Value Factor Investing is not Value Investing

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Longtermgrowth
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Re: Value Factor Investing is not Value Investing

Post by Longtermgrowth » Wed Sep 06, 2017 11:08 pm

snarlyjack wrote:
Wed Sep 06, 2017 8:32 am
Longtermgrowth,

Thank you that is very good advice.

I was 20 years old when my Mom died (I' am now 23 years old).
When I started out I knew I didn't want to pay any commissions
so that left me with Fidelity or Vanguard. After studying the difference
between companies I picked Vanguard. One of the best decisions
of my life.

I picked the High Dividend Yield Index Fund because of the
big blue chip stocks in the fund that pay a dividend. Larry Swedkie
talked me into the Total Stock Market Fund for about a month
then I switched back to High Dividend Yield Index due to the stocks
in the fund. After further research I ended up 50% in High Dividend
Index & 50% in Dividend Appreciation Index. That is where I' am at now.
The stocks in those 2 funds are excellent. By adding Small Cap. Value
would increase the risk. Smaller stocks are way more volatile than larger
stocks. It was just a thought. I know some people like the SCV fund.

In my time of need the Bogleheads have been great. I have received
numerous e-mails from Taylor Larimore helping me. Plus, other
individuals at Bogleheads have e-mailed me. Plus, lot's
of conversations in the blogs. I consider finding the Bogleheads a
"God send from my Mom". As far as I' am concerned the Bogleheads is
the best financial forum out there & my part time home.

Longtermgrowth, once again thank you for your excellent advice!
In the Wiki there's talk about an investment policy statement: https://www.bogleheads.org/wiki/Investm ... _statement. It helps some to put everything in writing to stay the course. If you do add SCV at some point, I'm sure you've already read that it can underperform for long periods of time, then have bursts of outperformance: tracking error. If you believe in the small value premium enough to go with it in the first place, it's imperative to stay the course so as not to lock in what could be a significant loss switching out of it during underperformance vs your other funds.

I understand what you mean about Bogleheads. I would quite possibly have a chunk of things in a variable annuity and another chunk in high expense ratio funds with a 1.7+% AUM fee on top of that, as a result of being pressured to make up my mind, while still in shock after the loss of my Mom, if not for this site.

If you have your mind made up on SCV, I would recommend reading Mr. Swedroe's book "Your Complete Guide To Factor-Based Investing" before implementing anything. :beer

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Re: Value Factor Investing is not Value Investing

Post by aegis965 » Thu Sep 07, 2017 2:35 am

packer16 wrote:
Thu Aug 31, 2017 7:15 am
I think there is some confusion on what value factor investing is and is not. Value factor investing is a trading strategy based upon buying stocks the market attributes low multiples to due to in most part to their high leverage and low margins (reflecting a poor competitive position) across a wide spectrum of securities. This is many ways is the opposite of value investing. Value investing is selecting securities that trade a significant discount to their estimated intrinsic value using conservative assumptions. This value can be more easily estimated for stock that do not have the characteristics of value factor stocks. As a matter of fact, may value investors will not even try to value value factor stocks because their values are so uncertain. I would characterize value factor stocks as crappy stocks in part due to the above characteristics and in part due to the lack of due diligence and relying on diversification to protect the investor from mistakes in selection. So value investing is a exclusive process, rejecting most securities except those who sell at a discount, and value factor investing in inclusive process, including all securities that have high value factor values. Also note value investing is dependent on only a few securities selling at a discount to intrinsic value while value factor investing is dependent upon a more broad base systematic effect occurring. IMO based upon markets becoming more efficient over time specific discounts to intrinsic value are more likely than broad based systematic effects occurring.
[. . .]
I think understanding the difference between value investing & value factor investing is key because they are not the same thing. Value investing properly implemented can provide returns in excess of the average value factor investing IMO can not as I view value factor investing as sector investing and economically should not result in excess returns over time as it is easily implementable and its risks can be diversified away.
If I understand correctly, you classified high-conviction, concentrated, quality/moat-aware stock picking, i.e. the Buffett camp, as value investing, and mechanical/quantitative value strategy of buying statistically undervalued securities, i.e. the Graham camp, as Fama/French value factor investing. This classification IMO has some issues. While it is true that every quantitative strategy runs the risk of being arbitraged away, in this sense quant value is identical to value factor investing, their implementation and outcome could be world apart. Quant value could be a long-short factor portfolio, it could also be a high-octane active strategy that has statistically significant alpha and insignificant value factor loading. Buying a 20-stock basket of extremely undervalued distressed securities, or crappy stocks, to use your description, selected through quantitative method, that are 99% away from their historical high, posed for long-term momentum reversal, for example. The majority would be comfortable to have a SCV tilt or hold an AQR value fund, but I doubt many would want to hold the said portfolio with possible massive outperformance.
"Value investing is at its core the marriage of a contrarian streak and a calculator." —Seth Klarman

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Re: Value Factor Investing is not Value Investing

Post by nisiprius » Thu Sep 07, 2017 11:46 am

Park wrote:
Thu Aug 31, 2017 8:47 am

However, I think I may be able to value factor invest. Why be interested in this inferior form of investing? My greatest fear as an investor is a secular bear market. The data I"ve seen is consistent with value factor investing being able to mitigate that risk.
And how well would that have worked in 2008-2009? Let's consider Vanguard Total Stock Market Index Fund to be the "factor-free fund." Morningstar considers it to be 72% large-cap, 19% mid-cap, 9% small-cap. That will be Portfolio 1.

