The challenge, importance, and discipline of staying the course - Asness

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Robert T
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The challenge, importance, and discipline of staying the course - Asness

Post by Robert T »

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Here are some extracts from an interview with Cliff Asness in Lasse Pedersen's (2015) book on Efficiently Inefficient.
Well, the single biggest difference between real world and academia is— this sounds over scientific— time dilation. I’ll explain what I mean. This is not relativistic time dilation as the only time I move at speeds near light is when there is pizza involved. But to borrow the term, your sense of time does change when you are running real money. Suppose you look at a cumulative return of a strategy with a Sharpe ratio of 0.7 and see a three-year period with poor performance. It does not faze you one drop. You go: “Oh, look, that happened in 1973, but it came back by 1976, and that’s what a 0.7 Sharpe ratio does.” But living through those periods takes— subjectively, and in wear and tear on your internal organs— many times the actual time it really lasts. If you have a three-year period where something doesn’t work, it ages you a decade. You face an immense pressure to change your models, you have bosses or clients who lose faith, and I cannot explain the amount of discipline that you need.
Discipline is important. We do not think we’re more immune to psychological biases than others, but following the models helps. If we followed them with less discipline, we run the serious risk of reintroducing the exact biases we are trying to exploit! For instance, if people run from stocks with any problems, making value stocks too cheap and attractive buys long-term, if we use our judgment to selectively override our models, perhaps we undo precisely the bet we want to make, in order to make ourselves more “comfortable”? Discipline is not always easy, by the way. It’s really hard to stick to a strategy. But when people cave and disregard their models, they seem to usually do this within an hour and a half of the worst possible time to cave. Admittedly, that’s not a quant study, but it’s been my experience. The difficulty of sticking to the models is part of why they work.
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by magneto »

"The difficulty of sticking to the models is part of why they work."

This sentence on first reading did not seem to make sense.

On reflection suppose this is a reference to that when everything in the investor's emotions is shouting to follow the herd and to sell sell sell, :shock: or buy buy buy :idea:
that is the moment to follow the model or IPS rigidly and rebalance/buy/sell.

Certainly in retrospect the best investment decisions seem to be those taken when everything inwardly is screaming against it.
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by Maynard F. Speer »

magneto wrote:"The difficulty of sticking to the models is part of why they work."

This sentence on first reading did not seem to make sense.

On reflection suppose this is a reference to that when everything in the investor's emotions is shouting to follow the herd and to sell sell sell, :shock: or buy buy buy :idea:
that is the moment to follow the model or IPS rigidly and rebalance/buy/sell.

Certainly in retrospect the best investment decisions seem to be those taken when everything inwardly is screaming against it.
I think being a 'quant' guy, Asness would be referring more specifically to things like value and trend-following - but of course it applies to every aspect of investor behaviour

E.g. You decide to invest entirely in value stocks, because they've doubled the market return over 20 years ... But immediately you're trailing the market ... A year passes - two years ... The media claims value has stopped being an effective strategy - papers are published showing it's been arbitraged away - that cackling banshee on Bloomberg mocks the demise of value investors, like they're stuck wielding pitchforks and blood-letting in the 18th century

And after three years, it's feeling like a mistake, and you sell your value stocks relatively cheaper than you bought them, and buy an S&P 500 tracker - and breathe a sigh of relief ... And of course by buying value when it had been doing well, and selling after it had been doing poorly, you've unwittingly contributed to the continuation of the value effect, and the reward of more patient investors
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by Call_Me_Op »

magneto wrote:"The difficulty of sticking to the models is part of why they work."

This sentence on first reading did not seem to make sense.
Made sense to me immediately. If it were easy, many would do it, and you would be following the crowd. That never is good for returns.
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by garlandwhizzer »

I think Mr. Asness makes a great point. In theory the whole reason for the value factor is simply that most investors bail out of value at the wrong time as it has now for more than a decade. It's the bailing out during hard times that creates real value. In my view SCV currently in the US market hasn't yet suffered enough to create such value going forward. Aside from that, one can look at this in an entirely different way, which has backtesting validity as compelling as factor investing. Factor investing may outperform simple market indexes given a long enough time frame on backtesting, but factor investors as a group do not. It appears to be significantly more tolerable emotionally during difficult market conditions for investors as a group to hold onto something like TSM than a portfolio of financially distressed debt-ridden small cap companies (SCV).

