Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

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pdavi21
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by pdavi21 » Wed Jun 12, 2019 1:28 pm

The problem is that when the evidence becomes compelling enough to change your factor choices, you are no longer staying the course with your initial factor choices (which may take decades to pay off-assuming they will pay off).

When the back-testing and justifications come out that say, wait size is really garbage and value may or may not be okay, but momentum and quality have killed it; what happens then?

Do you throw out part of your size/value strategy, which has under-performed to take on the impressively performing momentum and quality factors or do you "stay the course" and wait for the factor performance to show up.

Why do you think the factor zoo is here in the first place? It's because the size and value factors weren't cutting the mustard.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Taylor Larimore » Wed Jun 12, 2019 2:12 pm

nedsaid wrote: Lots of fun being right about things.

nedsaid:

How does it feel to be wrong about things?

Small-Value currently has the WORST 5-year return of all 14 Morningstar style indexes.[/url]

http://news.morningstar.com/index/indexReturn.html

Couldn't resist. :happy

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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nedsaid
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Wed Jun 12, 2019 3:45 pm

Taylor Larimore wrote:
Wed Jun 12, 2019 2:12 pm
nedsaid wrote: Lots of fun being right about things.

nedsaid:

How does it feel to be wrong about things?

Small-Value currently has the WORST 5-year return of all 14 Morningstar style indexes.[/url]

http://news.morningstar.com/index/indexReturn.html

Couldn't resist. :happy

Best wishes.
Taylor

Nedsaid: Well Taylor, I can see you are having fun with this just as I had some fun with Rick Ferri. The gentle jabs back and forth are part of what make the forum fun.

Want to point out that I compared the S&P 500 to the Vanguard Growth Index, Vanguard Value Index, the Vanguard Small Growth Index, and the Vanguard Small Value index over the last 10 years. It turned out that Growth Index, Small Growth Index, Small Value Index all outperformed the S&P 500. The only thing that the S&P 500 beat was the Value Index. I rather kiddingly suggested that people ought to think about selling their S&P 500 funds! In real life, I believe the S&P 500 Index to be a perfectly fine investment. The findings did surprise me and I was delighted that over 10 years, Small Value didn't do so bad.

Yes, I am aware of Small Value's record over the last 5 years. It allayed my fears that Small Value had become an overcrowded trade because of all the academic research. It actually, in my view, strengthens the case for buying it. Also, in 5 years almost anything can happen. The US Total Bond Index outperformed the S&P 500 index in the years after the late 1990's internet bubble but neither I or you would have advocated selling the S&P 500 for the sake of simplicity.

I get the arguments for the 3 fund portfolio, and long term it is a perfectly fine portfolio. I get the arguments for simplicity and I agree that most investors need not agonize over tilts. What I will say is that in the name of simplicity, some Bogleheads have dumped TIPS, REITs, and International Stocks. Indeed Bogle said all you need was US Total Stock Market Index and US Total Bond Market Index. So really we are down from 5 to 2. In another thread, you mentioned that the S&P 500 has outperformed the Yale Endowment Fund. Should be all be down to a one fund portfolio, or down to the FAANG stocks, or down to just Google? This isn't the argument that you or Bogle would make but just making the case that some Bogleheads are simply performance chasing and calling it simplification. They are simply dropping what hasn't done well recently.

I do not predict disaster for the 3 fund portfolio if High Tech and Internet stops leading the market and if the FAANG stocks in particular cool off. We aren't seeing the insane valuations in High Tech and Internet that we saw in 1999, valuations are relatively high historically but not at a speculative level. What I am saying is that the S&P 500 and US Total Market could be flat for 5-7 years or so, after the 1999 bubble, these indexes were flat 2000-2012 with two 50% down bear markets in between. What I don't want to see are people who abandoned their tilts in favor of the 3 fund portfolio starting to take them up again. That would be the worst possible thing they could do, in essense buying in again at the top, the reason I would say this is that Small and Value would have to outperform for a few years before folks start taking up interest again. Buying high and selling low isn't the prescription for investing success nor is changing investment styles at the worst possible time.

Some folks who are abandoning tilts for the 3 fund are doing it for the wrong reasons in my view. They are performance chasing without realizing it. My advice remains the same as it has for 10-12 years now, do the simple 3 fund if you don't believe in the academic research and factor tilting if you do. Your choice of investment approach should be based upon strong evidence and strong conviction and not upon hot recent performance.
Last edited by nedsaid on Wed Jun 12, 2019 4:18 pm, edited 1 time in total.
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Random Walker
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Random Walker » Wed Jun 12, 2019 4:14 pm

pdavi21 wrote:
Wed Jun 12, 2019 1:28 pm
The problem is that when the evidence becomes compelling enough to change your factor choices, you are no longer staying the course with your initial factor choices (which may take decades to pay off-assuming they will pay off).

