why are Small Caps falling?

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GLState
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Re: why are Small Caps falling?

Post by GLState » Tue Jun 11, 2019 4:09 pm

Will, I understand your point of view and agree that we can learn from the past. But, I have a problem with examples that go too far ... S&P 500 since 1927, for example https://www.macrotrends.net/2324/sp-500 ... chart-data. They seem to know that the S&P 500 would exist 50 years in the future. Or imagining that we could buy a brand new Tesla in 1976 for $1500 ... look what it would be worth today. :D

I started investing in the early 1970s. We bought shares in lots of 100 and paid commissions of a $100 (often much more) for those shares. There were no bond funds available to small investors and if we invested in individual bonds we were taken to the cleaners by the broker. To pretend that we could buy all of the stocks to replicate the S&P 500 along with thousands of bonds that didn't even exist ... all at no cost... and then say "This is what your portfolio would look like today" , just seems to pushing reality aside.

I don't even like to compare a fund to an index. I much rather compare to a representative fund that has costs, like SPY for the S&P 500, to compare what I "could have invested in" to "what I choose to invest in".
Last edited by GLState on Tue Jun 11, 2019 7:54 pm, edited 1 time in total.

fennewaldaj
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Re: Why are Small Caps falling?

Post by fennewaldaj » Tue Jun 11, 2019 6:37 pm

GLState wrote:
Tue Jun 11, 2019 9:54 am

IJR tracks a market-cap-weighted index of primarily small-cap US stocks. The S&P Committee selects 600 stocks representing about 3% of the publicly available market.
One can use the S+P 400 and S+P 600 for size tilting if being all in the S+P 600 makes you uncomfortable. That puts you at about 10% of the market (and this is a sampling of ~20% of the market). Or Vangaurd small cap index is 14% of the market.

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stocknoob4111
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Re: why are Small Caps falling?

Post by stocknoob4111 » Tue Jun 11, 2019 9:36 pm


KlangFool
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Re: why are Small Caps falling?

Post by KlangFool » Tue Jun 11, 2019 9:43 pm

stocknoob4111 wrote:
Tue Jun 11, 2019 9:36 pm
Interesting read:

https://www.barrons.com/articles/small- ... 1560278748
Please explain why we should read that link.

Klangfool

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willthrill81
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Re: why are Small Caps falling?

Post by willthrill81 » Tue Jun 11, 2019 9:45 pm

GLState wrote:
Tue Jun 11, 2019 4:09 pm
Will, I understand your point of view and agree that we can learn from the past. But, I have a problem with examples that go too far ... S&P 500 since 1927, for example https://www.macrotrends.net/2324/sp-500 ... chart-data. They seem to know that the S&P 500 would exist 50 years in the future. Or imagining that we could buy a brand new Tesla in 1976 for $1500 ... look what it would be worth today. :D

I started investing in the early 1970s. We bought shares in lots of 100 and paid commissions of a $100 (often much more) for those shares. There were no bond funds available to small investors and if we invested in individual bonds we were taken to the cleaners by the broker. To pretend that we could buy all of the stocks to replicate the S&P 500 along with thousands of bonds that didn't even exist ... all at no cost... and then say "This is what your portfolio would look like today" , just seems to pushing reality aside.

I don't even like to compare a fund to an index. I much rather compare to a representative fund that has costs, like SPY for the S&P 500, to compare what I "could have invested in" to "what I choose to invest in".
I'm not sure that your criticism is adequately based in historic fact. For instance, look at how well the Dow Jones has tracked the S&P 500, and the former is comprised of just 30 stocks. Contrary to how some here act, you don't need thousands of stocks in order to closely replicate the performance of the market (note that I'm not knocking index funds; I strongly prefer them due to their low costs).

Still, if that's what you want to believe, that's fine, but it's definitely a minority position.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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stocknoob4111
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Re: why are Small Caps falling?

Post by stocknoob4111 » Tue Jun 11, 2019 10:08 pm

KlangFool wrote:
Tue Jun 11, 2019 9:43 pm
Please explain why we should read that link.

