Small Value Premium - How Do You View It?

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yarnandthread
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Re: Small Value Premium - How Do You View It?

Post by yarnandthread » Wed Jan 24, 2018 4:27 am

I view the small cap premium to be real based on many DECADES of data showing it outperforms large and mid cap.

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Re: Small Value Premium - How Do You View It?

Post by Jeff Albertson » Wed Jan 24, 2018 11:57 am

Rekenthaler’s Rule: "If the bozos know about it, it doesn’t work anymore."
ETF.com: Do you have a sense, as I do, that “factor-focused” investing is reaching some critical mass these days—and that we can see that in the behavior of the Wall Street marketing machine?

Bernstein: I think so. The bozos have jumped into the factors with both feet.
http://www.etf.com/sections/features/21 ... nopaging=1

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Re: Small Value Premium - How Do You View It?

Post by triceratop » Wed Jan 24, 2018 12:32 pm

aegis965 wrote:
Wed Jan 24, 2018 4:11 am
Somebody should start an "Equity Risk Premium - How Do You View It?" thread.
Excellent idea.
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Re: Small Value Premium - How Do You View It?

Post by nisiprius » Wed Jan 24, 2018 12:36 pm

jhfenton wrote:
Tue Jan 23, 2018 9:27 am
nisiprius wrote:
Tue Jan 23, 2018 8:49 am
d) Small-cap value stocks are exactly the kinds of stocks I am personally least interested in, and would be least likely to choose if I were picking individual stocks for a portfolio.
I am very much the opposite. If I were an active investor, my instincts would lead me very much toward highly leveraged small cap companies. They are risky and very unattractive to most people, which is why I believe there is the possibility of a persistent premium.

If not, I believe they are unlikely to fair much worse than the broader market, so I view it as an attractive tilt.
And I will again quote Eugene Fama:
...investors can decide to tilt away from [the total market] based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either. So there's a whole multi-dimensional continuum here of efficient portfolios that anybody can decide to buy that I can't quarrel with. And I have no recommendations about because I think it's totally a matter of taste. If you eat oranges and I eat apples I can't really quarrel very much with that.
You have a taste for these stocks. I don't. That's all it is. I didn't say there was anything wrong with them, I said they are the kinds of stocks I do not have a taste for, and that factors into my decision not to have a small value tilt.

[Silly wisecrack deleted by me--NP]
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Re: Small Value Premium - How Do You View It?

Post by nisiprius » Wed Jan 24, 2018 12:45 pm

yarnandthread wrote:
Wed Jan 24, 2018 4:27 am
I view the small cap premium to be real based on many DECADES of data showing it outperforms large and mid cap.
1) Please correct your verb tense: you meant to say "many decades of data showing it has outperformed large and mid cap."

2) Why do you think "many decades" are conclusive? How many decades are enough--conclusive enough to act on, anyway--and why?

3) Are you talking about risk-adjusted return, or just raw return?

4) Hey, are you actually sure about small-cap outperforming mid-cap? How sure? Cite your source for that.

Here is almost two decades of real-world data on the Vanguard Mid-Cap Index Fund (blue) and the Vanguard Small-Cap Index Fund (orange). Did the mid-cap fund beat the small-cap fund? WARNING: I cheated. I cherry-picked... in favor of the small-cap fund. I cut off a few months at the beginning. Click on the "maximum" link and you'll see what I mean.

Source
Image
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Re: Small Value Premium - How Do You View It?

Post by jhfenton » Wed Jan 24, 2018 2:00 pm

nisiprius wrote:
Wed Jan 24, 2018 12:36 pm
You have a taste for these stocks. I don't. That's all it is. I didn't say there was anything wrong with them, I said they are the kinds of stocks I do not have a taste for, and that factors into my decision not to have a small value tilt.

If you mean "I am right to like dark roast coffee and you are wrong not to like it," well... Eugene Fama...
I agree that a lot of it boils down to gathering evidence to support our personal biases. 20 years ago when I started investing, I didn't know what a "factor" was, but I had read a lot about traditional value investing. It just made sense: buying the unloved at a discount to intrinsic value.

Our other first non-401(k) investment in June 1998 was in emerging markets, toward the end (but not quite) of the Asian financial crisis. I felt like an idiot for a few months, owning emerging markets, and for a couple of years, owning small value. But, for better or worse, my natural biases were forever reinforced by late 1998-1999 in EM and 2000-2001 in small value. :sharebeer

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Re: Small Value Premium - How Do You View It?

Post by Longtermgrowth » Thu Jan 25, 2018 1:37 am

To be fair, both of the funds in the chart above are blend funds. Didn't Larry Swedroe call small growth the black hole of investing? Lottery tickets?

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Re: Small Value Premium - How Do You View It?

Post by in_reality » Thu Jan 25, 2018 2:18 am

Alexa9 wrote:
Mon Jan 22, 2018 2:24 pm
How do you look at the Small Value Premium?

- Negative: It's just random luck or an anomaly that it outperformed in the past. Large cap companies are more proven and deserve their heavier market weight status in Total Stock Market Index Fund.

