Instead of betting on which small style/factor stocks will outperform in the future, Jack Bogle and other experts recommend investing in ALL the U.S. stocks:
Today is the second anniversary of Jack Bogle's Death. He was our best friend.
Best wishes.
Taylor
Jack Bogle's Words of Wisdom:"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- "Never think you know more than the market. Nobody does."
"Simplicity is the master key to financial success." -- Jack Bogle
I have been tempted (not for more than about 5 minutes) in the last six months to flip around 15% of my equity holdings to value, something like Vanguard Large Value Index. If value outperforms by a couple percent then I'll have a 30 basis point outperformance. Seems like a sure thing that value is "due" to outperform. You know, reversion to the mean.
But then I very quickly come back down to Earth:
I realize that if it were that easy to make a quick buck in the market, just by looking at recent performance and picking the loser, everybody would be doing it.
I realize that reversion to the mean can take years, even decades, and even reversion to the mean isn't guaranteed.
I realize that the market can remain irrational longer than I can remain solvent.
I realize that making a sector bet, even a small one, can cause me to underperform the market.
I realize that it would cause me to watch the market more closely and cheer for winners and losers.
I realize that it would cause me additional anxiety that may not even be worth the additional return, even if value does outperform.
I will stay the course on my 3 fund portfolio of total market index funds.
Instead of betting on which small style/factor stocks will outperform in the future, Jack Bogle and other experts recommend investing in ALL the U.S. stocks:
Today is the second anniversary of Jack Bogle's Death. He was our best friend.
Best wishes.
Taylor
Jack Bogle's Words of Wisdom:"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- "Never think you know more than the market. Nobody does."
Did he say that when he was still an equal-weighted index proponent, or was it later on? (His original idea was for equal weighting instead of cap weighting, right? Maybe I'm losing my mind, and I just made that up)
Triple digit golfer wrote: ↑Sat Jan 16, 2021 5:16 pm
I have been tempted (not for more than about 5 minutes) in the last six months to flip around 15% of my equity holdings to value, something like Vanguard Large Value Index. If value outperforms by a couple percent then I'll have a 30 basis point outperformance. Seems like a sure thing that value is "due" to outperform. You know, reversion to the mean.
But then I very quickly come back down to Earth:
I realize that if it were that easy to make a quick buck in the market, just by looking at recent performance and picking the loser, everybody would be doing it.
I realize that reversion to the mean can take years, even decades, and even reversion to the mean isn't guaranteed.
I realize that the market can remain irrational longer than I can remain solvent.
I realize that making a sector bet, even a small one, can cause me to underperform the market.
I realize that it would cause me to watch the market more closely and cheer for winners and losers.
I realize that it would cause me additional anxiety that may not even be worth the additional return, even if value does outperform.
I will stay the course on my 3 fund portfolio of total market index funds.
Triple digit golfer,
1) It takes conviction to be tilted to the value side.
2) I am heavily tilted to both LV and SCV.
<<I realize that the market can remain irrational longer than I can remain solvent. >>
3) I can remain solvent much longer than many folks. I am more afraid of the irrational Bull market which tends to favor LG. I had been through Telecom Bust and DotCom Bust.
Thank you, Taylor. This is a timely reminder because I'm noticed a lot of recent posts regarding new tilts to growth. Another example performance chasing and behavioral issues.
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
Did he say that when he was still an equal-weighted index proponent, or was it later on? (His original idea was for equal weighting instead of cap weighting, right? Maybe I'm losing my mind, and I just made that up)
Jack Bogle was not a proponent of equal-weighting.
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
The vast majority of what I read in this very forum about stock in specific companies and assets, also tends to be factually incorrect or poorly reasoned. For most people, buying a broad based index fund is insurance against their own ignorance, and I include myself as owning index funds as insurance against things I may not know and/or problems I've overlooked.
