Small cap value vs. total market?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
livesoft
Posts: 60954
Joined: Thu Mar 01, 2007 8:00 pm

Re: Small cap value vs. total market?

Post by livesoft » Fri Jan 12, 2018 9:46 pm

Yesterday at one point IJS was up more than 2% when everything else wasn't. So I sold some shares. But what to do with the money? Well, VSS was up the least, so I used the money to buy VSS. And today VSS was up more than 1% while IJS was up less than VTI (total market).

Of course, I wouldn't be telling you this if I had not made more money than doing nothing. :twisted:

But now I am underweight US small-cap value and overweight foreign equities, so next week I will have to fix that. I hope IJS drops big-time on Tuesday morning, but I am not holding my breath.
Wiki This signature message sponsored by sscritic: Learn to fish.

Dead Man Walking
Posts: 624
Joined: Wed Nov 07, 2007 6:51 pm

Re: Small cap value vs. total market?

Post by Dead Man Walking » Sat Jan 13, 2018 2:34 am

Dead Man Walking wrote:
Fri Jan 05, 2018 10:49 pm
Will someone please show me performance statistics that show that retail small cap value mutual funds have outperformed retail small cap blend mutual funds over periods of time more than 15 years. I tilt toward small caps, but don't buy the small cap value argument. I think that the key is small caps period. Please remember that I want stats that are limited to retail mutual funds available to all investors. Academic stats that go back to 1926 are interesting; however, they are not relevant to most investors who invest in retail mutual funds. My point is that most people need information that they can apply to asset allocations in the real world. Thanks in advance to those who reply to this post.

DMW
To date, no one has accepted my challenge. I am disappointed that no one has proven me wrong.

DMW

User avatar
saltycaper
Posts: 2650
Joined: Thu Apr 24, 2014 8:47 pm
Location: The Tower

Re: Small cap value vs. total market?

Post by saltycaper » Sat Jan 13, 2018 3:04 am

Dead Man Walking wrote:
Sat Jan 13, 2018 2:34 am
Dead Man Walking wrote:
Fri Jan 05, 2018 10:49 pm
Will someone please show me performance statistics that show that retail small cap value mutual funds have outperformed retail small cap blend mutual funds over periods of time more than 15 years. I tilt toward small caps, but don't buy the small cap value argument. I think that the key is small caps period. Please remember that I want stats that are limited to retail mutual funds available to all investors. Academic stats that go back to 1926 are interesting; however, they are not relevant to most investors who invest in retail mutual funds. My point is that most people need information that they can apply to asset allocations in the real world. Thanks in advance to those who reply to this post.

DMW
To date, no one has accepted my challenge. I am disappointed that no one has proven me wrong.

DMW
Well, not the comprehensive data you're looking for, but here's two retail funds over a particular >15-year time period chosen specifically for effect. If you go back to the inception of Vanguard Small Capitalization Value Index Fund Investor Shares (VISVX), it still outperforms Vanguard Small Capitalization Index Fund Investor Shares (NAESX) to date. Since these types of retail index funds or at least passive funds haven't been around too long (early 90s?), pretty much any comparison that includes the few years after the dot-com crash is going to favor small-cap value, and any comparison omitting that period is likely to show relatively close performance.

Image
Quod vitae sectabor iter?

Dead Man Walking
Posts: 624
Joined: Wed Nov 07, 2007 6:51 pm

Re: Small cap value vs. total market?

Post by Dead Man Walking » Sat Jan 13, 2018 5:10 am

Saltycaper,

Thanks for responding. I've compared the performance of small cap funds using 15 year returns provided by Morningstar for several years. The difference between value, growth, and blend funds is usually around 1%. The difference usually depends on what segment of the market has been in favor during the recent years. My comparisons have not been limited to Vanguard Small Cap Funds. I have included DFA funds, Fidelity funds, and Vanguard Tax-managed Small Cap Fund (VTMSX). My current 15 year comparison shows the following results:

Fidelity Small Cap Discovery FSCRX 12.56%
Vanguard Tax-managed Small Cap VTSMX 12.32%
DFA Small Cap Value I DFSVX 12.05%
Vanguard Small Cap Index NAESX 11.96%
Vanguard Small Cap Growth Index VISGX 11.90%
Vanguard Small Cap Value Index VISVX 11.38%

Since growth is in vogue, the Vanguard blend and growth funds have been slightly better performers. My main point is that small cap is the relevant aspect of tilting to small caps - growth, value, or blend are choices the tilter can make. I favor blend because I think that whether growth or value is hot, I'll have acceptable performance.

