Larry Swedroe: Momentum Distinctions

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Random Walker
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Larry Swedroe: Momentum Distinctions

Post by Random Walker » Wed Nov 14, 2018 9:15 am

https://www.etf.com/sections/index-inve ... nopaging=1

We discuss momentum frequently on the board. The term can get thrown around a bit loosely. There are actually two types of momentum: cross sectional (relative)momentum and time series (absolute)momentum. There is debate as to whether these two types are actually distinct from one another, and this essay gives some insight into that debate.

Dave

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Re: Larry Swedroe: Momentum Distinctions

Post by gtwhitegold » Wed Nov 14, 2018 6:42 pm

Interesting read. I wonder if this is going to change the methodology of any managed futures or other funds that use TS or CS momentum.

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Re: Larry Swedroe: Momentum Distinctions

Post by nisiprius » Wed Nov 14, 2018 6:59 pm

Momentum has been studied extensively since 1993, when the original paper “Momentum” was published by Narasimhan Jegadeesh and Sheridan Titman.
That was "the original paper?" What about Cowles 3rd, Alfred E. and Herbert E. Jones (1937), "Some A Posteriori Probabilities in Stock Market Action," Econometrica 5 (3): 280–294? They concluded that the effect--which they called "inertia"--was real, but, after several pages of examining strategies based on it, concluded that they "could not be employed by speculators with any assurance of consistent or large profits." Of course, they called it "inertia" rather than "momentum."

In 1940, Fred Schweb wrote, in "Where are the Customers' Yachts?"
chart reading is a complex way of arriving at a simple theorem, to wit: when [stocks] have gone up for a considerable time, they will continue to go up for a considerable time; and the same holds true for going down. This is simple, but it does not happen to be so. The easiest way of perceiving that it is not so is to go get a properly drawn chart and look at it.
Momentum is nothing new, and for as long as people have been writing about it, people have been expressing doubts about the ability to profit from it.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: Larry Swedroe: Momentum Distinctions

Post by Random Walker » Wed Nov 14, 2018 8:27 pm

gtwhitegold wrote:
Wed Nov 14, 2018 6:42 pm
Interesting read. I wonder if this is going to change the methodology of any managed futures or other funds that use TS or CS momentum.
Not sure. Until recently I have been invested in AQR Style Premia QSPRX and AQR Managed Futures. Style Premia has CS momentum and Managed Futures TS momentum. My advisor changed me to AQR Alternative Risk Premia Fund QRPRX. This fund adds TS momentum and variance risk premium to the 4 QSPRX styles (which include CS momentum) of QSPRX. This fund is supposed to be more tax friendly, and I thought this was the only reason for the change, but after reading the article, I wonder if there is just more efficiency to having both styles in one fund because of overlap.

Dave

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Re: Larry Swedroe: Momentum Distinctions

Post by Miriam2 » Wed Nov 14, 2018 8:58 pm

Random Walker wrote: Until recently I have been invested in AQR Style Premia QSPRX and AQR Managed Futures. Style Premia has CS momentum and Managed Futures TS momentum. My advisor changed me to AQR Alternative Risk Premia Fund QRPRX. This fund adds TS momentum and variance risk premium to the 4 QSPRX styles (which include CS momentum) of QSPRX. This fund is supposed to be more tax friendly, and I thought this was the only reason for the change, but after reading the article, I wonder if there is just more efficiency to having both styles in one fund because of overlap.
Who is your advisor?

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Re: Larry Swedroe: Momentum Distinctions

Post by gtwhitegold » Wed Nov 14, 2018 9:05 pm

Since I'm completely invested in Tax advantaged space, I have nothing driving me to switch me from investing in QSPNX to QRPNX. It's also not really investable with Fidelity without an advisor. I guess given the situation, I would likely break up those allocations into 3 separate funds and rebalance between them.

I MAY also be slightly biased against the switch as well due to losing the commodity exposure in QSPNX.

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Re: Larry Swedroe: Momentum Distinctions

Post by Random Walker » Wed Nov 14, 2018 9:22 pm

I’m a client of Larry’s firm, Buckingham Asset Management. QRPRX is a new fund; think it just opened this year.