So does one place investment dollars on something that may require enormous patience and emotional stability during the inevitable periods of underperformance because one believes that if one waits long enough such patience is rewarded on historical backtesting? Or does one invest in TSM which is maximally diversified, lowest on expenses, strikes a balance between growth and value, and outperforms on backtesting when we look at real investor behavior rather than abstract factors created with 20/20 hindsight?

Either choice has a rational basis. The important underlying questions are how well can you control your emotions and stay the course and how long is your investing time frame? For many of us, the best choice is the simplest and least expensive, TSM. For others like Robert T factors are the way to go.

One final point: I suspect that due to the popularity of factor based investing now it is probable that when (and if?) the factor payoff comes, it is likely to be less than in decades past. Backtesting past results may suggest the future but they do not define it.

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Re: The challenge, importance, and discipline of staying the course - Asness

Post by Fallible »

garlandwhizzer wrote:I think Mr. Asness makes a great point. In theory the whole reason for the value factor is simply that most investors bail out of value at the wrong time as it has now for more than a decade. It's the bailing out during hard times that creates real value. In my view SCV currently in the US market hasn't yet suffered enough to create such value going forward. Aside from that, one can look at this in an entirely different way, which has backtesting validity as compelling as factor investing. Factor investing may outperform simple market indexes given a long enough time frame on backtesting, but factor investors as a group do not. It appears to be significantly more tolerable emotionally during difficult market conditions for investors as a group to hold onto something like TSM than a portfolio of financially distressed debt-ridden small cap companies (SCV).

So does one place investment dollars on something that may require enormous patience and emotional stability during the inevitable periods of underperformance because one believes that if one waits long enough such patience is rewarded on historical backtesting? Or does one invest in TSM which is maximally diversified, lowest on expenses, strikes a balance between growth and value, and outperforms on backtesting when we look at real investor behavior rather than abstract factors created with 20/20 hindsight?

Either choice has a rational basis. The important underlying questions are how well can you control your emotions and stay the course and how long is your investing time frame? For many of us, the best choice is the simplest and least expensive, TSM. For others like Robert T factors are the way to go. ...Garland Whizzer
This. And I think it's worth adding that even investors who stay with the simplest and least costly can get into trouble if their stock allocation, TSM included, outweighs their emotional risk tolerance.
"Yes, investing is simple. But it is not easy, for it requires discipline, patience, steadfastness, and that most uncommon of all gifts, common sense." ~Jack Bogle
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Maynard F. Speer
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by Maynard F. Speer »

And of course there's a big difference between following a small value stock-picking strategy (e.g. Graham's simple value screen), which - when it's underperforming - is costing you time, energy and dealing fees .. and just holding an ETF that does it for you

I've no idea how much the rise of ETFs may impact on future returns, but when I look at small value and small growth ETF fundamentals today, it's difficult to see much separating them ... Perhaps a good argument to go with a slightly deeper value process, like DFA's

Either way I think there's a risk picking a tricky strategy that's suddenly been made a lot easier ... Great article I read yesterday:

The Trouble With Chasing Hot Strategies
http://thereformedbroker.com/2015/11/27 ... trategies/
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by stlutz »

I'm interested in the distinction between staying the course because you have a good strategy and staying the course simply because staying the course is a good idea in and of itself.

So, I ran 3 sets of return numbers using the data from portfolio visualizer using returns from 1973 to 2014. I chose one "default" portfolio, one using the investments generally considered to be the best around here, and one composed of investments generally considered to be the worst around here.

portfolio return volatility
default 9.35% 10.34%
best 11.06% 10.92%
worst 9.75% 14.21%

So, the question is, how long should one stick with the "worst" portfolio above before switching to the "best" or the "default" one?

(Note: I'll reveal my exact asset mixes used to construct the default, best, and worst portfolios in a subsequent post.)
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by Fallible »

stlutz wrote:I'm interested in the distinction between staying the course because you have a good strategy and staying the course simply because staying the course is a good idea in and of itself.
...
Staying the course if one is not wisely invested is not what staying the course means or was ever intended to mean. There is an implied first part of the phrase stay the course, which is "Invest wisely." Obvviously, if one is not wisely invested, the course should not be stayed and probably can't or won't be anyway if it's the wrong one.
Last edited by Fallible on Sun Nov 29, 2015 2:01 pm, edited 1 time in total.
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by Maynard F. Speer »

stlutz wrote:I'm interested in the distinction between staying the course because you have a good strategy and staying the course simply because staying the course is a good idea in and of itself.