DMW

Mark D
Posts: 10
Joined: Fri Jan 05, 2018 9:21 am

Re: Small cap value vs. total market?

Post by Mark D » Sat Feb 17, 2018 11:18 am

willthrill81 wrote:
Sat Jan 06, 2018 3:59 pm
Mark D wrote:
Sat Jan 06, 2018 9:09 am
willthrill81 wrote:
Fri Jan 05, 2018 9:31 pm
Mark D wrote:
Fri Jan 05, 2018 9:18 pm
willthrill81 wrote:
Fri Jan 05, 2018 4:25 pm


The gambler's fallacy does not apply to asset class returns because the returns are not random (i.e. returns are not independent of each other). RTM does indeed directly imply that returns are not independent of each other.
If by RTM we mean the well-known phenomenon cited above, how does it imply that? Say you flip a fair coin ten times and it comes up heads each time. On the eleventh toss, what is the probability that it comes up heads? 50%. That is reversion to the mean. But the outcomes of each toss are independent.

Maybe you mean something else by RTM?
"Reversion to the mean, also called regression to the mean, is the statistical phenomenon stating that the greater the deviation of a random variate from its mean, the greater the probability that the next measured variate will deviate less far. In other words, an extreme event is likely to be followed by a less extreme event."
http://mathworld.wolfram.com/ReversiontotheMean.html

Coin tosses are 'memory-less'. There is no real RTM when it comes to coin tosses because each toss is independent of the others. RTM can occur in situations where future events are dependent on past events (e.g. asset classes). As noted above, the probability of future events is dependent on prior events; this is not the case with coin tosses.
Note that what you describe in the second paragraph is not what is given in the MathWorld definition. Of course there is reversion to the mean in coin tosses. If you flip a coin ten times and it comes up heads 10 times, the expected value of the number of heads in the next batch of 10 tosses is 5. Or, as MathWorld puts it, the greater the past deviation, the greater the probability that the next deviation will be less than that extreme. But, with coin tosses, that's not because there's any memory of the previous run of tosses. It's because the mean is the most likely outcome in the first place.

My question would be what Bogle means by "reversion to the mean" or "RTM" in that 2002 talk. I think that he means it in the usual mathematical sense, one that applies to coin tosses and does not imply anything about the statistical dependence of future on past events.

RTM is not saying that doing better than average is likely to be followed by doing worse than average. That would require memory. It is saying that doing a lot better than average is likely to be followed by doing not as much different from average. That does not require memory.
If you'll carefully note the definition I quoted, you'll see that the probability of future events depends on the outcome of past events. For instance, if equity markets perform very poorly in one period and valuations drop significantly, this increases the likelihood of future returns being good (i.e. RTM). In the coin-toss situation, a string of 10 'heads' has absolutely no impact whatsoever on future tosses, so it is impossible for RTM to occur (i.e. an 'extreme' past event does not change the probability of future events).

The problem that many encounter here when it comes to stock returns, for instance, is that they believe that they are randomly distributed when they are not. Siegel pointed this out very clearly in his excellent book "Stocks for the Long Run" more than 20 years ago. Unfortunately, most Monte Carlo analyses do not incorporate mean reversion, and so they overstate the tails, both negative and positive, of long-term return distributions.
The definition you quoted doesn't imply that the events aren't independent. The website makes that clear in the phrase, "Although this phenomenon appears to violate the definition of independent events..." (my emphasis). It appears to preclude independence, but it does not.

If I win the lottery today, the chances are that, tomorrow, I won't. A less probable event is likely to be followed by a more probable event. This does not mean that the probability that I will win the lottery tomorrow depends on the outcome today.

In the sense of RTM given in the definition you quoted, it is not impossible for RTM to occur in coin tosses. If you google this, you will find any number of illustrations of reversion to the mean using that very example. There is an example in the Wikipedia article, https://en.wikipedia.org/wiki/Regressio ... d_the_mean.

User avatar
DWesterb2iz2
Posts: 57
Joined: Sun Apr 26, 2015 5:27 am

Re: Small cap value vs. total market?

Post by DWesterb2iz2 » Sat Mar 03, 2018 5:28 am

Longtermgrowth wrote:
Thu Dec 14, 2017 3:58 am
deltaneutral83 wrote:
Wed Dec 13, 2017 9:14 am
Merriman posted a podcast on SCV recently.
This one? https://paulmerriman.com/?powerpress_pinw=16819-podcast

I really enjoyed listening to that while watching the Geminid meteor shower tonight.
I liked it too. He says the phrase "Small cap valuuuue" about 10,000 times in that podcast.

Post Reply