Dave

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Re: Larry Swedroe: Momentum Distinctions

Post by Random Walker » Wed Nov 14, 2018 9:35 pm

gtwhitegold wrote:
Wed Nov 14, 2018 9:05 pm
Since I'm completely invested in Tax advantaged space, I have nothing driving me to switch me from investing in QSPNX to QRPNX. It's also not really investable with Fidelity without an advisor. I guess given the situation, I would likely break up those allocations into 3 separate funds and rebalance between them.

I MAY also be slightly biased against the switch as well due to losing the commodity exposure in QSPNX.
Yes, I was a bit bummed to lose the commodity exposure too. I think I had heard that commodities have capacity constraints that is the cause of it not being included in QRPRX. I don’t think enough of the Bogleheads discussing these funds appreciate the value of investing in the same style across different asset classes in addition to multiple styles within a single asset class.

Dave

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Re: Larry Swedroe: Momentum Distinctions

Post by Park » Thu Nov 15, 2018 9:53 am

[OT quoted comment removed --moderator triceratop]

Dave, thanks for your posts. I hope you continue with your posts.

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Re: Larry Swedroe: Momentum Distinctions

Post by chisey » Thu Nov 15, 2018 10:01 am

Park wrote:
Thu Nov 15, 2018 9:53 am
Dave, thanks for your posts. I hope you continue with your posts.
+1. I don't make it a habit of visiting etf.com for the articles, so I'd miss some interesting stuff from Larry if Dave didn't share it.

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Re: Larry Swedroe: Momentum Distinctions

Post by Random Walker » Thu Nov 15, 2018 10:55 am

Hi BJR,
First of all, when I was talking about being loose with the term momentum, I was referring to the distinction between cross sectional momentum and time series momentum.
Secondly, I can’t be any more straightforward than I have been. I started investing in 1996 with individual stocks. Learned a lot and was hardcore TSM ultra low ER Boglehead 2001-2009. I continued to read and learn, and ultimately chose to go the advisor, factor, increased complexity, increased cost route. I think my decision process is worthwhile for Bogleheads to read, and I’ve posted on it in the past. Look up some terms like “random walker, advisor, used cars” and you’ll find some posts where I describe my thought process. I’m not trying to sell anything and certainly profit in no way. I do strongly think that one of the keys to having the conviction to stick with a plan is having knowledge and understanding of one’s other choices and why he elected against them. A TSM Boglehead can have confidence he won’t underperform the broad indices and that his costs are rock bottom. That’s a big deal. But I believe his conviction to stick with that plan will be even stronger if he understands other views of diversification, portfolio efficiency, factors, alternatives, behavioral quirks/errors. At the bottom of a big bear, it is better for the TSM investor to know why he elected against something more complex and expensive than to suddenly open his eyes to it and consider abandoning his plan for something else. Alternatively, maybe some Bogleheads will see benefit to adding an extra level or two of complexity to the portfolio. In either case, I believe knowledge makes the individual a better investor. And while I’m on a roll, let me make a big plug for adding a financial history book to one’s investing reading list. I strongly believe knowledge of financial history adds a lot of strength to the individual investor’s stomach.
Lastly, a comment on confirmation bias. I’ve basically gone all in on the advisor, factor, alternative, more expensive, high torque portfolio route. Sure, I like to think something I’m doing is correct, positive, productive. So there is likely a lot of confirmation bias involved in my posting Larry’s articles. But, as I say to my patients, “just because I’m biased, doesn’t mean I’m not right” :-) I think Larry’s writings are outstanding for Bogleheads. Where else can we find academic research translated into language at our level. If I find it, I’ll post it, and certainly hope others will as well. If I thought Larry had an ulterior motive for his writings, I wouldn’t post them. I only post them because I firmly believe his goal to educate is pure. Read one or two of his books. I believe the clarity of thought, internal consistency, and integrity leaps off the pages.

Dave

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Re: Larry Swedroe: Momentum Distinctions

Post by Random Walker » Thu Nov 15, 2018 11:32 am

Larry discontinued his active participation in the forum because of sarcastic and cynical responses to him. His writings are too valuable to the individual investor to let his lack of participation result in his articles not being discussed here. So I post them for discussion.