So, I ran 3 sets of return numbers using the data from portfolio visualizer using returns from 1973 to 2014. I chose one "default" portfolio, one using the investments generally considered to be the best around here, and one composed of investments generally considered to be the worst around here.

portfolio return volatility
default 9.35% 10.34%
best 11.06% 10.92%
worst 9.75% 14.21%

So, the question is, how long should one stick with the "worst" portfolio above before switching to the "best" or the "default" one?

(Note: I'll reveal my exact asset mixes used to construct the default, best, and worst portfolios in a subsequent post.)
I suppose, according to research we're still getting on the investor return gap (often in the region of 2%), they'd do better sticking with any of them than chopping and changing intuitively ... Plus it's quite dangerous talking "best" and "worst" when looking backwards

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Re: The challenge, importance, and discipline of staying the course - Asness

Post by pkcrafter »

Excellent Post Robert T, and fine feedback from posters. Maynard's link is also a good one..

Josh Brown:
It’s sad to say, but this is exactly how it works. I’ve been watching this for almost 20 years. The fastest way to know you’re talking to an amateur investor (or an uninformed pro) is to see how much emphasis or meaning they ascribe to things like trailing 12 months of performance. This obsession with “what’s working?” is extremely widespread.
All true, but what creates a market crash--investors selling. Reminds me of these two quotes:
We have met the enemy, and he is us.

Walt Kelly/Pogo
You can't handle the truth
Jack Nicholson in A Few Good Men

The way investors behave seems to mean most are in over their head when it comes to risk.


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.
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by stlutz »

I suppose, according to research we're still getting on the investor return gap (often in the region of 2%), they'd do better sticking with any of them than chopping and changing intuitively
So, I ran one more set of numbers--call it the "buy what's hot" market-timing approach. I chose 4 equity sub-classes and 2 fixed income, and simply invested in whichever one did the best the prior year.

The updated full return set is as follows:

portfolio return volatility
default 9.35% 10.34%
best 11.06% 10.92%
worst 9.75% 14.21%
timing 12.45% 15.76%
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by Maynard F. Speer »

stlutz wrote:
I suppose, according to research we're still getting on the investor return gap (often in the region of 2%), they'd do better sticking with any of them than chopping and changing intuitively
So, I ran one more set of numbers--call it the "buy what's hot" market-timing approach. I chose 4 equity sub-classes and 2 fixed income, and simply invested in whichever one did the best the prior year.

The updated full return set is as follows:

portfolio return volatility
default 9.35% 10.34%
best 11.06% 10.92%
worst 9.75% 14.21%
timing 12.45% 15.76%
Can you do that somewhere in Portfolio Visualizer?

And trend-following (e.g. buying what's hot the year prior) is one of the strategies Asness has referred to, re: staying the course .. It works more often than not, but when it doesn't, a few years can feel like a long time
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by pkcrafter »

stlutz wrote:
I suppose, according to research we're still getting on the investor return gap (often in the region of 2%), they'd do better sticking with any of them than chopping and changing intuitively
So, I ran one more set of numbers--call it the "buy what's hot" market-timing approach. I chose 4 equity sub-classes and 2 fixed income, and simply invested in whichever one did the best the prior year.

The updated full return set is as follows:

portfolio return volatility
default 9.35% 10.34%
best 11.06% 10.92%
worst 9.75% 14.21%
timing 12.45% 15.76%
And your point is timing is better than holding? Your timing investors won't even follow the timing strategy you used. They prefer chaos theory. :happy

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Re: The challenge, importance, and discipline of staying the course - Asness

Post by Robert T »

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garlandwhizzer wrote:So does one place investment dollars on something that may require enormous patience and emotional stability during the inevitable periods of underperformance because one believes that if one waits long enough such patience is rewarded on historical backtesting? Or does one invest in TSM which is maximally diversified, lowest on expenses ...
IMO these are not separate - as Fallible noted in an earlier post - investing in TSM also requires "enormous patience and emotional stability during inevitable periods of underperformance". IMO, the Asness extracts/general points are relevant for all investments.