/ Neutral: Believe in it somewhat but I will just tilt to it a little. Too risky to go all in. It's not that big of a premium for the added risk. There aren't many good options to invest in small value anyways.

+ Positive: Fama-French is solid proof. All-in or heavy tilt to small value. Large caps like Total Stock Market Fund (mostly large cap) are overrated and not too big to fail. Larry Barbell Type Portfolio with bonds had less volatility with equal performance. Really like the DFA small value funds.
+ Positive but I don't think long-short portfolios are a great measure for most investors (especially one's that don't include trading costs and the possibility you couldn't short particular stocks even if you wanted, per Fama-French, to). Not sure bonds will replicated past performance starting at their lows.

I believe value investing is part risk (more of it due to the higher risk of capital loss and underperformance in any give time period), part behavior (some people want stocks with less risk especially when accumulating -- this is shown by investor studies and increased value holdings with more wealth, part behavior (in that risk is by nature tough to judge - we just don't know how long the bull will go on or how bad the downturn will be and even the sum of investor guesses can be off the mark usually too optimistic in good times and too pessimistic in bad ones), and part insurance (it's not necessarily poor trading to load up on growth even if it will underperform long term - if your income isn't same) but rather some people are not in position to hold riskier assets and earn an insurance premium of sorts.

For example see research on Swedish investors: https://www.cbs.dk/files/cbs.dk/paper_laurentcalvet.pdf

Furthermore, changes in age account for half of the value ladder, while changes in human capital and financial wealth account for the most of the
remainder. Life-cycle variation in human capital and financial wealth are important determinants of value and growth investing

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Re: Small Value Premium - How Do You View It?

Post by Earl Lemongrab » Thu Jan 25, 2018 1:02 pm

nisiprius wrote:
Wed Jan 24, 2018 12:36 pm
If you mean "I am right to like dark roast coffee and you are wrong not to like it," well... Eugene Fama...
My impression is that the people who factor tilt, slice-and-dice, etc. are lot less likely to tell others they're wrong than the three-fund market-weight folks.
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Re: Small Value Premium - How Do You View It?

Post by iceport » Thu Jan 25, 2018 1:25 pm

Earl Lemongrab wrote:
Thu Jan 25, 2018 1:02 pm
nisiprius wrote:
Wed Jan 24, 2018 12:36 pm
If you mean "I am right to like dark roast coffee and you are wrong not to like it," well... Eugene Fama...
My impression is that the people who factor tilt, slice-and-dice, etc. are lot less likely to tell others they're wrong than the three-fund market-weight folks.
Interesting. My experience here has been the exact opposite, with adamant slice-and-dice advocates derisively labeling market-weight allocators as "lumpers" and implying they're somehow defective for just not seeing the light. After all, it's a lot harder for total market adherents to claim factor investors are wrong when the returns indicate otherwise. Maybe the most insistent slice-and-dicers have been toned down lately, but there's a well established pattern of thinly veiled insults being hurled at "lumpers." And the slice-and-dicers are far more likely to lose track of their verb tenses when describing back-tested market behavior.
Last edited by iceport on Thu Jan 25, 2018 1:30 pm, edited 1 time in total.
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Re: Small Value Premium - How Do You View It?

Post by triceratop » Thu Jan 25, 2018 1:29 pm

iceport wrote:
Thu Jan 25, 2018 1:25 pm
Earl Lemongrab wrote:
Thu Jan 25, 2018 1:02 pm
nisiprius wrote:
Wed Jan 24, 2018 12:36 pm
If you mean "I am right to like dark roast coffee and you are wrong not to like it," well... Eugene Fama...
My impression is that the people who factor tilt, slice-and-dice, etc. are lot less likely to tell others they're wrong than the three-fund market-weight folks.
Interesting. My experience here has been the exact opposite, with adamant slice-and-dice advocates derisively labeling market-weight allocators as "lumpers" and implying they're somehow inadequate for just not seeing the light. After all, it's a lot harder for total market adherents to claim factor investors are wrong when the returns indicate otherwise. Maybe the most insistent slice-and-dicers have been toned down lately, but there's a well established pattern of thinly veiled insults being hurled at "lumpers." And the slice-and-dicers are far more likely to lose track of their verb tenses when describing back-tested market behavior.
Such a personal description would be a personal attack in violation of forum policy, since it focuses on the person and not the idea. Such posts should be reported to the moderators.
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Earl Lemongrab
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Re: Small Value Premium - How Do You View It?

Post by Earl Lemongrab » Thu Jan 25, 2018 1:43 pm

iceport wrote:
Thu Jan 25, 2018 1:25 pm
Interesting. My experience here has been the exact opposite, with adamant slice-and-dice advocates derisively labeling market-weight allocators as "lumpers" and implying they're somehow defective for just not seeing the light.
Examples?
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Re: Small Value Premium - How Do You View It?