Now let's compare it with "value factor" funds with the same cap-size profile.

We'll use Vanguard's large-cap value, mid-cap value, and small-cap value funds, 72%, 19%, 9% respectively, as Portfolio 2, and then, since some factor advocates consider Vanguard's "factor" funds to be inferior to DFA's, DFLVX (DFA US Large-Cap Value I) and DFSVX (DFA US Small-Cap Value I).

DFA doesn't offer a mid-cap fund. Morningstar considers DFLVX to be 75% large-cap, 26% mid-cap, 0% small-cap; and DFSVX to be 0% large-cap, 4% mid-cap, and, oh, 96% small-cap. A little work with Excel suggests that 92% DFLVX, 8% DFSVX is fairly similar to Total Stock in capitalization profile, 69% large-cap, 24.2% mid-cap, 7.7% small-cap.

Source

Image

There is not the slightest bit of support here for the idea that the value factor had any important effect in minimizing the effect of a bear market. My summary would be that these three portfolios were virtually identical--and that all of the very small differences that occurred are in favor of Total Stock and against the value tilt. Total Stock had a higher return, lower volatility, and--most relevant here--a smaller drawdown than the value tilted portfolios. Not that the difference between a 48% decline (Total Stock), a 50% decline (value-tilted portfolio using Vanguard funds), and a 55% decline (value-tilted portfolio using DFA funds) amounts to all that much, but the differences are all in the wrong direction. Furthermore, notice that the greatest drawdown is seen in the DFA portfolio, which is interesting because DFA funds have heavier loadings on the value factor than Vanguard's.
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Re: Value Factor Investing is not Value Investing

Post by snarlyjack » Thu Sep 07, 2017 3:21 pm

Nisiprius,

I totality agree with you.
I would like to add this to the conversation.
Both of these Vanguard funds are excellent.

When I look at Vanguard Total Stock Market Index Fund &
Vanguard High Dividend Yield Index Fund they are within "hairs"
of each other over a 10 year period. Like $300. difference.
And, I think that is due to the admiral shares of the TSM Fund.

The Total Stock Market dividend is 1.8%
The High Dividend Yield Index dividend is 3.0%
Let's say I have $1.0 Million in my fund.
$1.0 Million x 1.8% = $18,000 year, to live on. (Total Stock Market)
$1.0 Million x 3.0% = $30,000 year, to live on. (High Dividend Yield)

My hope is to someday have a $1.0 Million portfolio or more. In my
mind it is easier to live on $30,000. per year instead of $18,000 per year.
My example is not using factors at all, just practical livability. I think
it is all about the big blue chip stocks & livability.

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Re: Value Factor Investing is not Value Investing

Post by aegis965 » Thu Sep 07, 2017 7:46 pm

nisiprius wrote:
Thu Sep 07, 2017 11:46 am
Park wrote:
Thu Aug 31, 2017 8:47 am

However, I think I may be able to value factor invest. Why be interested in this inferior form of investing? My greatest fear as an investor is a secular bear market. The data I"ve seen is consistent with value factor investing being able to mitigate that risk.
There is not the slightest bit of support here for the idea that the value factor had any important effect in minimizing the effect of a bear market. My summary would be that these three portfolios were virtually identical--and that all of the very small differences that occurred are in favor of Total Stock and against the value tilt. Total Stock had a higher return, lower volatility, and--most relevant here--a smaller drawdown than the value tilted portfolios. Not that the difference between a 48% decline (Total Stock), a 50% decline (value-tilted portfolio using Vanguard funds), and a 55% decline (value-tilted portfolio using DFA funds) amounts to all that much, but the differences are all in the wrong direction. Furthermore, notice that the greatest drawdown is seen in the DFA portfolio, which is interesting because DFA funds have heavier loadings on the value factor than Vanguard's.
Value factor is pro-cyclical, so you should expect it to perform badly in a downturn. However, after that large 2008-2009 drawdown, you can see the DFA portfolio slightly outperforming Vanguard portfolios. I refer to this study:
Value strategies exhibit asymmetric betas: a large and positive up-market beta when the contemporaneous market excess returns are positive, and a small or negative down-market beta when the contemporaneous market excess returns are zero or negative. Value strategies also exhibit time-varying betas: after a string of good market returns, value has a small negative bull-market beta. After a string of poor market returns, value has a large positive bear-market beta. Asymmetric betas and time-varying betas are also found for international equity-value strategies, and to a lesser extent, for three non-equity-value strategies.
I should add that DFA added profitability screen in 2015. Since stocks that have both value and profitability characteristics tend to be low-risk, we should expect their funds to be less pro-cyclical and less a high beta deep value play going forward. I should also add that I don't expect DFA or other smart beta/factor products, which sacrifice factor exposure for capacity, to perform much differently than plain vanilla Vanguard funds. And because of that, I don't think it is fair to draw conclusion of factor investing from mass-market, high-capacity smart beta/factor products.
"Value investing is at its core the marriage of a contrarian streak and a calculator." —Seth Klarman