For example Vanguard 500 declined 37.7% and 37.0% in 2000-2002 and 2008 respectively, while Vanguard Total Bond increased 30.8% and 5.1% respectively. Staying invested in Vanguard 500 required significant fortitude. And since 2000, almost 16 years, Vanguard Total Bond Market annualized return has been almost 1 percent higher than Vanguard 500 (5.2% vs. 4.1% annualized) - and the outlook is also no slam-dunk. RAFI's 10-year expected real returns for US large cap stocks is the same as US bonds (1.1% annualized), while GMO's 7-year expected real return for stocks is 1.1 percent lower than bonds (-2.0 vs. -0.9). Obviously no guarantees, but staying the course with a TSM/S&P500 type investment also requires 'enormous patience and emotional stability".

Robert
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by matjen »

Robert T wrote:.
garlandwhizzer wrote:So does one place investment dollars on something that may require enormous patience and emotional stability during the inevitable periods of underperformance because one believes that if one waits long enough such patience is rewarded on historical backtesting? Or does one invest in TSM which is maximally diversified, lowest on expenses ...
IMO these are not separate - as Fallible noted in an earlier post - investing in TSM also requires "enormous patience and emotional stability during inevitable periods of underperformance". IMO, the Asness extracts are relevant for all investments.

For example Vanguard 500 declined 37.7% and 37.0% in 2000-2002 and 2008 respectively, while Vanguard Total Bond increased 30.8% and 5.1% respectively. Staying invested in Vanguard 500 required significant fortitude. And since 2000, almost 16 years, Vanguard Total Bond Market annualized returns has been almost 1 percent higher than Vanguard 500 (5.2% vs. 4.1% annualized) - and the outlook is also no slam-dunk. RAFI's 10-year expected real returns for US large cap stocks is the same as US bonds (1.1% annualized), while GMO's 7-year expected real return for stocks is 1.1 percent lower than bonds (-2.0 vs. -0.9). Obviously no guarantees, but staying the course with a TSM/S&P500 type investment also requires 'enormous patience and emotional stability".

Robert.
^+1 This is so true. The three-fund folks just assume that because they are sold on their portfolio that it is easier. That they are emotionally immune from crushing equities losses. Well guess what? People like Robert T. and me are sold on factor investing. That makes it easier for us I suppose plus we have the finance theory, back testing and in Robert T's case 12 years of kicking *ss and taking names.

I should also point out that I highlighted the exact same section of Lasse Pedersen's (2015) book on Efficiently Inefficient back in June in this thread. It really struck me as well as Robert T. Great minds...
;-)

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Re: The challenge, importance, and discipline of staying the course - Asness

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Re: The challenge, importance, and discipline of staying the course - Asness

Post by nedsaid »

garlandwhizzer wrote:I think Mr. Asness makes a great point. In theory the whole reason for the value factor is simply that most investors bail out of value at the wrong time as it has now for more than a decade. It's the bailing out during hard times that creates real value.

Nedsaid: Garland, you have hit on a huge issue. Many investors simply are not patient enough to stay with a strategy long enough for it to work. It is the old "selling at the bottom" problem. I still remember the articles in the late 1990's that Warren Buffett had lost it and that his strategies didn't work anymore. The poor doddering old fool. Fast forward a few years and it all looked different. Buffett is now back in the investing pantheon. Mr. Buffett couldn't have cared less what the financial columns said about him in the late 1990's, he just kept doing what he had always done and time vindicated him.

In my view SCV currently in the US market hasn't yet suffered enough to create such value going forward.

Nedsaid: I own a bunch of VBR, the Vanguard Small-Cap Value EFT. Golly gee whiz, I hope you are wrong. I see Morningstar has a forward P/E on it of 16.61. Not too valuey, but better than it was. It is a long-term position and I will continue to hold it.

Aside from that, one can look at this in an entirely different way, which has backtesting validity as compelling as factor investing. Factor investing may outperform simple market indexes given a long enough time frame on backtesting, but factor investors as a group do not. It appears to be significantly more tolerable emotionally during difficult market conditions for investors as a group to hold onto something like TSM than a portfolio of financially distressed debt-ridden small cap companies (SCV).