Post by iceport » Thu Jan 25, 2018 1:46 pm

triceratop wrote:
Thu Jan 25, 2018 1:29 pm

Such a personal description would be a personal attack in violation of forum policy, since it focuses on the person and not the idea. Such posts should be reported to the moderators.
Oh, it was never all that bad. But the point is I've observed factor-based slicers to be far more likely to be abrasive, over-confident and insistent that they are right and lumpers are chumps. Obviously, that's a generalization, one that doesn't apply to the better-informed and formally trained professionals or academics here.
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3funder
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Re: Small Value Premium - How Do You View It?

Post by 3funder » Thu Jan 25, 2018 2:09 pm

I just invest in total market index funds. I'm much more comfortable with mid and large caps. I tolerate small caps in small doses.

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Re: Small Value Premium - How Do You View It?

Post by czeckers » Thu Jan 25, 2018 2:14 pm

I think it is reasonable to tilt, and I do so with my portfolio. However, one has to understand that the tilts can underperform the large indexes such as the S&P500 for very long periods of time, particularly when large growth is outperforming. One has to have the conviction to stick to the tilted portfolio through thick and thin.
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Re: Small Value Premium - How Do You View It?

Post by nisiprius » Thu Jan 25, 2018 2:21 pm

Longtermgrowth wrote:
Thu Jan 25, 2018 1:37 am
To be fair, both of the funds in the chart above are blend funds. Didn't Larry Swedroe call small growth the black hole of investing?...
Yes, he did.

Leaving me to scratch my head at

a) why people have invested $21.2 billion into the Vanguard Small-Cap Growth Fund--haven't they heard?

b) why there's been so darned little difference, since inception, between Vanguard Small-Cap Growth Fund (blue) and Vanguard Small-Cap Value (orange)--the most notable difference occurring during jhfenton's 2000-2002 time period,

Source
Image

c) and why Dimensional Fund Advisors, the firm most closely identified with Fama and French, even offers DSCGX, the DFA US Small-Cap Growth Portfolio. (I think someone said, "oh, that's not really a small-cap growth fund" or something like that, and as usual Dimensional offers little help in grokking what this fund is supposed to be for: "The investment objective of the U.S. Small Cap Growth Portfolio is to achieve long-term capital appreciation." It certainly is in the small-cap growth style box

Image

but I guess they have a screen that only accepts unholey stocks?
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Re: Small Value Premium - How Do You View It?

Post by MindTheGAAP » Thu Jan 25, 2018 2:55 pm

nisiprius wrote:
Thu Jan 25, 2018 2:21 pm
Longtermgrowth wrote:
Thu Jan 25, 2018 1:37 am
To be fair, both of the funds in the chart above are blend funds. Didn't Larry Swedroe call small growth the black hole of investing?...
Yes, he did.

Leaving me to scratch my head at

a) why people have invested $21.2 billion into the Vanguard Small-Cap Growth Fund--haven't they heard?

b) why there's been so darned little difference, since inception, between Vanguard Small-Cap Growth Fund (blue) and Vanguard Small-Cap Value (orange)--the most notable difference occurring during jhfenton's 2000-2002 time period,

Source
Image

c) and why Dimensional Fund Advisors, the firm most closely identified with Fama and French, even offers DSCGX, the DFA US Small-Cap Growth Portfolio. (I think someone said, "oh, that's not really a small-cap growth fund" or something like that, and as usual Dimensional offers little help in grokking what this fund is supposed to be for: "The investment objective of the U.S. Small Cap Growth Portfolio is to achieve long-term capital appreciation." It certainly is in the small-cap growth style box

Image

but I guess they have a screen that only accepts unholey stocks?
My question for you, sir - or anyone else who cares to answer - why has VSMAX (Small Cap Blend) trailed the other two by about 5%? Is it just that there are less valuey or growthy stock concentration and so you end up with more middling results? Chart:
https://imgur.com/a/7ahBP
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Re: Small Value Premium - How Do You View It?

Post by nisiprius » Thu Jan 25, 2018 4:06 pm

Is that robust and consistent, or is just the luck of the draw of the two endpoints?
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Re: Small Value Premium - How Do You View It?

Post by jalbert » Thu Jan 25, 2018 4:43 pm

I think most or all of the long-term past under-performance of small-cap growth results from the contribution of stocks that would fail to meet many liquidity and profitability screens.

The S&P Small-Cap 600 blend, value, and growth indices use liquidity and profitability screens. I think that the pure value and pure growth versions of these indices probably do not.

Small-cap stocks used to be much less liquid. It is far from clear to me how much of the historical small-cap premium and value premium for small-caps were illiquidity premia and how much is a durable size and/or value premium. As a result, I only use a fairly mild tilt for US equities (recently changed from 90% VTCLX / 10% DFFVX to 85% VTCLX / 15% VSIAX for the purpose of re-locating small/mid-value from a 401K acct to a Roth acct).

It is not a portfolio I recommend to others because it is non-standard, but it has in the past slightly beaten the total market index both during periods when value beat growth and when growth beat value (e.g. 1.9% total excess return over the last 10 years before tax-- even wider spread after-tax). How is that possible? VTCLX has a slight growth tilt so the portfolio is fairly neutral with respect to the size and value factors, but omits the area of small-cap growth that has in the past underperformed the market. Another way to view it is that it tilts to large-caps on the growth side and tilts to small-caps on the value side.
Last edited by jalbert on Thu Jan 25, 2018 5:42 pm, edited 1 time in total.
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Re: Small Value Premium - How Do You View It?