I have a very strong belief in efficient markets. The simple TSM philosophy resonates deeply with me. Low costs certainly do as well. Yet individual portfolios can be made more efficient by deviating from the TSM portfolio. Each step away from TSM involves some marginal benefit, increased complexity, and increased marginal cost. The costs are certain and the benefits only potential. I think it is fascinating to discuss where individuals draw the line between potential increased marginal portfolio benefit and certain increased marginal portfolio cost. I’m at an extreme end of the Boglehead spectrum.

Dave

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Re: Larry Swedroe: Momentum Distinctions

Post by tarheel » Thu Nov 15, 2018 1:46 pm

[OT quotation and response removed -- moderator triceratop

Dave, I read the ETF.com column this morning and I knew you would have started this thread and I appreciate it. I also invest in QMHIX, and while I understand the takeaway (CS and TS momentum are not as distinct as previously thought), I had a hard time understanding the details af the article. In the end, it suggested to take no action anyway. I'm a bit confused to be honest.

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Re: Larry Swedroe: Momentum Distinctions

Post by Random Walker » Thu Nov 15, 2018 1:59 pm

Tar Heel,
You and I are in the same place on CS mom and TS mom. Given that they are not as distinct as maybe we thought previously, that generally more efficient to have multiple styles/factors/asset classes in single fund, and that they are tax inefficient, maybe only take away is for taxable investor to consolidate them into the new fund, alternative risk premium QRPRX. In tax advantaged space, sitting tight seems like a good idea to me.

Dave

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Re: Larry Swedroe: Momentum Distinctions

Post by nedsaid » Thu Nov 15, 2018 2:06 pm

tarheel wrote:
Thu Nov 15, 2018 1:46 pm
[OT quotation removed --moderator triceratop]

Dave, I read the ETF.com column this morning and I knew you would have started this thread and I appreciate it. I also invest in QMHIX, and while I understand the takeaway (CS and TS momentum are not as distinct as previously thought), I had a hard time understanding the details af the article. In the end, it suggested to take no action anyway. I'm a bit confused to be honest.
Last time I checked, we still live in a free country. If you don't want to read Larry Swedroe's articles, don't read them. If one doesn't want to invest with Buckingham, nothing says one has to. No law I am aware of requires someone to invest with AQR. If someone doesn't believe in academic research, one is free not to accept its conclusions. All that being said, I don't understand the vitriol here. Can't we agree to disagree here?

I don't know, I have tried a lot of things as an investor. Sometimes I think I am the most brilliant thing that ever lived (like in late 1999 or in 2007) and sometimes I wonder what the heck I was thinking (early 2009). I have experience the thrill of victory and the agony of defeat. So there is no clear answer to the questions raised in these threads. Every person is different and everyone's experience is different.

I do appreciate Dave starting threads linking to Larry Swedroe's articles and for taking time to discuss the articles.
A fool and his money are good for business.

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Re: Larry Swedroe: Momentum Distinctions

Post by Dottie57 » Thu Nov 15, 2018 2:13 pm

chisey wrote:
Thu Nov 15, 2018 10:01 am
Park wrote:
Thu Nov 15, 2018 9:53 am
Dave, thanks for your posts. I hope you continue with your posts.
+1. I don't make it a habit of visiting etf.com for the articles, so I'd miss some interesting stuff from Larry if Dave didn't share it.
+1

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Re: Larry Swedroe: Momentum Distinctions

Post by bjr89 » Thu Nov 15, 2018 2:27 pm

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Last edited by bjr89 on Fri Nov 16, 2018 7:10 pm, edited 1 time in total.

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Re: Larry Swedroe: Momentum Distinctions

Post by willthrill81 » Thu Nov 15, 2018 2:37 pm

Random Walker wrote:
Thu Nov 15, 2018 1:59 pm
Tar Heel,
You and I are in the same place on CS mom and TS mom. Given that they are not as distinct as maybe we thought previously, that generally more efficient to have multiple styles/factors/asset classes in single fund, and that they are tax inefficient, maybe only take away is for taxable investor to consolidate them into the new fund, alternative risk premium QRPRX. In tax advantaged space, sitting tight seems like a good idea to me.