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Re: Value Factor Investing is not Value Investing

Post by avalpert » Thu Sep 07, 2017 9:21 pm

snarlyjack wrote:
Thu Sep 07, 2017 3:21 pm
Nisiprius,

I totality agree with you.
I would like to add this to the conversation.
Both of these Vanguard funds are excellent.

When I look at Vanguard Total Stock Market Index Fund &
Vanguard High Dividend Yield Index Fund they are within "hairs"
of each other over a 10 year period. Like $300. difference.
And, I think that is due to the admiral shares of the TSM Fund.

The Total Stock Market dividend is 1.8%
The High Dividend Yield Index dividend is 3.0%
Let's say I have $1.0 Million in my fund.
$1.0 Million x 1.8% = $18,000 year, to live on. (Total Stock Market)
$1.0 Million x 3.0% = $30,000 year, to live on. (High Dividend Yield)

My hope is to someday have a $1.0 Million portfolio or more. In my
mind it is easier to live on $30,000. per year instead of $18,000 per year.
My example is not using factors at all, just practical livability. I think
it is all about the big blue chip stocks & livability.
No, no, no. Those total returns assume reinvested dividends - the only thing the higher dividend rate got you was higher taxes. If you live off of 2% from the High Dividend Yield fund you will just have less money than living off of 1.8% from the Total Stock Market - and higher expenses.

That your mind focuses on living off of the dividends is causing you to make bad decisions - so train your mind to focus on what actually matters, total returns and portfolio withdrawal rate.

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Re: Value Factor Investing is not Value Investing

Post by snarlyjack » Thu Sep 07, 2017 10:12 pm

Aegis965,

I read your study that you enclosed, Thank you.
(It was a very mathematical & academic study).

That said, Their are a couple of points I would like to point out.
1). We are investing in Mutual Funds so the analysis is different.
2). It is extremely hard for us to use long/short portfolio's.
3). We are mostly long term buy & hold investors, not timing the markets.

Their are 3 funds that we are "kind of" looking at:
1). Total Stock Market Index fund....10.88 YTD%....1.86% Dividend Yield.
2). High Dividend Yield Index Fund....6.23%YTD%....3.00% Dividend Yield.
3). Value Index Fund.....................5.50%YTD%....2.54% Dividend Yield.

We would be looking for a long term, buy & hold investment. That hopefully
pay's a dividend, using Vanguard Mutual Funds with a low ER (expense ratio).

What I' am looking for is a excellent fund that I can invest in for the next 50-60
years and achieve good returns, be able to "live" off the fund, with a low ER.

When it's all said & done I believe what Jack Bogle said: "Expenses matter
a lot" & "Buy & hold for the very long term" & "Buy the haystack". I think "factor"
investing in a index fund would sacrifice the whole strategy, given the above restrictions.

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Re: Value Factor Investing is not Value Investing

Post by Longtermgrowth » Thu Sep 07, 2017 11:56 pm

snarlyjack wrote:
Thu Sep 07, 2017 10:12 pm
When it's all said & done I believe what Jack Bogle said: "Expenses matter
a lot" & "Buy & hold for the very long term" & "Buy the haystack". I think "factor"
investing in a index fund would sacrifice the whole strategy, given the above restrictions.
Essentially you are factor investing with the High Dividend and Dividend Appreciation funds. One focuses on value, the other on quality/growth.
The value premium is less for large cap funds, so your self created blend of Total Stock Index may or may not outperform simply holding Vanguard Total Stock Index moving forward.

Don't forget that your funds have to outperform enough to overcome the higher expense ratios and tax drag vs Total Stock Index.
There really is no difference between selling a share here or there, while holding Total Stock Index, to match the High Dividend Index's distributions, if they both have the same expected return going forward with dividends reinvested (except for the tax drag while reinvesting)...

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Re: Value Factor Investing is not Value Investing

Post by Random Walker » Fri Sep 08, 2017 12:46 am

See the Larry Swedroe 9/8/17'article posted above on "Deep Value"

Dave

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Re: Value Factor Investing is not Value Investing

Post by Longtermgrowth » Fri Sep 08, 2017 3:40 am

Random Walker wrote:
Fri Sep 08, 2017 12:46 am
See the Larry Swedroe 9/8/17'article posted above on "Deep Value"

Dave
Looks interesting. Thought I would add a link to the thread for those that can't find it easily later on: viewtopic.php?f=10&t=227248&newpost=3524205

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Re: Value Factor Investing is not Value Investing

Post by nisiprius » Fri Sep 08, 2017 5:35 am

I am continuing to address Park's hope that
Park wrote:My greatest fear as an investor is a secular bear market. The data I"ve seen is consistent with value factor investing being able to mitigate that risk.
Here, I've charted the cumulative growth of $10,000, with dividends reinvested, over the period 1927 through 1950, which includes two 7-year secular bear markets back-to-back.