Post by Stonebr » Thu Jan 25, 2018 4:59 pm

I've heard that the trouble with this "premium" is that it comes in spurts, and the spurts can be decades apart. There was one in the 1970s, according to legend...

My observation of how this worked from 1982 through about 2012 (my own "accumulation" period) was that there was no Small Value Premium except for a very brief spurt in the early 2000s. I held small value mutual funds of various sorts for years and years, then finally got a 2 or 3 year payoff followed by another long dead period. It was not worth the trouble. My hair turned gray while waiting for small value to kick in, and by the time it kicked in, everybody knew it and the small value funds filled up and closed to new investors, and then it was over.
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Re: Small Value Premium - How Do You View It?

Post by Alexa9 » Thu Jan 25, 2018 5:08 pm

There is the complaint that the offerings in small value funds are neither small or valuey enough to achieve maximum exposure to the premiums.
Just wait for my super value microcap fund.

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Re: Small Value Premium - How Do You View It?

Post by Longtermgrowth » Thu Jan 25, 2018 6:02 pm

nisiprius, could many just by seeing the word growth in the fund name think it's the best way to grow their portfolio?
The comment above about quality screens for the S&P 600 helping somewhat would be interesting to see on a chart: comparing Russell 2k value and growth to S&P 600 value and growth, if that's even possible.

I was also looking at the Callan Periodic Table, thinking many must try to time when growth outperforms value, but that would be a terrible game to play: https://www.callan.com/wp-content/uploa ... d_2018.pdf

I should say that I always thought the word growth in a fund name meant better for long term holdings before many hours of reading here on Bogleheads. If I were more busy and my life hadn't been turned so upside down in the past from unfortunate family situations, I probably wouldn't have had the time to research things. I was very lucky in my searching to come across paulmerriman.com, along with reading here while Larry Swedroe was actively posting. I also enjoyed reading a few of Larry's books. Both Larry and Paul are some of the most down to earth guys you're going to see in this life, and their intent is only to educate and help the little guy.
So in that Callan Peridoic Table, for the time frame shown, if my calculations are correct, Russell 2000 Value had a return of 203.73%, and Russell 2000 Growth had a return of 185.05%.
Last edited by Longtermgrowth on Sat Jan 27, 2018 5:03 am, edited 2 times in total.

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Re: Small Value Premium - How Do You View It?

Post by steve roy » Fri Jan 26, 2018 12:59 pm

I slice and dice but I’m not a fanatic about it. I have VG Target Date 2015 in a 401(k) and it’s done as well as anything.

Beyond broad diversification and a workmanlike asset allocation, I don’t think the tilts mean very much. Certainly haven’t in my case.

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Re: Small Value Premium - How Do You View It?

Post by nisiprius » Sat Jan 27, 2018 5:10 pm

Stonebr wrote:
Thu Jan 25, 2018 4:59 pm
...I've heard that the trouble with this "premium" is that it comes in spurts, and the spurts can be decades apart...
It seems to me that that is the problem with almost all investing strategies based on examination of long-term data. It all comes in spurts, and the spurts are so far apart the seemingly long periods of time like "1926-2017" only capture a small number of them, not enough to get reliable averages... and even these periods of time, though not long enough, are so long that one has to seriously question whether it is "the same" market over the whole time period.
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Re: Small Value Premium - How Do You View It?

Post by dbr » Sat Jan 27, 2018 6:20 pm

nisiprius wrote:
Sat Jan 27, 2018 5:10 pm
Stonebr wrote:
Thu Jan 25, 2018 4:59 pm
...I've heard that the trouble with this "premium" is that it comes in spurts, and the spurts can be decades apart...
It seems to me that that is the problem with almost all investing strategies based on examination of long-term data. It all comes in spurts, and the spurts are so far apart the seemingly long periods of time like "1926-2017" only capture a small number of them, not enough to get reliable averages... and even these periods of time, though not long enough, are so long that one has to seriously question whether it is "the same" market over the whole time period.
This is true. As much as a data model for investing helps the intuition it has always been problematic to do quantitative prediction and system design.

Investing is not rocket science because in rocket science you can actually do remarkably accurate calculations and engineer things to land a man on the moon or send a satellite to circumnavigate Saturn. You can't do any of the analogous things in investing.

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Re: Small Value Premium - How Do You View It?

Post by yarnandthread » Mon Jan 29, 2018 2:01 pm

nisiprius wrote:
Wed Jan 24, 2018 12:45 pm
yarnandthread wrote:
Wed Jan 24, 2018 4:27 am
I view the small cap premium to be real based on many DECADES of data showing it outperforms large and mid cap.
1) Please correct your verb tense: you meant to say "many decades of data showing it has outperformed large and mid cap."

2) Why do you think "many decades" are conclusive? How many decades are enough--conclusive enough to act on, anyway--and why?