Klangfool
because it's some relevant info that was in the press

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willthrill81
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Re: why are Small Caps falling?

Post by willthrill81 » Tue Jun 11, 2019 10:10 pm

stocknoob4111 wrote:
Tue Jun 11, 2019 10:08 pm
KlangFool wrote:
Tue Jun 11, 2019 9:43 pm
Please explain why we should read that link.

Klangfool
because it's some relevant info that was in the press
Naked links are forbidden in the forum rules.
refrain from posting naked links - all links should include an explanation or excerpt unless its meaning is clear from the context
rules
Last edited by willthrill81 on Tue Jun 11, 2019 10:12 pm, edited 1 time in total.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

KlangFool
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Re: why are Small Caps falling?

Post by KlangFool » Tue Jun 11, 2019 10:12 pm

stocknoob4111 wrote:
Tue Jun 11, 2019 10:08 pm
KlangFool wrote:
Tue Jun 11, 2019 9:43 pm
Please explain why we should read that link.

Klangfool
because it's some relevant info that was in the press
stocknoob4111,

That is not good enough. Why do you want us to read it? Most of the press is pure noise. If you want us to read it, you should tell us why it is useful.

KlangFool

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Dialectical Investor
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Re: why are Small Caps falling?

Post by Dialectical Investor » Tue Jun 11, 2019 10:27 pm

stocknoob4111 wrote:
Tue Jun 11, 2019 9:36 pm
Interesting read:

https://www.barrons.com/articles/small- ... 1560278748
Subscription required. :annoyed

Now you have to summarize.

DesertDiva
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Re: why are Small Caps falling?

Post by DesertDiva » Tue Jun 11, 2019 10:35 pm

At the end of the article:
“Andrew Addison is the author of THE INSTITUTIONAL VIEW, a research service that focuses on technical analysis.” (Italics added)

Follow the money

moneybeard
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Re: why are Small Caps falling?

Post by moneybeard » Wed Jun 12, 2019 10:26 am

Anecdotal, and past performance cannot predict future returns, but if you look over the last 50 years, small caps tend to do very well at the inception/ first phase of a bull market, out-performing total US, and then towards the tail end of the bull cycle, they slow down a lot. Small Cap value killed total stock market for a period in the early 80s, and did it again in the early 2000s, to the point where small cap value appears to beat the crap out of total market over long periods, but if you remove those two little extra runs, small cap value underperforms.

If history is an indicator small cap value is falling now because we are in the last phase of this bull market, and that's how they always behave. If you are interested in factor-tilted market timing, you want to wait until we are at what you believe is the rock bottom of the next big correction and then buy into small caps.

Personally I do not get into much factor tilting, as it is unlikely you will end up beating TSM over the long haul with it. Sure you may get an extra 1/2 a % or 1% on your returns if you time it correctly, but your chance of falling on your face as you mistime the "bottom" of the market, or don't get out before the inevitable small cap pullback toward the end of the bull is pretty high

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stocknoob4111
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Re: why are Small Caps falling?

Post by stocknoob4111 » Wed Jun 12, 2019 4:51 pm

moneybeard wrote:
Wed Jun 12, 2019 10:26 am
Anecdotal, and past performance cannot predict future returns, but if you look over the last 50 years, small caps tend to do very well at the inception/ first phase of a bull market, out-performing total US, and then towards the tail end of the bull cycle, they slow down a lot.
This wasn't true for the 2000 and 2008 bear markets. Small Cap outperformed Large Cap in both those bear markets.

S&P 500 VFIAX vs S&P 600 VTMSX (03/2000 to 10/2002 bear market - tech bust) :

Small Caps cumulative loss = -17.36%
Large Caps cumulative loss = -40.60%


Image

S&P 500 VFIAX vs S&P 500 VTMSX (10/2007 to 03/2009 bear market - Great Recession crash) :

Small Caps cumulative loss = -53.22%
Large Caps cumulative loss = -55.92%


Image

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Taylor Larimore
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Charts and Past Performance

Post by Taylor Larimore » Wed Jun 12, 2019 8:26 pm

stocknob:

I don't mean to be disrespectful, but I never put much credence in graphs that are designed to show above average or below average performance with intermediate starting dates. This occurs with ALL funds.