Dave
With futures contracts, one can easily and tax efficiently zero a stock position. There are some relatively small costs involved, but it's far better than the tax hit.
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Re: Larry Swedroe: Momentum Distinctions

Post by marcopolo » Thu Nov 15, 2018 2:44 pm

I have not been convinced by the argument that the increased portfolio efficiency is worth the increased costs of some of the suggested investments.
But, I do appreciate the thoughtful discussion many of these topics generate.

There is no need for the vitriol on the one side, or the condescending attitude on the other.

Just because Larry, Dave, or many others find value in these products, and present arguments why they do so, does not mean they have some nefarious motives.

Similarly, just because some people might not find the arguments convincing does not make them "fools" that are just too stupid to understand your position.
Once in a while you get shown the light, in the strangest of places if you look at it right.

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Re: Larry Swedroe: Momentum Distinctions

Post by Random Walker » Thu Nov 15, 2018 2:54 pm

bjr89 wrote:
Thu Nov 15, 2018 2:27 pm
The whole Boglehead philosophy is based on skepticism and a vocal rejection of this sort of thing.
I pretty much agree with you. But what do we do when academic evidence suggests we might be able to make improvements? Does Boglehead philosophy require vocal rejection of something BEFORE we learn about it? Bogle coined the term “Cost Matters Hypothesis”. He didn’t call it “Only Cost Matters Hypothesis”.

Dave

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Re: Larry Swedroe: Momentum Distinctions

Post by nedsaid » Thu Nov 15, 2018 2:56 pm

bjr89 wrote:
Thu Nov 15, 2018 2:27 pm
vineviz wrote:
Thu Nov 15, 2018 1:43 pm
bjr89 wrote:
Thu Nov 15, 2018 1:35 pm
Just don't blame other people (especially at a place like the Bogleheads) for having a somewhat natural reaction to BS. Consider looking in.
Uninformed disregard of new ideas might be a "natural" reaction but it's not terribly honorable.

We can aim higher, I think.
Trend following is not a new idea. Nor are running long short factor portfolios. By design, none of this stuff is a new idea.
tarheel wrote:
Thu Nov 15, 2018 1:46 pm
bjr89 wrote:
Thu Nov 15, 2018 1:35 pm
I think you're a cool, interesting, and smart person, Larry.
But man. You can biased. I don't blame you -- I am too.
The thing is it really shows for you. Sometimes you're a bit intellectually dishonest due to your conflicts of interest (you know this is true) and that rubs people the wrong way.
I'm not saying I'm perfect. I'm an arrogant kid with idealistic views who should probably be showing more respect right now for someone who has taught me a few things in my journey thus far.
Just don't blame other people (especially at a place like the Bogleheads) for having a somewhat natural reaction to BS. Consider looking in.
Um, what does it take to ban someone? Moderators?

Dave, I read the ETF.com column this morning and I knew you would have started this thread and I appreciate it. I also invest in QMHIX, and while I understand the takeaway (CS and TS momentum are not as distinct as previously thought), I had a hard time understanding the details af the article. In the end, it suggested to take no action anyway. I'm a bit confused to be honest.
Ban me for what exactly?
There are wolves in the hen house on this board. Most here are smart enough to know they shouldn't be picking stocks or timing the market, yet when it's dressed up as a quantitative strategy and given a nonsensical story, things are suddenly accepted by the unsuspecting Boglehead.
I always thought the main purpose of this forum was not to gain insight into alpha generation, but to protect people from making un-Bogleheaded decisions like investing with AQR or advisers that relentlessly push such products.
nedsaid wrote:
Thu Nov 15, 2018 2:06 pm


Last time I checked, we still live in a free country. If you don't want to read Larry Swedroe's articles, don't read them. If one doesn't want to invest with Buckingham, nothing says one has to. No law I am aware of requires someone to invest with AQR. If someone doesn't believe in academic research, one is free not to accept its conclusions. All that being said, I don't understand the vitriol here. Can't we agree to disagree here?
Ned, hope you've been well. It's a been a while. Not saying anyone's forcing anyone to do anything. I just don't understand why when active security selection and marketing timing is dressed up with math that it is suddenly accepted here. The whole Boglehead philosophy is based on skepticism and a vocal rejection of this sort of thing.
I am a pretty plain vanilla investor but I have tried a lot of things. It is important to keep an open mind. As far as myself, I am probably only right about something around here every six months or so.