Taking a break as of 2 Mar. 2021; First Principles: (1) Diversify (2) Low Cost (3) Stay the Course | 3-Fund Index Portfolio
Triple digit golfer wrote: ↑Sat Jan 16, 2021 5:16 pm
I have been tempted (not for more than about 5 minutes) in the last six months to flip around 15% of my equity holdings to value, something like Vanguard Large Value Index. If value outperforms by a couple percent then I'll have a 30 basis point outperformance. Seems like a sure thing that value is "due" to outperform. You know, reversion to the mean.
But then I very quickly come back down to Earth:
I realize that if it were that easy to make a quick buck in the market, just by looking at recent performance and picking the loser, everybody would be doing it.
I realize that reversion to the mean can take years, even decades, and even reversion to the mean isn't guaranteed.
I realize that the market can remain irrational longer than I can remain solvent.
I realize that making a sector bet, even a small one, can cause me to underperform the market.
I realize that it would cause me to watch the market more closely and cheer for winners and losers.
I realize that it would cause me additional anxiety that may not even be worth the additional return, even if value does outperform.
I will stay the course on my 3 fund portfolio of total market index funds.
Triple digit golfer,
1) It takes conviction to be tilted to the value side.
2) I am heavily tilted to both LV and SCV.
<<I realize that the market can remain irrational longer than I can remain solvent. >>
3) I can remain solvent much longer than many folks. I am more afraid of the irrational Bull market which tends to favor LG. I had been through Telecom Bust and DotCom Bust.
Triple digit golfer wrote: ↑Sat Jan 16, 2021 5:16 pm
I have been tempted (not for more than about 5 minutes) in the last six months to flip around 15% of my equity holdings to value, something like Vanguard Large Value Index. If value outperforms by a couple percent then I'll have a 30 basis point outperformance. Seems like a sure thing that value is "due" to outperform. You know, reversion to the mean.
But then I very quickly come back down to Earth:
I realize that if it were that easy to make a quick buck in the market, just by looking at recent performance and picking the loser, everybody would be doing it.
I realize that reversion to the mean can take years, even decades, and even reversion to the mean isn't guaranteed.
I realize that the market can remain irrational longer than I can remain solvent.
I realize that making a sector bet, even a small one, can cause me to underperform the market.
I realize that it would cause me to watch the market more closely and cheer for winners and losers.
I realize that it would cause me additional anxiety that may not even be worth the additional return, even if value does outperform.
I will stay the course on my 3 fund portfolio of total market index funds.
Triple digit golfer,
1) It takes conviction to be tilted to the value side.
2) I am heavily tilted to both LV and SCV.
<<I realize that the market can remain irrational longer than I can remain solvent. >>
3) I can remain solvent much longer than many folks. I am more afraid of the irrational Bull market which tends to favor LG. I had been through Telecom Bust and DotCom Bust.
Nice discussion by Wade Pfau at retirementresearcher.com on the value premium, and its relationship to risk. Worth a read before you make any decisions.
I think the correct term for "Value" should be Junk stocks and Growth Stocks Quality Stocks. That might be why the performance is very different. The issue is that the past performance of the Value factor which was amazing was mostly before the Internet was widespread. I would advice anyone doing Value tilting to read Howard Marks letter on this called "Something of Value" to find out more on the disappointing results of Value factor out-of-sample of Fama 1992 paper in USA.
Anon9001 wrote: ↑Mon Jan 18, 2021 12:41 pm
I think the correct term for "Value" should be Junk stocks and Growth Stocks Quality Stocks. That might be why the performance is very different. The issue is that the past performance of the Value factor which was amazing was mostly before the Internet was widespread. I would advice anyone doing Value tilting to read Howard Marks letter on this called "Something of Value" to find out more on the disappointing results of Value factor out-of-sample of Fama 1992 paper in USA.
TSLA at $800+ per share is now expected to announce a per-share earnings of about $1. That would be a quarterly record for the company.
That is a growth stock - a high p/e that is only justified by future potential growth.
I’ve been seeing more information lately asking if the stock market is becoming a bubble a la 1999 style. Maybe value stocks represent a type of bubble insurance. I guess I will have to wait to see if the premiums I’ve been paying recently will pay off.
bck63 wrote: ↑Sat Jan 16, 2021 8:48 pm
Just hold both.