"Large-cap (SBBI)" is data from the SBBI Classic Yearbook, which is the S&P 500 since 1957 (not shown) and the closest approximation to the S&P 500 before that. "Large-cap value (Fama-French)" is from the Ken French online data library, and is calculated from the "B/H" portfolio data. I started from "start of data," 1927 in the case of Fama-French, because I thought that was more objective than intentionally starting at 1929 at the peak of the mania.

Image

To my eye, I see no support for the idea that the value factor is protective in a secular bear market. The drawdown is (much) larger, and the duration is just as long, for value stocks.

Here, we have small-cap versus small-cap value, from the same sources--probably an unrealistic thing to look at since small-cap and small-cap value weren't very investable during that time period--and my eyeball summary is that they are about the same and that there's no evidence of any strong protective effect. However, if you think that you would have slept much better with a 69% decline (small-cap value, 1927 to 1932) than a 76% decline (small-cap, 1927 to 1933) that is, of course, your personal judgement that nobody can argue with.

Image
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Re: Value Factor Investing is not Value Investing

Post by nisiprius » Fri Sep 08, 2017 5:47 am

aegis965 wrote:
Thu Sep 07, 2017 7:46 pm
nisiprius wrote:
Thu Sep 07, 2017 11:46 am
...There is not the slightest bit of support here for the idea that the value factor had any important effect in minimizing the effect of a bear market.
...Value factor is pro-cyclical, so you should expect it to perform badly in a downturn.
I was addressing Park's stated belief or hope that the value factor would mitigate the risk of a secular bear market.
I should also add that I don't expect DFA or other smart beta/factor products, which sacrifice factor exposure for capacity, to perform much differently than plain vanilla Vanguard funds. And because of that, I don't think it is fair to draw conclusion of factor investing from mass-market, high-capacity smart beta/factor products.
I should expect that if the value factor has some particular behavior, you should be able to see it plainly to the eyeball in "high-capacity" mutual funds. The Vanguard and the DFA funds do have a substantial loading on that factor, and do fall in the Morningstar style box they are supposed to fall in--even if there may be better??? funds that have a higher loading.

All of this stuff about "you didn't see the effect of [factor X] because Vanguard's funds are icky poo" seems like nonsense to me. There is caffeine in all coffee, be it Dunkin' Donuts, Starbucks, or Pele Plantations Single-Estate 100% Kona, and they will all wake you up (or interfere with your sleep), even if you need to drink more of the Dunkin' Donuts to get the same effect.

Also, I'm surprised that you disparage the DFA funds since they are often cited as being suitable for serious factor investors, and that you categorize them as "mass-market" since they are not available to an individual investor buying directly from a brokerage.

But since you describe both Vanguard and DFA funds as "mass-market, high-capacity" funds, please name the mutual funds that you think would be suitable to look at in a comparison of the kind I am making.
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Re: Value Factor Investing is not Value Investing

Post by Random Walker » Fri Sep 08, 2017 7:25 am

Nisiprius wrote
All of this stuff about "you didn't see the effect of [factor X] because Vanguard's funds are icky poo" seems like nonsense to me. There is caffeine in all coffee, be it Dunkin' Donuts, Starbucks, or Pele Plantations Single-Estate 100% Kona, and they will all wake you up (or interfere with your sleep), even if you need to drink more of the Dunkin' Donuts to get the same effect.
This analogy is a good one, but misses an important point. The point of Factor investing is to DIVERSIFY across factors. Most of out portfolios are already super heavy loaded on market beta. To gain a certain factor tilt, we need more of a fund with less factor exposure than we do of a more concentrated fund with deeper factor exposure. That means we need less additional market beta exposure to gain the desired factor tilt with the more concentrated fund. Drinking more of the weaker coffee to gain the same amount of caffeine exposes the drinker to more of all the other stuff in coffee.
In general a more concentrated fund will be more expensive than a less concentrated one, but the investor will need less of the more expensive fund, and less overall exposure to market beta, to obtain the same factor tilt. It's not cost that matters as much as it is cost per unit value added.

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Re: Value Factor Investing is not Value Investing

Post by Seasonal » Fri Sep 08, 2017 7:27 am

We can easily identify value factor investors. They buy stocks that are cheap relative to defined metrics - low p/e, low p/b, etc.