Nedsaid: Mr. Bogle made a good speech called "The Tell Tale Chart." Bogle talked a lot about reversion to the mean. He talked about certain backtested results being period dependent. He talked about the real life investments that real investors could have actually made during the time periods cited by the academics to prove the small/value premium. (Hint: DFA didn't exist in 1940). It was a good speech and contained a good dose of skepticism. Just Google "The Tell Tale Chart John Bogle" and you will find the link to the Vanguard website.

However, I believe the academics even knowing that nothing is 100% perfect or 100% free from bias. Larry Swedroe, Dr. Bill Bernstein, and Rick Ferri all believe in the small/value phenomenon as well as DFA which was founded in large part upon this research. I also can't help but notice that most of the great all-time investors I can think of were value investors or at least value oriented. It seems also common sense that smaller companies have greater growth potential than those who already dominate their markets. I believe the case made by the academics.

I factor invest because the academic research is consistent with my accumulated experiences in the market and it is consistent with what I know about human nature. I believe the factors exist because of human nature and human behavior. In other words, human beings make the same behavioral errors again and again. My gosh, people have known for many, many years that smoking is bad for your health but many people still choose to smoke. I don't believe that human nature can be arbitraged away.

As far as holding on in bad times, to me holding onto anything other than bonds in the 2008-2009 financial crisis was difficult. My losses in the Total US Stock Market Fund were just as painful as my losses in Vanguard Small Cap Value ETF or my losses in my REIT Funds. It was all painful. But I suppose a Total Market Index might be a bit less volatile than the factor investments like small value.

Finally, I am not certain that even the Total Market Index investors get 100% of the return of the indexes because of the buy high, sell low problem. Doggone it, human behavior will get you every time. Pretty much, whatever investing disciplines you adopt you have to be emotionally strong enough to stick with them. Human behavior seems to have that cancelling out effect.


So does one place investment dollars on something that may require enormous patience and emotional stability during the inevitable periods of underperformance because one believes that if one waits long enough such patience is rewarded on historical backtesting? Or does one invest in TSM which is maximally diversified, lowest on expenses, strikes a balance between growth and value, and outperforms on backtesting when we look at real investor behavior rather than abstract factors created with 20/20 hindsight?

Nedsaid: I make extensive use of index funds myself. Over time, my portfolio has in some ways untilted. Looking at my stock stylebox, I am no longer value tilted but 40% of my stocks are mid-cap/small-cap compared to 27% for the market and 6% in small value compared to 3% for the market. We are in a growth phase now so I think I will let things ride for now.

I have no argument with the simple three to five fund index portfolios. They work and work great. Whether you tilt or not depends on whether or not you believe the academics and their research. Also there is the question whether the additional costs of tilting will outweigh whatever extra performance one achieves. A fertile area for debate.


Either choice has a rational basis. The important underlying questions are how well can you control your emotions and stay the course and how long is your investing time frame? For many of us, the best choice is the simplest and least expensive, TSM. For others like Robert T factors are the way to go.

One final point: I suspect that due to the popularity of factor based investing now it is probable that when (and if?) the factor payoff comes, it is likely to be less than in decades past. Backtesting past results may suggest the future but they do not define it.

Nedsaid: My suspicion is that the factors can be arbitraged away for awhile. But the professional traders and arbitrageurs are themselves human. My guess is that the factors will reappear with a vengeance at some point, particularly value. Maybe the robots will take all this away. But then again, humans program the robots.

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Re: The challenge, importance, and discipline of staying the course - Asness

Post by stlutz »

So, here are the allocations I used for my portfolios:

Default: 50% Total US and 50% Total Bond
Best: 50% Small Value and 50% Intermediate Treasuries
Worst: 50% Small Growth and 50% Corporate Bonds

And my timing strategy simply invested 100% in the asset that did the best over the prior year of Large Growth, Large Value, Small Growth, Small Value, Intermediate Treasuries and Corporate Bonds.
Can you do that somewhere in Portfolio Visualizer?
I had to do this manually in Excel.
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by blueblock »