Good advise. I try to keep my value/growth allocation 50%/50% even if the total market is not quite that way (it is leans towards growth right now, I think).
We cannot beat the market, but we can and should avoid being crushed by the market.
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
When I've thought about this, I wonder if the reasons for historical value outperformance are no longer are applicable. In my view/opinion, we are now in a political and economic environment where monopolies are not kept in check and it's more difficult to unseat the leaders in any given market segment (for a variety of reasons). If that is true, it makes sense that value continues to underperform.
Hoosier CPA wrote: ↑Mon Jan 18, 2021 12:06 am
I've tilted towards value for a long time. Wondering if it's time to throw in the towel but I feel that I'd be chasing performance...
Surprising that now is the time that you capitulate. You've been doing it long time and you probably realize its a long term decision. Stay the course would be my recommendation.
Hoosier CPA wrote: ↑Mon Jan 18, 2021 12:06 am
I've tilted towards value for a long time. Wondering if it's time to throw in the towel but I feel that I'd be chasing performance...
Surprising that now is the time that you capitulate. You've been doing it long time and you probably realize its a long term decision. Stay the course would be my recommendation.
You should approach the tilting decision independently of what you were doing before (avoid the sunk-cost fallacy). It is completely acceptable to stop tilting if you were tilting before and vice-versa, provided you've changed your mind.
"... 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
I am sorry but I think that's impossible in the USA. It is very efficient market so whatever Quality you are assuming you are getting is probably still Junk.
Value and Quality are probably negatively correlated long-short from my vague recollection.
Hoosier CPA wrote: ↑Mon Jan 18, 2021 12:06 am
I've tilted towards value for a long time. Wondering if it's time to throw in the towel but I feel that I'd be chasing performance...
So you’d be selling low/buying high? I think the bet is a sound one that Value will have its day sooner rather than later - stick with your convictions!
Looking back empirically, the past decade set up extraordinarily well for outperformance by growth stocks.
We’ve had a broadly low growth, low interest rate environment with deflationary headwinds. The archetypal value stock struggles to grow earnings and carries considerable debt on its balance sheet. Inflation, assuming it is reflected in increased nominal earnings power, lessens its debt burden. While the effect of charged economic growth improving real earnings is further magnified by its heavy debt burden.
For the past decade, real earnings growth (or the prospect of it) has been concentrated in a handful of sectors and a handful of companies. Investors, lacking other sources of yield, have chased those names for growth. To some extent, investors saw this same dynamic in the 1990s, which was both high growth and deflationary (brought on by tech-fueled growth and outsourcing, rather than demographic change and a financial crisis hangover).
Growth vs value is really a question of what ‘normal’ economic conditions in the US will be going forward. Historically, ‘normal’ has been economic expansion with inflationary tailwinds—the sweet spot for value. People are free to argue that a new normal will apply.
bck63 wrote: ↑Sat Jan 16, 2021 8:48 pm
Just hold both.
Good advise. I try to keep my value/growth allocation 50%/50% even if the total market is not quite that way (it is leans towards growth right now, I think).
We cannot beat the market, but we can and should avoid being crushed by the market.
This is interesting and thought provoking. Thank you.
secondopinion wrote: ↑Mon Jan 18, 2021 1:06 pm
Good advise. I try to keep my value/growth allocation 50%/50% even if the total market is not quite that way (it is leans towards growth right now, I think).
Agreed. I stumbled across this by accident this w/e while checking my asset allocation and both SP500 and VTI have major growth tilts. Makes sense, of course, but the magnitude was a lot more than I expected...
Wait 'til I get my money right | Then you can't tell me nothing, right?
secondopinion wrote: ↑Mon Jan 18, 2021 1:06 pm
Good advise. I try to keep my value/growth allocation 50%/50% even if the total market is not quite that way (it is leans towards growth right now, I think).
