected utility if you have a log utility function. There is no need to say "X difference in CAGR with slightly higher risk", the CAGR figure is already adjusted for risk. Investors that choose 100% TSM do not have a log utility function, therefore comparing this asset allocation by CAGR is completely meaningless.
You are just simply wrong here. Arithmetic average is absolutely meaningless for an investor. An investment with 100% return the first year and -50% return the second year has an arithmetic average return of +50%. Yet the return for the investor was *zero*. The effect of compounding is what generates meaningful investment returns and is measured by geometric mean also called Compound Average Growth Rate (CAGR).
Suppose that you have a fund with the following annual payoff:
1% chance of 100% loss.
99% chance of a 100% gain.

This fund has an arithmetic average of 198%, and a geometric return of 0%. According to your logic, this fund is worthless. According to my logic, this fund has a high average return and can be used in a portfolio together with other funds to obtain superior performance. Which logic do you think is correct?

If you want to show that this fund is bad, it's not sufficient to compare it to something else. Instead, you must show that the efficient frontier does not contain this specific fund. This cannot be done with a simple 100% fund A vs 100% fund B backtest.
Then why did the premier SCV designed to capture the premium for investors fail to provide this premium to those who paid DFA for that exposure?
DFSVX realized a gain of 0.79% per year relative to TSM, after expenses.
Last edited by Uncorrelated on Wed Oct 14, 2020 10:39 am, edited 1 time in total.
kabob
Posts: 110
Joined: Wed Oct 16, 2019 9:01 am
Location: Loudon, Tn

Re: Why is Large Growth disliked?

Post by kabob »

Why is Large Growth disliked? – Simply, cause growth is outside the philosophy, practices and disciplines of BogleiIsm. Perhaps for good reason – one has to learn how to deal with Market Conditions when deviating from BoglePhilosophy. Yes, literally decades can be Lost, or Gained! But, One must gain some understanding and measurement of Secular markets.
Here’s a good chart and measurements of the past Century of our Markets….
Image
For the complete article: “The Aftermath of 2020 – What’s Next?” :
https://stockcharts.com/articles/tradin ... il-85.html
It’s a good read…
(just disregard promotional adds and such – ya don’t need to join for charts, ChartSchool and public articles. I’ve used StockCharts as a non member(free) since 2005 and it’s a Great Resource! Made me a Lotta $,$$$,$$$++.
BoogleIsm Works!, been good for me( gave me a good start), but BogleIsm + ChartSchool is a New Level !!!
But ya gotta Pay Attention! )

And Oh Yea, I joined the party with Vug & Vgt – Love a Good Party! (cause I went to ChartSchool)
Last edited by kabob on Thu Oct 15, 2020 9:52 am, edited 3 times in total.
Post Reply