I am not even sure I want to place credence in ANY graphs showing past performance. This is what experts say:
American Association of Individual Investors: "Top Performance lists are dangerous."

Frank Armstrong, financial author: "Rating services such as Morningstar's 'Star Awards' or the 'Forbes Honor Roll' attest to the futility of applying past performance to tomorrow."

Arnott and Bernstein (2002, p. 64): “The investment management industry thrives on the expedient of forecasting the future by extrapolating the past."

Barra Research: "There is no persistence of equity fund performance."

Christine Benz, Morningstar Director of Personal Finance: "When we look at our data, at the factors that are most predictive of good performance going forward, low costs are a much better predictor than is great past performance."

Wm. Bernstein, author of The Four Pillars of Investing: "For the 20 years from 1970 to 1989, the best performing stock assets were Japanese stocks, U.S. small stocks, and gold stocks. These turned out to be the worst performing assets over the next decade."

Jack Bogle: "The biggest mistake investors make is looking backward at performance and thinking it’ll recur in the future."

Bogleheads' Guide to Investing: "Using past performance to pick tomorrow's winning mutual funds is such a bad idea that the government requires a statement similar to this: "Past performance is no guarantee of future performance." Believe it!"

Jack Brennan, former Vanguard CEO: "Fund ranking is meaningless when based primarily on past performance, as most are."

Burns Advisory tracked the performance of Morningstar's five-star rated stock funds beginning January 1, 1999. Of the 248 stock funds, just four still kept that rank after ten years.

Ben Carlson, author of A Wealth of Common Sense : "Dow Jones looked at nearly 2,900 active mutual funds. Only 2 funds in the top quartile stayed in the top quartile of performance over the next four 1-year periods."

Andrew Clarke, author: "By the time an investment reaches the top of the performance tables, there's a good chance that its run is over. The past is not prologue."

Jonathan Clements, author & former Wall Street Journal columnist: "Suppose you picked stock funds that ranked in their category's top 25% over the past five years. A regular updated study suggests that less than a quarter of these funds will remain in the top 25% over the next five years--even worse than the result you would expect based purely on chance."

Prof. John Cochrane, author: "Past performance has almost no information about future performance."

S.T.Coleridge: "History is a lantern over the stern. It shows where you've been but not where you're going"

Dow Jones Indices Report, June 2015: "The data shows a stronger likelihood for the best-performing funds to become the worst performing funds than vice versa." -- June 2016: "Only 3.7% of large-cap funds maintained top-half performance over five-consecutive 12-month periods. For midcap funds, the comparable figure was 5.79%, and for small-cap funds, it was 7.82%."

Charles D. Ellis, author of 16 financial books: "Sadly, investors who rely on performance records are relying on useless data."

Eugene Fama, Nobel Laureate: "Our research on individual mutual funds says that it's impossible to identify true winners on a reliable basis, even if one ignores the costs that active funds impose on investors."

Forbes (2/2/04 issue): "Over the past decade, Morningstar's five-star equity funds have earned an average 5.7% against a 10.3% return for the Wilshire 5000 (Total Stock Market)."

Gensler & Bear, co-authors of The Great Mutual Fund Trap: "Of the fifty top-performing funds in 2000, not a single one appeared on the list in either 1999 or 1998."

Ken Hebner's CGM Focus Fund was the top U.S. equity fund in 2007. In November 2009, it ranked in the bottom 1% of its category.

Mark Hulbert (12-31-2014): "Consider a hypothetical portfolio that each year followed the investment newsletter portfolio that, among the more than 500 tracked by The Hulbert Financial Digest, had the best record during the previous calendar year. Over the past 20 years, that portfolio would have been a disaster, producing an annualized loss of more than -17%."

Mark Hebner, President, Index Fund Advisors: "From 1998 through 2013 only about 8 funds remained in the top 100 the following year."

JPMorgan Chase claimed that 97% of their alternate-asset mutual funds beat their benchmark during the 10-year period ending December, 2013. Morningstar reported that only 33% beat their benchmark during the same period (past-performance calculations differ).