Agreed. I stumbled across this by accident this w/e while checking my asset allocation and both SP500 and VTI have major growth tilts. Makes sense, of course, but the magnitude was a lot more than I expected...
By definition, the total market does not have any tilt at all
muffins14 wrote: ↑Mon Jan 18, 2021 4:11 pm
By definition, the total market does not have any tilt at all
Morningstar seems to believe that it does. For SP500 and VTI, there is a ten (?) percentage-point differential between the Value and Growth style boxes. I am not accustomed to seeing that.
So, actionably, when someone estimates asset allocation - and it is usually with that database -- that is the interpretation they will see.
Wait 'til I get my money right | Then you can't tell me nothing, right?
I am sorry but I think that's impossible in the USA.
Just because you think it doesn't make it true. Funds like VFMF and LRGF have higher levels of value and quality, by most relevant metrics, than VTI does. Check for yourself, use Morningstar, ETF.com or whatever other service website you want.
Anon9001 wrote: ↑Mon Jan 18, 2021 1:28 pm
Value and Quality are probably negatively correlated long-short from my vague recollection.
Value and quality factors (long-short) have been historically positively correlated (about 0.07). You can check for yourself, Ken French puts out the data for free for anyone to see.
"... 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
Hoosier CPA wrote: ↑Mon Jan 18, 2021 12:06 am
I've tilted towards value for a long time. Wondering if it's time to throw in the towel but I feel that I'd be chasing performance...
So you’d be selling low/buying high? I think the bet is a sound one that Value will have its day sooner rather than later - stick with your convictions!
Appreciate that. I haven't done anything yet. I usually take emotion out of it when actually making changes. Value investing makes sense in theory to me, and I've studied it a lot. I know it goes against the buy the market theme here, and I appreciate that too.
I'm tilted 20% of my US equities in SCV, so it's not like I'm all in.
Anon9001 wrote: ↑Mon Jan 18, 2021 1:28 pm
Value and Quality are probably negatively correlated long-short from my vague recollection.
Value and quality factors (long-short) have been historically positively correlated (about 0.07). You can check for yourself, Ken French puts out the data for free for anyone to see.
+0.07 is hardly any correlation statistically. We can expect some diversification benefits by balancing them even if it is slightly positive.
What about value and growth comparison?
It is better to be half-wrong than have a 50% chance of being all-wrong. With the former, you will learn and have money to try again. Otherwise, you will never learn and will have nothing eventually.
Anon9001 wrote: ↑Mon Jan 18, 2021 1:28 pm
Value and Quality are probably negatively correlated long-short from my vague recollection.
Value and quality factors (long-short) have been historically positively correlated (about 0.07). You can check for yourself, Ken French puts out the data for free for anyone to see.
+0.07 is hardly any correlation statistically. We can expect some diversification benefits by balancing them even if it is slightly positive.
What about value and growth comparison?
I agree, they’re basically uncorrelated which means value and quality are roughly independent of each other (aka they’re not “opposites” as Anon9001 keeps saying).
Value and growth, by definition, have a correlation of -1.
"... 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
Anon9001 wrote: ↑Mon Jan 18, 2021 12:41 pm
I think the correct term for "Value" should be Junk stocks and Growth Stocks Quality Stocks. That might be why the performance is very different. The issue is that the past performance of the Value factor which was amazing was mostly before the Internet was widespread. I would advice anyone doing Value tilting to read Howard Marks letter on this called "Something of Value" to find out more on the disappointing results of Value factor out-of-sample of Fama 1992 paper in USA.
Junk vs quality is really a whole different dimension than value growth. Plenty of value companies are just really slow growth companies as opposed to junky. And many growth companies carry junk ratings on their debt.
Anon9001 wrote: ↑Mon Jan 18, 2021 12:41 pm
I think the correct term for "Value" should be Junk stocks and Growth Stocks Quality Stocks. That might be why the performance is very different. The issue is that the past performance of the Value factor which was amazing was mostly before the Internet was widespread. I would advice anyone doing Value tilting to read Howard Marks letter on this called "Something of Value" to find out more on the disappointing results of Value factor out-of-sample of Fama 1992 paper in USA.