Maynard F. Speer wrote: E.g. You decide to invest entirely in value stocks, because they've doubled the market return over 20 years ... [/snip]
And after three years, it's feeling like a mistake, and you sell your value stocks relatively cheaper than you bought them, and buy an S&P 500 tracker - and breathe a sigh of relief ... And of course by buying value when it had been doing well, and selling after it had been doing poorly, you've unwittingly contributed to the continuation of the value effect, and the reward of more patient investors
This hypothetical example really speaks to me. In my unreformed days, I used to rationalize taking trading losses by telling myself that "it once belonged in my portfolio, but now it doesn't, because [reasons]." One of the several advantages of going to a 3-fund portfolio when I retired, for me, has been that I am freed from such machinations and potential mistakes. Now there's no slicing and dicing; I'm either in or I'm out, and I'm not getting out, so I leave it alone, regardless of what the markets are doing. No guesswork, no temptation to change course.
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by SeeMoe »

Me, I'll stay cool, calm and collected WHILE my money manager does the grunt work along with his expert staff at VPAS ! :greedy
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Re: The challenge, importance, and discipline of staying the course - Asness

Post by garlandwhizzer »

Robert T wrote:


IMO these are not separate - as Fallible noted in an earlier post - investing in TSM also requires "enormous patience and emotional stability during inevitable periods of underperformance". IMO, the Asness extracts/general points are relevant for all investments.
I agree totally. It is difficult to stay the course whatever your strategy during market downturns. The question is: is a factor based strategy more difficult than a cap weighted total market position? For Robert T it is not, but for me it is. My own personal experience is that it is easier for me to hold TSM than SCV when SCV is in one of its long stretches of underperformance. I do not mean to imply that everyone is like me in this regard or that it is comfortable to hold onto TSM during market collapses.

Ultimately if you hold TSM you're not making bets on a specific sector or strategy but rather on the economy as a whole. It is far more diversified than SCV which represents perhaps as much as 3% of market cap although the best funds narrow that to less than 1% with screens for deep value, microchip, profitability, quality, lack of MOM, and negative alpha. There is no way that less than 1% of the market is a diversified position. Neither does MOM represent full diversification, being only a subset of LCG. Cost constraints in pursuit of SCV MOM (wide bid ask spreads, frequent trades, expensive put options) make it essentially impossible to harvest any of the MOM premium on an after cost basis in the SC and most of the MC space. So for MOM we're looking at only a subset of LCG and for SCV you're looking at a subset of perhaps less than 1% of stocks by market weight. In other words you're making vey concentrated non-diversified bets which work in some market cycles and don't work in others. Having maximal diversification is one reason why it is easier for me to hold onto TSM.

Another is the cost matters hypothesis. It costs more to pursue these factor based strategies.

A third is the fact that markets are now 90% plus professionally driven (in contrast to the past when factor research shone brightly) and I believe that market misplacing of assets currently is minimal and difficult to exploit in a cost efficient manner.

Do these factors as they're currently defined and understood predict all market returns? The answer is no. There is this thing called alpha. When you add up the factor returns of a portfolio and they differ from real portfolio returns, the difference is called alpha. If factors explained everything there would be no alpha. Some funds, like Vanguard's Primecap for example, have zero or negative factor based returns over a long time span but a persistently high alpha and in fact outperform the vast majority of factor based funds. So we must admit that even with all the research that has gone into factor investing we are still working from and drawing our conclusions from a knowledge base that is imperfect. Not only imperfect but constantly changing as new factors appear (QUAL, Low Vol,) while old factors are being discredited (LCV, Small). An optimal factor based portfolio chosen today may in 10 years be discredited as new papers driven by the purveyors of funds and academics desperately trying to publish something new.

When a smart beta or factor based fund or etf fails to outperform it is often ascribed to negative alpha, or in the case of SCV, lack of screening for negative MOM, or positive quality, profitability, etc.. You can always set up a multi-factor based strategy that with 20/20 hindsight, defines an outperforming strategy over a given past time period. The question is will that same mix outperform going forward? I am skeptical that it will. It is this fact plus my belief that factor returns are very likely to diminish or disappear in the future now that professionals are arbitraging them away, that makes it easier for me personally to hold onto TSM than bets (make no mistake about it, it is a bet) on SCV or MOM or smart beta.

Garland Whizzer
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