I think what has fueled the interest in Alternatives is the realization that both stocks and bonds got to be pretty darned expensive and thus it is sinking in that future expected returns will likely be lower than historical returns. For example, bonds have historically returned about 6%, hard to project historical returns from bonds when yields for investment grade is 3-4%. In fact, 6% returns over the next decade are almost impossible, unless yields drop into negative territory. We are seeing rates going up and not going down.

So Larry and others are scouring the academic research for sources of return. So you have factor funds that use leverage and shorts, Variance Risk Premium, Alternative Lending, and Reinsurance. There is hope that in the interval funds that investors can pick up an illiquidity premium. Historically, there is all kinds of evidence that these returns can be captured. Problem is, Stoneridge and AQR aren't the only ones out there who know the historical data. Lots of other folks, including the hedge funds, that are trying to do the same thing.

I think Larry would say yes, there is competition out there but we still believe there are returns out there than can be captured. He thinks he can get 7% maybe 8% from the alts, my guess is that it might be more like 5%. It might be that such strategies might amount to be nothing more than high priced bonds. When I am in a pessimistic mood, I suspect such returns might be more like 3%.

So I can see what Larry is saying and it has sound basis in theory and in historical data. Again, Larry isn't the only one out there who knows all of this. Cliff Asness knows these things as do the Hedge Fund managers. The retail mutual fund companies know of all this as well. So pretty much, the argument has to be that this is due to human greed and fear and that the premiums persist because we humans make the same behavioral errors over and over again. Even the professional institutional investors are not immune from this effect, or so the argument goes.

My best guess on all of this is that the factor premiums exist and are real. I am in the camp that human nature and human behavior, fear and greed, make this inevitable. Problem is, the institutional market players can take the premiums away and for an extended period of time. In my view, at some point the premiums will return with a vengeance but no one knows when. I just believe that fear and greed will never go away no matter how hard the quants try, my take is that they can head it off for a while. The key is this, are factor investors patient enough? I know for Value, that it has been a decade.

Another argument that can be made is that the premiums are real but because they are known, the premiums have shrunk and the additional costs might make them pretty difficult to capture. So pretty much, it is an argument over how much the premiums have shrunk and if this effect is permanent. Hard to say.
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Re: Larry Swedroe: Momentum Distinctions

Post by triceratop » Thu Nov 15, 2018 3:17 pm

I removed a number of personal attacks and OT comments. Please stick to discussion of ideas. Per the forum rules:
This is a moderated forum. We expect this forum to be a place where people can feel comfortable asking questions and where debates and discussions are conducted in civil tones. Discussions are about issues, not people. If you disagree with an idea, go ahead and marshal all your forces against it. But do not confuse ideas with the person posting them. At all times we must conduct ourselves in a respectful manner to other posters. Attacks on individuals, insults, name calling, trolling, baiting or other attempts to sow dissension are not acceptable. If you feel that someone has attacked you or otherwise violated the policies of this forum, do not respond in kind. Instead, please click the report button on the offending post. This is the quickest method to notify the site moderators.
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Re: Larry Swedroe: Momentum Distinctions

Post by nedsaid » Thu Nov 15, 2018 3:36 pm

Yep. Time to take away the punch bowl. We were getting too rowdy. Thanks.
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Re: Larry Swedroe: Momentum Distinctions

Post by cheezit » Thu Nov 15, 2018 3:36 pm

triceratop,

Thank you for cleaning up the thread.

Dave,

I think you are being a little loose with the term 'evidence' when you say
But what do we do when academic evidence suggests we might be able to make improvements?
Studies and the results of backtests are more suggestions than evidence, IMO. This is the whole conundrum of factor investing - to what extent are the patterns that we see the result of signal rather than "fitting the noise", and if we have found signal to what extent is it likely to persist in the future once the effect is public knowledge? If you look at Bogle's publications and presentations over the years, this seems to be his problem with factors moreso than costs.