3) Are you talking about risk-adjusted return, or just raw return?

4) Hey, are you actually sure about small-cap outperforming mid-cap? How sure? Cite your source for that.

Here is almost two decades of real-world data on the Vanguard Mid-Cap Index Fund (blue) and the Vanguard Small-Cap Index Fund (orange). Did the mid-cap fund beat the small-cap fund? WARNING: I cheated. I cherry-picked... in favor of the small-cap fund. I cut off a few months at the beginning. Click on the "maximum" link and you'll see what I mean.

Source
Image
Back online. Not conclusive, but long term trends are indeed useful. Example: Why would most people still argue that stocks over the long term will outperform cash going forward? Why? Decades of data. Does that mean that the future will result in the same? No. Cash could all of a sudden outperform, but people are willing to plan for stocks' superior long term performance based on prior results. How many decades is subjective.

Raw return.

Regarding mid-cap...fair enough. Common sense didn't prevail in this instance. Intuitive thinking would have had performance comparisons as small > mid > large, but alas, it doesn't appear to be the case based on further investigation.

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Re: Small Value Premium - How Do You View It?

Post by protagonist » Wed Jan 31, 2018 7:45 pm

yarnandthread wrote:
Mon Jan 29, 2018 2:01 pm
nisiprius wrote:
Wed Jan 24, 2018 12:45 pm
yarnandthread wrote:
Wed Jan 24, 2018 4:27 am
I view the small cap premium to be real based on many DECADES of data showing it outperforms large and mid cap.
1) Please correct your verb tense: you meant to say "many decades of data showing it has outperformed large and mid cap."

2) Why do you think "many decades" are conclusive? How many decades are enough--conclusive enough to act on, anyway--and why?

3) Are you talking about risk-adjusted return, or just raw return?

4) Hey, are you actually sure about small-cap outperforming mid-cap? How sure? Cite your source for that.

Here is almost two decades of real-world data on the Vanguard Mid-Cap Index Fund (blue) and the Vanguard Small-Cap Index Fund (orange). Did the mid-cap fund beat the small-cap fund? WARNING: I cheated. I cherry-picked... in favor of the small-cap fund. I cut off a few months at the beginning. Click on the "maximum" link and you'll see what I mean.

Source
Image
Back online. Not conclusive, but long term trends are indeed useful. Example: Why would most people still argue that stocks over the long term will outperform cash going forward? Why? Decades of data. Does that mean that the future will result in the same? No. Cash could all of a sudden outperform, but people are willing to plan for stocks' superior long term performance based on prior results. How many decades is subjective.

Raw return.

Regarding mid-cap...fair enough. Common sense didn't prevail in this instance. Intuitive thinking would have had performance comparisons as small > mid > large, but alas, it doesn't appear to be the case based on further investigation.
Excellent analysis, Nisi.

In assessing the value of past data, think in terms of symmetry of scale. Statistically that makes sense.

If I had 3000 years of data showing that stocks consistently outperformed cash, I would feel quite confident to invest in stocks for the next year, or ten years....maybe 30 or 50 or 100 years. But not the next 3000 years.

Most of the reliable data we have is from the mid-1920s, and this past century has been perhaps the greatest growth century in the history of civilization, or certainly close (the previous century being a close rival), so it is by no means typical.

Many of us here are looking at about a 30 year investment horizon. Some are looking at 50 years or more.

So, even if we are to assume that the past is predictive of the future (a huge assumption in the absence of a good explanation as to why), predicting 30 years into the future based on 90 years of historical data is statistically equivalent to predicting one day into the future based on 3 days of historical data.

If stocks outperformed cash these last three days, how confident would you be that stocks will outperform cash tomorrow? Maybe you just flipped a coin and got 3 heads in a row. How many days of outperformance would you require before you would confidently bet that they will outperform tomorrow?

You can apply the same logic to small cap vs large cap stocks. My personal feeling (a guess really, like most of what we do) is that this boils down to the simple relationship between risk and reward. And during periods of explosive growth, that usually pays off. But I have no idea what the world will toss us in the upcoming century.

As Nisi correctly stated, "How many decades is subjective."

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Re: Small Value Premium - How Do You View It?

Post by nisiprius » Wed Jan 31, 2018 8:06 pm

yarnandthread wrote:
Mon Jan 29, 2018 2:01 pm
...Example: Why would most people still argue that stocks over the long term will outperform cash going forward? Why? Decades of data...
No. Not because of "decades of data."

I would argue that stocks over the long term will outperform cash because cash is designed to be a fairly stable store of value--it is not expected to grow (and indeed is expected to shrink!). While stock represents a share in the earnings of a business, and often in the growth of that business.
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Re: Small Value Premium - How Do You View It?

Post by Taylor Larimore » Wed Jan 31, 2018 8:42 pm

yarnandthread wrote:
Wed Jan 24, 2018 4:27 am
I view the small cap premium to be real based on many DECADES of data showing it outperforms large and mid cap.
yarnandthread:

It is dangerous to rely on past performance to forecast future performance.