How do we identify value investors? Name or Morningstar classification? Jack Bogle was heavily criticized by value factor investors (such as Larry Swedroe on this board) for using that approach, an approach that led him to conclude value investing was not a useful pursuit in https://www.vanguard.com/bogle_site/sp20020626.html

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Re: Value Factor Investing is not Value Investing

Post by aegis965 » Fri Sep 08, 2017 9:07 am

nisiprius wrote:
Fri Sep 08, 2017 5:47 am
All of this stuff about "you didn't see the effect of [factor X] because Vanguard's funds are icky poo" seems like nonsense to me. There is caffeine in all coffee, be it Dunkin' Donuts, Starbucks, or Pele Plantations Single-Estate 100% Kona, and they will all wake you up (or interfere with your sleep), even if you need to drink more of the Dunkin' Donuts to get the same effect.
I'm not denying there is caffeine in all coffee, and coffee more or less have the same effect. What I'm saying is that one shouldn't draw the conclusion that caffeine won't cause heart problems when taken with amphetamines just because they saw someone drinking watery americano and taking amphetamines. I'm not selling any brand of coffee, just saying Dunkin' Donuts, Starbucks, and the like are not equal to caffeine. How much water is in you add to your coffee matters. If there's so much water that its effect is close to nothing to you, what's the use? Just safe your money and drink water. I brew coffee at home because I hate watery americano and love me a cup of strong, potent espresso.
"Value investing is at its core the marriage of a contrarian streak and a calculator." —Seth Klarman

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Re: Value Factor Investing is not Value Investing

Post by privatefarmer » Fri Sep 08, 2017 9:14 am

Seasonal wrote:
Fri Sep 08, 2017 7:27 am
We can easily identify value factor investors. They buy stocks that are cheap relative to defined metrics - low p/e, low p/b, etc.

How do we identify value investors? Name or Morningstar classification? Jack Bogle was heavily criticized by value factor investors (such as Larry Swedroe on this board) for using that approach, an approach that led him to conclude value investing was not a useful pursuit in https://www.vanguard.com/bogle_site/sp20020626.html
thanks for posting the tell tale chart article, always a good read.

I used to "slice and dice" to small/value, due to the overwhelming amount of evidence of it working in the past. Now, I ask myself, "is there any reason why institutional investors won't siphon up any excess return provided by [name your factor]"? Why would hedge funds not slice and dice themselves, for example, and thus drive up the valuation of small/value stocks? They would, of course, if they thought there was any excess return to be had.

It simply cannot be that easy to beat everyone else (the market), unless you get lucky. But betting on a strategy that differs from the market return essentially has a 50% chance of failure, before costs.

It's disappointing to think that we may not be able to do better than ~5% real return in equities over the long haul but that's what global equities have given historically and I just don't see why we can expect to earn any more. We are best to just take it as is, save more, work longer, and maybe hold more equities.

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Re: Value Factor Investing is not Value Investing

Post by triceratop » Fri Sep 08, 2017 10:01 am

privatefarmer wrote:
Fri Sep 08, 2017 9:14 am
Seasonal wrote:
Fri Sep 08, 2017 7:27 am
We can easily identify value factor investors. They buy stocks that are cheap relative to defined metrics - low p/e, low p/b, etc.

How do we identify value investors? Name or Morningstar classification? Jack Bogle was heavily criticized by value factor investors (such as Larry Swedroe on this board) for using that approach, an approach that led him to conclude value investing was not a useful pursuit in https://www.vanguard.com/bogle_site/sp20020626.html
thanks for posting the tell tale chart article, always a good read.

I used to "slice and dice" to small/value, due to the overwhelming amount of evidence of it working in the past. Now, I ask myself, "is there any reason why institutional investors won't siphon up any excess return provided by [name your factor]"? Why would hedge funds not slice and dice themselves, for example, and thus drive up the valuation of small/value stocks? They would, of course, if they thought there was any excess return to be had.

It simply cannot be that easy to beat everyone else (the market), unless you get lucky. But betting on a strategy that differs from the market return essentially has a 50% chance of failure, before costs.

It's disappointing to think that we may not be able to do better than ~5% real return in equities over the long haul but that's what global equities have given historically and I just don't see why we can expect to earn any more. We are best to just take it as is, save more, work longer, and maybe hold more equities.
I believe Seasonal's goal was to point out that Bogle's "good read" may be misleading due to methodology, by classifying as value due to name/M* category rather than actual adherence to value investing. In other words, if the Triceratop Value Fund Premium Share Class invests in high-growth stocks, like Tesla, because I believe they are undervalued relative to some intrinsic value and Tesla underperforms, why should that ding the idea of value-factor investing? Tesla is not a value stock.
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Re: Value Factor Investing is not Value Investing

Post by Seasonal » Fri Sep 08, 2017 10:22 am

triceratop wrote:
Fri Sep 08, 2017 10:01 am
I believe Seasonal's goal was to point out that Bogle's "good read" may be misleading due to methodology, by classifying as value due to name/M* category rather than actual adherence to value investing. In other words, if the Triceratop Value Fund Premium Share Class invests in high-growth stocks, like Tesla, because I believe they are undervalued relative to some intrinsic value and Tesla underperforms, why should that ding the idea of value-factor investing? Tesla is not a value stock.
My main point was that it's not clear what criteria we should use to identify value funds (as opposed to value factor funds). If the criteria are name or Morningstar classification or some such, then Bogle's methodology shows that these funds don't do better than total market investing. Value factor investing has clear criteria and its advocates don't want it confused with value investing, at least not as identified by Bogle.