Personally, my doubts about a lot of things spring from the relatively primitive analytical techniques used in most open treatments of the markets, whether they be of academic or commercial origin. People treat boxcar averages as if they were the best means available to remove noise and transients from the data (looking at you, Shiller!); if you're lucky, someone will use an exponential average, the discrete equivalent of the humble single-pole RC filter that every EE learns in his freshman circuits course before he even starts studying signal processing proper. Regression analyses almost always assume the variables are totally independent and that the effects are linear. The way stats get used, it becomes clear many of the authors only have a cookbook understanding of probability and statistics, and if you mention simple foundational concepts like a Fourier transform with some of these people (not looking at anybody in particular here) you get reactions ranging from "I've heard that phrase before" to the sort of blank stare that you might be given if you had a horn growing out of your forehead. Add to this the failure of many of the factor strategies that people talk about to work well in out-of-sample testing, and you get a very large dose of skepticism from me.

I still tilt mid and small, though I don't feel very strongly about the matter and the cost is negligible.

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Re: Larry Swedroe: Momentum Distinctions

Post by Random Walker » Thu Nov 15, 2018 3:52 pm

Cheezit,
I get your point, and you clearly know more math and stats than me. But we look back at data, see a pattern, form a hypothesis. Then look into different time periods, different geographic markets, and in some cases even different asset classes for supporting data. That does start to sound like true evidence to me. Especially for the social sciences.

Dave

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Re: Larry Swedroe: Momentum Distinctions

Post by bjr89 » Thu Nov 15, 2018 3:56 pm

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Last edited by bjr89 on Fri Nov 16, 2018 7:10 pm, edited 1 time in total.

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Re: Larry Swedroe: Momentum Distinctions

Post by cheezit » Thu Nov 15, 2018 5:03 pm

Random Walker wrote:
Thu Nov 15, 2018 3:52 pm
But we look back at data, see a pattern, form a hypothesis. Then look into different time periods, different geographic markets, and in some cases even different asset classes for supporting data. That does start to sound like true evidence to me. 8-) Especially for the social sciences.

Dave
That's reasonable.

A further question then arises: at what point do we decide that our original model was fitting noise rather than signal if new evidence contradicts old evidence? I was taught years ago that the process was look at the evidence -> form a hypothesis or hypotheses -> test and try to falsify whatever you came up with. Now with a very complex system like the markets with a ton of noise and many inputs, it's clear we need to look at a longer period to form any sort of conclusion, but how long does the period need to be?

Eg. if you look at the returns of small versus small-value over the roughly 18-year period from the creation of the iShares ETFs that track the relevant S&P indices until the present, or the returns of large versus large-value over the same period, or the returns of mid versus mid-value over the same periodit seems like you could reasonably conclude that the value factor hypothesis is false, or that it was formerly true but the effect disappeared once it was observed ("Shroedinger's factor" if you will forgive the slight corruption of QM).

If we cannot come to a conclusion with a sample period of that length, what length would be sufficient? If we are going to point to past oscillations between value and growth overperformance as an explanation, how to we guard ourselves against moving the goalposts or dismissing data that is contrary to the conclusions we want? After all, if the last X years of underperformance were an unlikely aberration, the Y years of overperformance upon which we based our hypothesis could also have been the result of chance/noise-fitting as well.

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Re: Larry Swedroe: Momentum Distinctions

Post by Random Walker » Thu Nov 15, 2018 6:06 pm

cheezit wrote:
Thu Nov 15, 2018 5:03 pm
Random Walker wrote:
Thu Nov 15, 2018 3:52 pm
But we look back at data, see a pattern, form a hypothesis. Then look into different time periods, different geographic markets, and in some cases even different asset classes for supporting data. That does start to sound like true evidence to me. 8-) Especially for the social sciences.

Dave
That's reasonable.

A further question then arises: at what point do we decide that our original model was fitting noise rather than signal if new evidence contradicts old evidence? I was taught years ago that the process was look at the evidence -> form a hypothesis or hypotheses -> test and try to falsify whatever you came up with. Now with a very complex system like the markets with a ton of noise and many inputs, it's clear we need to look at a longer period to form any sort of conclusion, but how long does the period need to be?

Eg. if you look at the returns of small versus small-value over the roughly 18-year period from the creation of the iShares ETFs that track the relevant S&P indices until the present, or the returns of large versus large-value over the same period, or the returns of mid versus mid-value over the same periodit seems like you could reasonably conclude that the value factor hypothesis is false, or that it was formerly true but the effect disappeared once it was observed ("Shroedinger's factor" if you will forgive the slight corruption of QM).