It could be that after a couple of centuries of experience, investors are valuing growth more reasonably than the past. If growth is not very expensive compared to value, it doesn't take much growth in earnings for valuations to catch up. At the end of last week, the PE ratios for Nasdaq 100 and DJIA were roughly comparable.
Instead of betting on which small style/factor stocks will outperform in the future, Jack Bogle and other experts recommend investing in ALL the U.S. stocks:
Today is the second anniversary of Jack Bogle's Death. He was our best friend.
Best wishes.
Taylor
Jack Bogle's Words of Wisdom:"The beauty of owning the market is that you eliminate individual stock risk, you eliminate market sector risk, and you eliminate manager risk. -- "Never think you know more than the market. Nobody does."
Mr. Larimore,
Thank you for the shrewd and timely advice. I’m a long time follower of the forum, but have made very few posts. It seems there has been an uptick recently of posters touting tilts, timing and Tesla.
I’d be interested to hear if you’ve noticed similar upticks on the forum during the exuberance of bull markets in the past?
fennewaldaj wrote: ↑Mon Jan 18, 2021 10:47 pm
Junk vs quality is really a whole different dimension than value growth. Plenty of value companies are just really slow growth companies as opposed to junky. And many growth companies carry junk ratings on their debt.
What I found via my tests in Portfolio Visualizer is that Value Funds tend to show high Excess Kurtosis (measure how fat the tails are relative to a Normal Distribution) and slightly more negative skewness compared to Growth stocks. Evidence for US Large Cap,Evidence for US Small Cap,Evidence for Ex-US Large Cap,Evidence for Ex-US Small Cap. (Make sure to Click Metrics Tab in PV Table. Scroll Down.) This correlates well with selling options and junk bonds which tend to also show Negative Skewness and High Excess Kurtosis. I would advice if you are not interesting in buying junk bonds or selling options then Value factor is not good idea to invest in.
Thank you for the shrewd and timely advice. I’m a long time follower of the forum, but have made very few posts. It seems there has been an uptick recently of posters touting tilts, timing and Tesla.
I’d be interested to hear if you’ve noticed similar upticks on the forum during the exuberance of bull markets in the past?
-Will
Will:
Answer: Yes.
Taylor
Jack Bogle's Words of Wisdom:"We say stay the course. But before you stay the course, make sure you're on the right course."
"Simplicity is the master key to financial success." -- Jack Bogle
Just looking back at past performance, there's no justifiable reason for anybody to think he or she could time the value/growth tilt.
I am not referring to somebody who has a modest tilt (in either direction, actually) and maintains it over decades. I'm referring to somebody who strategically attempts to make shifts in the tilt from one to the other.
Look at 2009-19. Growth outperformed by more than 3% each year - a cumulative return of approximately 425% vs. 258%.
So, coming into 2020, it seemed, at least to a market timer, probably fairly obvious that value is due to outperform. I could see many market timers saying themselves, "even if it doesn't outperform this year, if I hold it for ten years it probably will!"
Well, that timer is off to a bad start. Value returned 2% vs. 40% for growth.
To make the decade beginning in 2020 even, the next nine years will need to see value outperforming growth by about 3.6% per year.
My point isn't that it won't or that it can't. My point is that to a market timer, getting into something that has been underperforming may seem like "low risk." What's the harm in switching to value after growth had outperformed by 3.3% a year? Well, the harm is you made the switch right before the largest growth/value spread in history, to my knowledge, and now to "make it up" you need value to outperform by 3.6% a year for the next nine.
It is just a loser's game. Pick a strategy, even if it isn't optimal, and stick to it. Trying to time the market or any sector or style of the market is a loser's game.
I'm 100% Value, holding all four forms - undervalued by: academic definition (VSAIX), traditional measures (BRK, MKL, BAM), "special situation" (FNMA, FNMAS), and potential (PLTR).
.