So, for the advocates of value investing, how does one identify value funds? For that matter, how should one pick an appropriate fund to invest in?

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Re: Value Factor Investing is not Value Investing

Post by nedsaid » Fri Sep 08, 2017 11:18 am

nisiprius wrote:
Fri Sep 08, 2017 5:47 am

All of this stuff about "you didn't see the effect of [factor X] because Vanguard's funds are icky poo" seems like nonsense to me. There is caffeine in all coffee, be it Dunkin' Donuts, Starbucks, or Pele Plantations Single-Estate 100% Kona, and they will all wake you up (or interfere with your sleep), even if you need to drink more of the Dunkin' Donuts to get the same effect.
Yes, this is a frustration of those who Small/Value tilt and Nisiprius stated it well. And for your information, I invest in the "icky poo" Vanguard Small Cap Value Index EFT. I got a chuckle out of that.
A fool and his money are good for business.

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Re: Value Factor Investing is not Value Investing

Post by packer16 » Wed Sep 13, 2017 3:10 pm

betablocker wrote:
Sun Sep 03, 2017 4:03 pm
packer16 wrote:
Sun Sep 03, 2017 2:49 pm
What I am trying to convey with this thread that what Buffet did in stock selection had nothing to do with factors. To conflate the two is what good factor marketers have done and some have taken the whole thing hook, line & sinker. Factors are historical artifacts not a stock selection system although some would like to portray it that way. Value investing is as adaptive as the market itself is so to compare it to non-adaptive factors is IMO like comparing apples & oranges.

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The evidence indicates that your assertion on the thread isn't the case. Buffett (and Fisher and Graham before him) figured out that those factors work. Their individual stock selection skill came almost solely from that. Ad hominem criticism of people as "marketers" seems beside the point. What evidence would convince you?
To say that Buffett and others figured out the factors & used them is nice story telling but incorrect. Buffett selected stocks that did better than the market in a method fully described by himself that has nothing to do with factors. The academics analyzed the results using their statistical factors and showed a correlation between the factors & the stocks Buffet selected. What is forgotten is the factors would have selected many more securities than Buffett ever did. Buffett is pretty frank & if he did use factor he would say so. You also have to have alot of gumption to believe the academics who studied Buffet more the Buffet himself when comes to his stock selection methodology. Again this is marketing & the factor folks saying they have the answer when they do not. I do not have a problem with factors, as they are useful tools, but when they are promoted as the answer to value investing is when I have a problem. A proof of his lack of factor usage is the forward looking performance of factor funds versus his own selections.

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Re: Value Factor Investing is not Value Investing

Post by packer16 » Wed Sep 13, 2017 3:29 pm

aegis965 wrote:
Thu Sep 07, 2017 2:35 am
packer16 wrote:
Thu Aug 31, 2017 7:15 am
I think there is some confusion on what value factor investing is and is not. Value factor investing is a trading strategy based upon buying stocks the market attributes low multiples to due to in most part to their high leverage and low margins (reflecting a poor competitive position) across a wide spectrum of securities. This is many ways is the opposite of value investing. Value investing is selecting securities that trade a significant discount to their estimated intrinsic value using conservative assumptions. This value can be more easily estimated for stock that do not have the characteristics of value factor stocks. As a matter of fact, may value investors will not even try to value value factor stocks because their values are so uncertain. I would characterize value factor stocks as crappy stocks in part due to the above characteristics and in part due to the lack of due diligence and relying on diversification to protect the investor from mistakes in selection. So value investing is a exclusive process, rejecting most securities except those who sell at a discount, and value factor investing in inclusive process, including all securities that have high value factor values. Also note value investing is dependent on only a few securities selling at a discount to intrinsic value while value factor investing is dependent upon a more broad base systematic effect occurring. IMO based upon markets becoming more efficient over time specific discounts to intrinsic value are more likely than broad based systematic effects occurring.
[. . .]
I think understanding the difference between value investing & value factor investing is key because they are not the same thing. Value investing properly implemented can provide returns in excess of the average value factor investing IMO can not as I view value factor investing as sector investing and economically should not result in excess returns over time as it is easily implementable and its risks can be diversified away.
If I understand correctly, you classified high-conviction, concentrated, quality/moat-aware stock picking, i.e. the Buffett camp, as value investing, and mechanical/quantitative value strategy of buying statistically undervalued securities, i.e. the Graham camp, as Fama/French value factor investing. This classification IMO has some issues. While it is true that every quantitative strategy runs the risk of being arbitraged away, in this sense quant value is identical to value factor investing, their implementation and outcome could be world apart. Quant value could be a long-short factor portfolio, it could also be a high-octane active strategy that has statistically significant alpha and insignificant value factor loading. Buying a 20-stock basket of extremely undervalued distressed securities, or crappy stocks, to use your description, selected through quantitative method, that are 99% away from their historical high, posed for long-term momentum reversal, for example. The majority would be comfortable to have a SCV tilt or hold an AQR value fund, but I doubt many would want to hold the said portfolio with possible massive outperformance.
The main difference IMO is the underlying assumptions of market efficiency & analysis performed. The value factor is dependent upon a cross sectional effect across a wide number of securities, a rare event IMO in today's ever more efficient market. The value investing philosophy is dependent upon a smaller number of securities in unusual circumstances & places being mispriced. I think the later is more likely to be the case then the former.