Not so many years ago, small-cap funds/factors were doing well and heavily promoted by the industry. The result was that many investors added small-cap funds to their portfolios (thereby reducing their allocation to mid-cap and large-cap funds). We now know it was a costly addition.

According to Morningstar, large-cap funds and total market index funds have significantly outperformed small-cap funds for the past 1-year; 3-years and 5-years.

Index Returns
Don't look for the needle. Buy the haystack. -- Jack Bogle
Best wishes.
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Re: Small Value Premium - How Do You View It?

Post by White Coat Investor » Wed Jan 31, 2018 8:46 pm

I hedge my bets. I have a big domestic tilt (25/15 TSM/SV) and only a small tilt internationally (15/5 TISM/IS). I can stay the course with that and be okay whichever way it turns out in the long run.
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Re: Small Value Premium - How Do You View It?

Post by jalbert » Wed Jan 31, 2018 8:56 pm

I would argue that stocks over the long term will outperform cash because cash is designed to be a fairly stable store of value--it is not expected to grow (and indeed is expected to shrink!). While stock represents a share in the earnings of a business, and often in the growth of that business.
I would add that the market prices a stock investment to reflect the risk that the future earnings and growth may not materialize, and the market prices a cash investment by setting an interest rate that reflects the risk that some ot all of the principal and interest will not be returned to you.

Stocks are expected to return more because their greater risk translates to a deeper discount.
Risk is not a guarantor of return.

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Re: Small Value Premium - How Do You View It?

Post by garlandwhizzer » Wed Jan 31, 2018 8:59 pm

Alexa9 wrote:
There is the complaint that the offerings in small value funds are neither small or valuey enough to achieve maximum exposure to the premiums.
Just wait for my super value microcap fund.
There is such a fund, Guggenheim's S&P Small Cap Pure Value ETF, RZV. It is dominated by microcaps, average market cap 726 million, and it has a P/B of 1.01, both figures courtesy of Morningstar. It has almost equal amounts of deep value and core value with no exposure to growth on its Morningstar style boxes. So in theory it should maximize the premiums of both small and value. Let's compare it to VB Vanguards Small Cap Index ETF which has a much larger average market cap of 3.8 billion, 5 times as large as RZV, and according to Morningstar VB is slanted not toward value at all but toward small cap growth, the so called black hole of investing. One would expect that RZV would significantly outperform VB with substantial exposure to the black hole of investing, SCG, given sufficient time. In point of fact VB has outperformed RZV IYR, 3YR, 5YR, 10YR, and since RZV's inception 12 years ago. The difference in return after 12 years of underperformance is significant, VB 132.6% and RZV at 92.7%, a 40% relative loss after 12 years from a fund that is supposed to outperform. Having maximal exposure to 2 premiums is probably providing little comfort at this point for those die-hards who have held on to RZV for 12 years and hugely underperformed a simple low cost index fund. The point is that there is often a big difference between what factor analysis predicts and what actually occurs at least over 12 years, perhaps longer. It is certainly possible that over the next 12 years RZV will rise from its chronic grave and outperform, but IMO that is more a question of faith than of certainty. When the smart guys claim to know beforehand what is destined to outperform after costs for investors in the market's future, a bit of skepticism may be in order.

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Re: Small Value Premium - How Do You View It?

Post by GratefulinNC » Wed Jan 31, 2018 10:16 pm

privatefarmer wrote:
Mon Jan 22, 2018 3:46 pm
All in baby!! I’m 50% domestics scv and 50% international scv. That’s my entire portfolio. I’m 33yo so hope to let it ride for 30-40 years before I even start to tap it.

1) just as I believe equities will outperform FI, I believe the more volatile an asset the more it will outperform otherwise nobody would invest in them. The only reason to own a volatile asset is bc you expect it to outperform. In other words, you pay a “premium” to own “safe” companies like FAANG stocks. May or may not be very significant going forward but I think it’ll be greater than zero.

2) SCV premium has been seen globally not just domestically. The value premium is seen across asset classes, as well. For example, real estate investors who buy rentals look for a higher rent/value ratio. This is the exact same thing as looking for stocks with higher earnings/price. Being a smart investor in any asset is buying things on discount and selling at a premium, if possible. Easier said than done but if I’m going to buy a basket of securities might as well buy a basket of lower P/E or p/b etc stocks and hang on to them forever.

3) unless you own a global TSM fund you are tilted towards something. Either tilted towards domestic or large cap etc. the only true “passive” would be a global TSM fund but even then you are tilted towards equities and away from any other investable asset class (FI, real estate, commodities, currency, art, agriculture, private equity, etc etc). In all practical sense, it’s impossible to NOT be tilted towards something as owning a true passive portfolio of all available investments is not feasible. So you have to pick something (or somethings) to invest in and exclude everything else, might as well pick the best performing asset class over the last ~100 years IMO.

4) owning a basket of small companies is MORE diversified, ever so slightly, than large companies bc you are spread out across thousands of companies instead of maybe 500. We all know that like 20% of the s/p 500 is in the top 5 stocks I believe. This may or may not matter much but technically you’re more diversified in the small cap space vs large cap.