Arthur Levitt, SEC Commissioner: "A mutual fund's past performance, which is the first feature that investors consider when choosing a fund, doesn't predict future performance."

Peter Lynch's Fidelity Magellan Fund (FMAGX), once the world's largest and most successful mutual fund, is now (Feb. 9, 2018) in the bottom 11% of its category for 15-year annualized return

Burton Malkiel, author of the classic Random Walk Down Wall Street: "I have examined the lack of persistency in fund returns over periods from the 1960s through the early 2000s.--There is no persistency to good performance. It is as random as the market."

Mercer Investment Consulting from a study of over 12,000 institutional managers: "Excellent recent performance not only doesn't guarantee future results but generally leads to under-performance in the subsequent period."

Bill Miller, former manager of Legg Mason Value Trust (LMVTX), was the only manager to outperform The S&P 500 Index for 15 consecutive years. On 9/7/2016 Miller’s fund is in the bottom 1% for 15 year returns.

Mark Miller, financial author and journalist: "Only 7.33% of domestic equity funds that were in the top quartile of performance in March 2014 were still there two years later."

Morningstar: "Over the long term, there is no meaningful relationship between past and future fund performance."

Ron Ross, author of The Unbeatable Market: "Extensive studies by Davis, Brown & Groetzman, Ibbotson, Elton et al, all confirmed there is no significant persistence in mutual fund performance. -- Wall Street’s favorite scam is pretending that luck is skill.”

Bill Schultheis, adviser and author of The Coffeehouse Investor: "Using past performance numbers as a method for choosing mutual funds is such a lousy idea that mutual fund companies are required by law to tell you it is a lousy idea."

Sequoia Fund was the top performing large-cap growth fund at the end of 2015 according to Morningstar. On 4/21/2017 it ranked in the bottom 1% for five year returns.

Standard & Poor's Persistence Scorecard (Dec-2014): "The data show a stronger likelihood for the best-performing funds to become the worst-performing funds than vice versa. Of 421 funds that were in the bottom quartile, 14.45% moved to the top quartile over the five year horizon, while 27.08% of the 421 funds that were in the top quartile moved into the bottom quartile during the same period."

Larry Swedroe, author of many finance books: "The 44 Wall Street Fund was the top performing fund over the decade of the 1970s. It ranked as the single worst performing fund of the 1980's losing 73%. -- If you are going to use past performance to predict the future winners, the evidence is strong that your approach is highly likely to fail."

David Swensen, Yale's Chief Investment Officer: "Chasing performance is the biggest mistake investors make. If anything, it is a perverse indicator."

Tweddell & Pierce, co-authors of Winning With Mutual Funds: "Numerous studies have shown that using superior past performance is no better than random selection."

Eric Tyson, author of Mutual Funds for Dummies (2010 edition): "Of the number one top-performing stock and bond funds in each of the last 20 years, a whopping 80% of them subsequently performed worse than the average fund in their peer group over the next 5 to 10 years! Some of these former #1 funds actually went on to become the worst-performing funds in their particular category."

Value Line selected Garret Van Wagoner "Mutual fund Manager of the Year" in 1999. In August 2009, Van Wagoner's Emerging Growth Fund was the worst performing U.S. stock fund over the past 10 years.

Vanguard Study: "Persistence of performance among past winners is no more predictable than a flip of a coin."

Jason Zweig, author and Wall Street Journal columnist: "Buying funds based purely on their past performance is one of the stupidest things an investor can do."
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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willthrill81
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Re: Charts and Past Performance

Post by willthrill81 » Wed Jun 12, 2019 8:35 pm

Taylor Larimore wrote:
Wed Jun 12, 2019 8:26 pm
stocknob:

I don't mean to be disrespectful, but I never put much credence in graphs that are designed to show above average or below average performance with intermediate starting dates. This occurs with ALL funds.

I am not even sure I want to place credence in ANY graphs showing past performance.
You seem to have no problem comparing the S&P 500's recent performance against that of Yale's endowment fund: viewtopic.php?f=10&t=283267.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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