As to analysis performed, value investing includes understanding the industry where the valuation bet is being made including non-qunatifiable factors where as factor investing is based upon how much of an ever changing value factor is associated with a security. The interesting thing about factor investing is that its implementation appears to be as varied a value investing itself as the securities of value factor funds do not appear to be the same or have similar weights. With a varied implementation, how do you know you are going to capture the ever changing value factor is the stocks held?

Your point about holding what considered non-risk averse portfolios is another good point. In order to beat the market you have to invest different from the market & be correct & the easiest way to do this is to concentrate in your best ideas. The folks that I know who have beat the market did it with non-diversified portfolios that most would run away from.

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Re: Value Factor Investing is not Value Investing

Post by inittowinit » Wed Sep 13, 2017 3:42 pm

Simplegift wrote:
Thu Aug 31, 2017 8:51 am
packer16 wrote:
Thu Aug 31, 2017 7:15 am
I think understanding the difference between value investing & value factor investing is key because they are not the same thing.
Agreed. There is often confusion in Forum discussions between passive "value factor tilting" (ala Fama-French) and active "fundamental value investing" (ala Ben Graham). But these are two completely different investing approaches:
  • To Fama-French, value is determined strictly by a database screen that sorts companies by book value and price. It's assumed that no one can do better than average at discerning how well a company is likely to perform in the future. Because it involves simple database screens, value factor investing lends itself to a mostly passive, index-like approach.
  • In contrast, Ben Graham's fundamental analysis values specific businesses on a bottom-up basis. The value investor’s goal is to estimate a company’s future cash flows and buy it when its share price is trading significantly lower than the intrinsic value implied by these cash flows. It's the epitome of active stock picking.
This is not to make any judgement about the efficacy of these two approaches, but just to observe they are quite different.
Thank you for this breakdown, I found it very helpful.

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Re: Value Factor Investing is not Value Investing

Post by betablocker » Thu Sep 14, 2017 11:49 am

packer16 wrote:
Wed Sep 13, 2017 3:10 pm
betablocker wrote:
Sun Sep 03, 2017 4:03 pm
packer16 wrote:
Sun Sep 03, 2017 2:49 pm
What I am trying to convey with this thread that what Buffet did in stock selection had nothing to do with factors. To conflate the two is what good factor marketers have done and some have taken the whole thing hook, line & sinker. Factors are historical artifacts not a stock selection system although some would like to portray it that way. Value investing is as adaptive as the market itself is so to compare it to non-adaptive factors is IMO like comparing apples & oranges.

Packer
The evidence indicates that your assertion on the thread isn't the case. Buffett (and Fisher and Graham before him) figured out that those factors work. Their individual stock selection skill came almost solely from that. Ad hominem criticism of people as "marketers" seems beside the point. What evidence would convince you?
To say that Buffett and others figured out the factors & used them is nice story telling but incorrect. Buffett selected stocks that did better than the market in a method fully described by himself that has nothing to do with factors. The academics analyzed the results using their statistical factors and showed a correlation between the factors & the stocks Buffet selected. What is forgotten is the factors would have selected many more securities than Buffett ever did. Buffett is pretty frank & if he did use factor he would say so. You also have to have alot of gumption to believe the academics who studied Buffet more the Buffet himself when comes to his stock selection methodology. Again this is marketing & the factor folks saying they have the answer when they do not. I do not have a problem with factors, as they are useful tools, but when they are promoted as the answer to value investing is when I have a problem. A proof of his lack of factor usage is the forward looking performance of factor funds versus his own selections.

Packer
I agree that factors (as defined by Fama and French) are different than the selection criteria that Buffett has employed but it's like the difference between a doctor using a substance to treat patients because s/he has seen it work and a pharmaceutical that has undergone trials and testing. The substance might be refined a bit but it's still the same thing. Where I would agree is that Buffett is flexible and always learning. Maybe some of the things he's doing now don't fit the traditional criteria. It's just that most of his historic outperformance is explained by a few criteria that are the value, quality, etc. factors.