If we cannot come to a conclusion with a sample period of that length, what length would be sufficient? If we are going to point to past oscillations between value and growth overperformance as an explanation, how to we guard ourselves against moving the goalposts or dismissing data that is contrary to the conclusions we want? After all, if the last X years of underperformance were an unlikely aberration, the Y years of overperformance upon which we based our hypothesis could also have been the result of chance/noise-fitting as well.
Can’t argue with anything you’ve said. I think we need to look at data of varying lengths. The longest periods certainly give us a sense of persistence. But markets, technology, the world are always changing. And we worry that older data may no longer apply. So I think we need to look at a combination of longest available series of data and perhaps subset of most applicable data. For example, it’s great to have 1926-present to look at value premium. But also highly interested in what happened to premium after 1992 Fama French publication, and perhaps even the shorter time after the internet bubble burst where we might say value had an unfair head start. Have you read Larry’s factor book? I think his 5 criteria for a factor (any source of return really) provide a great framework for evaluating a potential investment.

Dave

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Re: Larry Swedroe: Momentum Distinctions

Post by cheezit » Fri Nov 16, 2018 10:10 am

Random Walker wrote:
Thu Nov 15, 2018 6:06 pm
Can’t argue with anything you’ve said. I think we need to look at data of varying lengths. The longest periods certainly give us a sense of persistence. But markets, technology, the world are always changing. And we worry that older data may no longer apply. So I think we need to look at a combination of longest available series of data and perhaps subset of most applicable data. For example, it’s great to have 1926-present to look at value premium. But also highly interested in what happened to premium after 1992 Fama French publication, and perhaps even the shorter time after the internet bubble burst where we might say value had an unfair head start. Have you read Larry’s factor book? I think his 5 criteria for a factor (any source of return really) provide a great framework for evaluating a potential investment.

Dave

Thank you for your thoughtful reply. I haven't read Larry's factor book yet - it's on my list after I make my way through Bernstein's latest. I also want to comb through some of Bogle's work to see what the best "one stop shopping" book is for my sister-in-law, who graduated recently and asked for advice in setting up her 401(k) but who lives about three hours away, but that can wait until closer to Christmas.

garlandwhizzer
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Re: Larry Swedroe: Momentum Distinctions

Post by garlandwhizzer » Fri Nov 16, 2018 12:55 pm

cheezit wrote:

the returns of small versus small-value over the roughly 18-year period from the creation of the iShares ETFs that track the relevant S&P indices until the present, or the returns of large versus large-value over the same period, or the returns of mid versus mid-value over the same periodit seems like you could reasonably conclude that the value factor hypothesis is false, or that it was formerly true but the effect disappeared once it was observed ("Shroedinger's factor" if you will forgive the slight corruption of QM).

If we cannot come to a conclusion with a sample period of that length, what length would be sufficient? If we are going to point to past oscillations between value and growth overperformance as an explanation, how to we guard ourselves against moving the goalposts or dismissing data that is contrary to the conclusions we want? After all, if the last X years of underperformance were an unlikely aberration, the Y years of overperformance upon which we based our hypothesis could also have been the result of chance/noise-fitting as well.
1+

No one denies that factors have convincing narratives for their existence that make sense based on human nature. No one denies that very long term cost free academic backtesting makes a strong case for their existence although in recent years those backtesting results are clearly less robust. The question is: do real factor funds with real costs/expenses and real trading frictions produce improved after-cost, risk-adjusted returns to investors in the current environment when markets are dominated by professionals who are keenly aware of factors? That is an entirely different proposition as cheezit points out in this example of comparable blend versus value funds in small, mid, and large market cap levels. Value underperformed blend in all 3 cases for 18 years in ETFs run by the same company. The same is true for Vanguard's Growth Versus Value Index funds. Growth has beaten value for the entire 20+ year history of VISGX versus VISGX in the small cap space. In the large cap space, LCG has beaten LCV for 26 years according to Vanguard Indexes. I don't know whether or not value will outperform going forward or not. I expect that at some point it should, but these results of real funds demonstrate that a wide gulf can exist between convincing academic theory and the real world results of funds that attempt to exploit that theory.

Garland Whizzer

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