The only real downside I see is that 1) lots of people do it now so the premium is likely reduced and 2) it does cost slightly more to implement. DFA does a great job of keeping transaction costs low since they don’t track an outside index, they make their own index. So they patiently trade etc and use security lending to offset some costs. I paid ~$1500 to move ~600k into DFA funds a couple months ago, as a one-time fee, and im just going to let them ride for hopefully 40+ years.
The increased risk of small cap value cannot be mitigated. Hence, the risk premium for small cap value cannot be mitigated.

Many Bogleheads are financially risk averse. Therefore, a RISK premium is unappealing to them. They are "total market" investors. Being cap weighted, the total market is large cap growth momentum.

The crucial variable is risk tolerance. Small cap value equity investors are willing to assume increased volatility and risk to capture this premium over the long term. Will that risk pay off in the long run? Probably, but there are no guarantees.
Last edited by GratefulinNC on Thu Feb 01, 2018 7:32 pm, edited 1 time in total.

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Owning the largest and most successful corporations

Post by Taylor Larimore » Wed Jan 31, 2018 10:31 pm

Being cap weighted, the total market is large cap growth momentum.
GratefulinNC:

Owning shares in the largest and most successful corporations in the United States gives me comfort.

Best wishes.
Taylor
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Re: Small Value Premium - How Do You View It?

Post by protagonist » Wed Jan 31, 2018 10:49 pm

nisiprius wrote:
Wed Jan 31, 2018 8:06 pm
yarnandthread wrote:
Mon Jan 29, 2018 2:01 pm
...Example: Why would most people still argue that stocks over the long term will outperform cash going forward? Why? Decades of data...
No. Not because of "decades of data."

I would argue that stocks over the long term will outperform cash because cash is designed to be a fairly stable store of value--it is not expected to grow (and indeed is expected to shrink!). While stock represents a share in the earnings of a business, and often in the growth of that business.
Which is based on the assumption that companies will continue to grow, as has been the case in the West over the past few hundred years, but certainly that has not been the rule over recorded history.

I am invested in stocks , Nisi, because my guess, like yours, is that the economy will continue growing, for awhile at least. I think that is a good guess, but I can't give you probabilities...they are incalculable, I'm guessing.

But as you are aware, history is chaotic, not linear, and there have been many long periods of stagnation and decline in the past- empires (financial and geopolitical) rise and fall. If we assume that progressive growth will continue for 20 years, or 50,or 100 or 1000 or 1 million years, we are just guessing, and our guesses become rapidly less accurate as the horizon becomes farther away from the present.

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Re: Small Value Premium - How Do You View It?

Post by protagonist » Wed Jan 31, 2018 10:52 pm

Taylor Larimore wrote:
Wed Jan 31, 2018 8:42 pm
yarnandthread wrote:
Wed Jan 24, 2018 4:27 am
I view the small cap premium to be real based on many DECADES of data showing it outperforms large and mid cap.
yarnandthread:

It is dangerous to rely on past performance to forecast future performance.

Not so many years ago, small-cap funds/factors were doing well and heavily promoted by the industry. The result was that many investors added small-cap funds to their portfolios (thereby reducing their allocation to mid-cap and large-cap funds). We now know it was a costly addition.

According to Morningstar, large-cap funds and total market index funds have significantly outperformed small-cap funds for the past 1-year; 3-years and 5-years.

Index Returns
Don't look for the needle. Buy the haystack. -- Jack Bogle
Best wishes.
Taylor
Makes sense to me....

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Re: Small Value Premium - How Do You View It?

Post by aegis965 » Wed Jan 31, 2018 11:05 pm

Alexa9 wrote:
Thu Jan 25, 2018 5:08 pm
There is the complaint that the offerings in small value funds are neither small or valuey enough to achieve maximum exposure to the premiums.
Just wait for my super value microcap fund.
Agree. None of the current offerings are small or valuey enough. And I doubt there ever will be a fund that has true micro cap exposure because fund companies are not poor enough to build micro/nano cap positions.
I may be biased.

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Re: Small Value Premium - How Do You View It?

Post by patrick013 » Thu Feb 01, 2018 5:45 pm

yarnandthread wrote:
Wed Jan 24, 2018 4:27 am
I view the small cap premium to be real based on many DECADES of data showing it outperforms large and mid cap.
From 1926 to 2006


Large Cap :

average annual return = 12.3%
standard deviation = 20.1%
coefficient of variation = 1.63


Small Cap :

average annual return = 17.4%
standard deviation = 32.7%
coefficient of variation = 1.88


Inflation = 3.1%


While large caps are closing dozens of stores small caps can
be very efficient, operating at close to peak capacity, etc..
That's my viewpoint. Both can be overpriced as well. An
efficient large cap is very hard to beat as well.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Small Value Premium - How Do You View It?