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Re: Value Factor Investing is not Value Investing

Post by aegis965 » Thu Sep 14, 2017 6:21 pm

Buffett does like A LOT of special situations, market timing, leveraging, derivatives (LEAPS, warrant, and whatnot,) and has ALWAYS been holding concentrated positions, sometimes betting on a stock with 40% of his portfolio. IMO saying his return can be explained by factors is one thing, saying investors can replicate his return by factor investing is another, which is oftentimes the pitch of factor "marketers" and advocates.
"Value investing is at its core the marriage of a contrarian streak and a calculator." —Seth Klarman

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Re: Value Factor Investing is not Value Investing

Post by packer16 » Thu Sep 14, 2017 8:38 pm

betablocker wrote:
Thu Sep 14, 2017 11:49 am
packer16 wrote:
Wed Sep 13, 2017 3:10 pm
betablocker wrote:
Sun Sep 03, 2017 4:03 pm
packer16 wrote:
Sun Sep 03, 2017 2:49 pm
What I am trying to convey with this thread that what Buffet did in stock selection had nothing to do with factors. To conflate the two is what good factor marketers have done and some have taken the whole thing hook, line & sinker. Factors are historical artifacts not a stock selection system although some would like to portray it that way. Value investing is as adaptive as the market itself is so to compare it to non-adaptive factors is IMO like comparing apples & oranges.

Packer
The evidence indicates that your assertion on the thread isn't the case. Buffett (and Fisher and Graham before him) figured out that those factors work. Their individual stock selection skill came almost solely from that. Ad hominem criticism of people as "marketers" seems beside the point. What evidence would convince you?
To say that Buffett and others figured out the factors & used them is nice story telling but incorrect. Buffett selected stocks that did better than the market in a method fully described by himself that has nothing to do with factors. The academics analyzed the results using their statistical factors and showed a correlation between the factors & the stocks Buffet selected. What is forgotten is the factors would have selected many more securities than Buffett ever did. Buffett is pretty frank & if he did use factor he would say so. You also have to have alot of gumption to believe the academics who studied Buffet more the Buffet himself when comes to his stock selection methodology. Again this is marketing & the factor folks saying they have the answer when they do not. I do not have a problem with factors, as they are useful tools, but when they are promoted as the answer to value investing is when I have a problem. A proof of his lack of factor usage is the forward looking performance of factor funds versus his own selections.

Packer
I agree that factors (as defined by Fama and French) are different than the selection criteria that Buffett has employed but it's like the difference between a doctor using a substance to treat patients because s/he has seen it work and a pharmaceutical that has undergone trials and testing. The substance might be refined a bit but it's still the same thing. Where I would agree is that Buffett is flexible and always learning. Maybe some of the things he's doing now don't fit the traditional criteria. It's just that most of his historic outperformance is explained by a few criteria that are the value, quality, etc. factors.
I think your analogy to medicine is one folks have made & is incorrect because in medicine you are determining the cause not finding a correlation & treating on a correlation. The folks studying factors are using tools used in science which has an answer that is right pretty much all of the time. In markets you have almost the opposite situation where the factors determined via these scientific methods describe how the market was not how it is today or will be in the future. We know from the large periods of performance different from what the factor would predict that we are dealing with something different than in science.

I think a second point which is lost is that although factors can explain historic returns, trying to replicate it in an investment appears to require quite abit of judgement as to the composition & weighting of firms. This "top down" approach using correlations versus the "bottoms-up" approach of examining each firm I think has some issues of applying general concepts to securities where you do not examine the underlying cash flows which determine value. Also, IMO when you do factor investing you are stating the market has not placed the correct weight on these firms & the factors know better. I think this is a large assumption & is anti-Bogle in the aspect of the non stated Bogle principle that the market on average has it correct more than the average active manager which when you are chosing the composition & weighting of securities versus the market weight you are becoming an active manager.

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Re: Value Factor Investing is not Value Investing

Post by betablocker » Fri Sep 15, 2017 3:03 pm

We might have to agree to disagree. In my mind Buffett's genius is combining these factors with cheap leverage from insurance float then putting it in a public company structure and indoctrinating the shareholders of that company in the religion of value investing. How he gets and holds on to his money and investors is complete genius. That is a feat no one has ever accomplished and might never again accomplish. His stock picking can be immitated.

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Re: Value Factor Investing is not Value Investing

Post by Random Walker » Fri Sep 15, 2017 3:51 pm

Also, IMO when you do factor investing you are stating the market has not placed the correct weight on these firms & the factors know better. I think this is a large assumption & is anti-Bogle in the aspect of the non stated Bogle principle that the market on average has it correct more than the average active manager which when you are chosing the composition & weighting of securities versus the market weight you are becoming an active manager.
I disagree with this. I am a big efficient market believer and also a factor investor. There is a difference between one's view of the market as a whole and one's individual portfolio. Size and value can be priced perfectly efficiently in the market and still warrant tilt in an individual's portfolio. Size and value represent risk factors independent of the market factor, and whether efficiently priced by the market or not, can improve the individual's portfolio efficiency. So an efficient market that appropriately prices risk does not preclude the individual from creating a more efficient portfolio by diversifying across different types of risk.
Now with regard to behavioral factors, I have to admit that acknowledging those requires a belief that market inefficiencies exist. Personally, in constructing my portfolio, because I have more faith in risk based explanations than behavioral ones, I have placed more weight on the risk based factors. I do find the fact that there are both strong risk based and behavior based explanations for value especially compelling.

Dave

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