Post by Jeff Albertson » Fri Feb 02, 2018 3:29 pm

The Economist 'newspaper' has an article in the new issue:
“Factor investing” gains popularity

https://www.economist.com/news/finance- ... till-looks
Still, the best-known factors have been too successful for too long for it to be a statistical quirk. Broadly, there are two possible explanations. One is that higher returns compensate for some form of risk. Smaller stocks are less liquid and more expensive to manage, for example. Value stocks look cheap because the firms’ businesses genuinely are more risky. Though they believe in efficient markets, with no easy ways to outperform, Eugene Fama and Kenneth French, two leading academics, have backed Dimensional Advisors, a fund-management company that uses size and value factors to pick investments.

A second explanation relies on behavioural explanations. Momentum may play a role when investors are slow to realise that a company’s fortunes have changed for the better; a few cotton on early, driving up the share price, and then others follow suit. The low-volatility effect may be because investors instinctively prefer to buy high-volatility stocks which they believe will produce excess returns, leaving low-volatility stocks comparatively cheap.

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"Fama-French is solid proof of "heavy tilt to small value." ??

Post by Taylor Larimore » Fri Feb 02, 2018 6:29 pm

Deleted
Last edited by Taylor Larimore on Sat Feb 03, 2018 2:58 pm, edited 1 time in total.
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Re: "Fama-French is solid proof of "heavy tilt to small value." ??

Post by Earl Lemongrab » Sat Feb 03, 2018 1:25 pm

Ditto.
Last edited by Earl Lemongrab on Sat Feb 03, 2018 3:03 pm, edited 1 time in total.
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Re: Small Value Premium - How Do You View It?

Post by Taylor Larimore » Sat Feb 03, 2018 2:59 pm

Earl:

You are right. I deleted my post.

Best wishes.
Taylor
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Re: Owning the largest and most successful corporations

Post by Hyperborea » Sat Feb 03, 2018 6:45 pm

Taylor Larimore wrote:
Wed Jan 31, 2018 10:31 pm
Owning shares in the largest and most successful corporations in the United States gives me comfort.
Taylor Larimore wrote:
Wed Jan 31, 2018 8:42 pm
It is dangerous to rely on past performance to forecast future performance.

Those two ideas seem incredibly inconsistent to me. Your comfort comes from past performance and projecting that into the future.
"Plans are worthless, but planning is everything." - Dwight D. Eisenhower

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Re: Small Value Premium - How Do You View It?

Post by Jack FFR1846 » Sat Feb 03, 2018 7:03 pm

privatefarmer wrote:
Wed Jan 24, 2018 3:08 am
Jack FFR1846 wrote:
Tue Jan 23, 2018 9:00 am
Nobody knows nothin'

I am a firm believer in that and so buy the entire haystack.

I would no sooner tilt to small value than I would tilt to stocks that happen to begin with the letter "L".
okay but then why own stocks over bonds (or commodities or real estate etc etc)?
I own bonds too in total bond funds. And international in total international funds. Commodities dont do anything so I dont own them. I own my house and the land around it but dont own rentals because I dont want an extra job.
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Re: Small Value Premium - How Do You View It?

Post by heyyou » Sun Feb 04, 2018 12:22 am

How Do You View It?
Others are welcome to do what suits them, while I do what suits me. I like near equal slices of most of the size and value categories. I'm not trying for portfolio out-performance. With my high susceptibility to behavioral biases, I choose to hopefully own a little of whatever did well, so I can focus on that fund instead of any losses in the other equity categories.

Since the 2000 Crash, I do not trust the popularity contest of the Large Growth tilt of the 500 index or TSM. To me, LG is just another color on the Callan Periodic Table.

No guarantees, but the easiest path to growing a larger portfolio is to save more. There are plenty of allocations, all of which are good enough to be successful. For new posters here, my recommendation is for Trev H's 4x25% of domestic L blend and SCV plus foreign LV and SB, all at Vanguard (VG).

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Re: Small Value Premium - How Do You View It?

Post by GratefulinNC » Mon Mar 12, 2018 7:11 pm

protagonist wrote:
Wed Jan 31, 2018 10:52 pm
Taylor Larimore wrote:
Wed Jan 31, 2018 8:42 pm
yarnandthread wrote:
Wed Jan 24, 2018 4:27 am
I view the small cap premium to be real based on many DECADES of data showing it outperforms large and mid cap.
yarnandthread:

It is dangerous to rely on past performance to forecast future performance.

Not so many years ago, small-cap funds/factors were doing well and heavily promoted by the industry. The result was that many investors added small-cap funds to their portfolios (thereby reducing their allocation to mid-cap and large-cap funds). We now know it was a costly addition.

According to Morningstar, large-cap funds and total market index funds have significantly outperformed small-cap funds for the past 1-year; 3-years and 5-years.

Index Returns
Don't look for the needle. Buy the haystack. -- Jack Bogle
Best wishes.
Taylor
Makes sense to me....
There is not just one haystack. There are many haystacks -- each performing differently than the others. Some haystacks will perform better; some worse. Therefore, I buy multiple haystacks:

US large cap growth (US total stock market or S&P 500);
US large cap value;
US small cap growth;
US small cap value;
Internation large cap growth (International total stock market);
International large cap value;
International small cap growth;
International small cap value

It is all about diversification.

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