When the back-testing and justifications come out that say, wait size is really garbage and value may or may not be okay, but momentum and quality have killed it; what happens then?

Do you throw out part of your size/value strategy, which has under-performed to take on the impressively performing momentum and quality factors or do you "stay the course" and wait for the factor performance to show up.

Why do you think the factor zoo is here in the first place? It's because the size and value factors weren't cutting the mustard.
I don’t really see a problem. I don’t see these factors as coming and going like bell bottom jeans and leisure suits. To me it’s been a one way, unidirectional, move towards explaining the behavior of assets and portfolios. CAPM got us about 60-70% of the way there, size and value to about 90%, and momentum and profitability to about 95%. I don’t see these being eradicated. They might get subsumed by other factors in new models, but still not rendered useless. For example, I believe this has happened with investment and profitability subsuming value. But this does not at all render value useless. So I think the answer is straightforward. Stay the course.

Dave

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by klaus14 » Wed Jun 12, 2019 4:35 pm

Random Walker wrote:
Wed Jun 12, 2019 4:14 pm
pdavi21 wrote:
Wed Jun 12, 2019 1:28 pm
The problem is that when the evidence becomes compelling enough to change your factor choices, you are no longer staying the course with your initial factor choices (which may take decades to pay off-assuming they will pay off).

When the back-testing and justifications come out that say, wait size is really garbage and value may or may not be okay, but momentum and quality have killed it; what happens then?

Do you throw out part of your size/value strategy, which has under-performed to take on the impressively performing momentum and quality factors or do you "stay the course" and wait for the factor performance to show up.

Why do you think the factor zoo is here in the first place? It's because the size and value factors weren't cutting the mustard.
I don’t really see a problem. I don’t see these factors as coming and going like bell bottom jeans and leisure suits. To me it’s been a one way, unidirectional, move towards explaining the behavior of assets and portfolios. CAPM got us about 60-70% of the way there, size and value to about 90%, and momentum and profitability to about 95%. I don’t see these being eradicated. They might get subsumed by other factors in new models, but still not rendered useless. For example, I believe this has happened with investment and profitability subsuming value. But this does not at all render value useless. So I think the answer is straightforward. Stay the course.

Dave
There was some discussion explaining the periods small and value overperforming. like 2001 bubble and oil shock. now large and growth is overperforming because tech. the worry is that maybe there won't be any other historical period for small value to overperform.

I have no doubt factors explain what happened, i am not sure same factors (or similar) will retain their explanatory power. What if big tech continues to dominate and kill other companies? then we will have a tech factor (TECH = percantage of programmers among employees). Then we'll say, oh factors are cyclical and now TECH factor dominates..

we just don't know.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by larryswedroe » Wed Jun 12, 2019 5:01 pm

Klaus. So let me ask you, assuming you believe markets are efficient how can you not believe SV should outperform when the SD of SV over the very long term is like 34 vs. 20 for the market? Pretty simple. Not higher risk adjusted returns, just higher returns.

For my good friend Taylor who is fond of showing SV underperformance in last 10 years. But for some reason he only shows US performance. So for the last 10 and 15 year periods in US Vanguard 500 outperformed DFSVX by 2.0 and 1.1 percent, respectively. But internationally, DISVX outperformed Vanguard developed markets fund by 1.1 and 1.8 percent, respectively. And then in EM, VEIEX outperformed DFEVX for last ten years by all of 0.1%, but underperformed for last 15 by 1.4%. So think we can say for last 10 and 15 years it is a tie when you include US and international. So in one of the worst periods ever for value it basically made no difference if you tilted or not. Go back further and you see big outperformance. And now the spreads in valuations are near record highs favoring value due to the underperformance. An informed investor makes better decisions.
Best wishes
Larry

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HomerJ
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by HomerJ » Wed Jun 12, 2019 5:13 pm

Random Walker wrote:
Wed Jun 12, 2019 4:14 pm
I don’t really see a problem. I don’t see these factors as coming and going like bell bottom jeans and leisure suits. To me it’s been a one way, unidirectional, move towards explaining the behavior of assets and portfolios.
What happened to CCFs? They don't seem to be mentioned any more.
The J stands for Jay

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nedsaid
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Wed Jun 12, 2019 5:38 pm

HomerJ wrote:
Wed Jun 12, 2019 5:13 pm
Random Walker wrote:
Wed Jun 12, 2019 4:14 pm
I don’t really see a problem. I don’t see these factors as coming and going like bell bottom jeans and leisure suits. To me it’s been a one way, unidirectional, move towards explaining the behavior of assets and portfolios.
What happened to CCFs? They don't seem to be mentioned any more.
CCFs are not factors for one thing. We have gone over all of this before and not sure why you are bringing this up. Larry has posted that Low Volatility is a crowded trade and thus he does not recommend investors chase this factor. Collateralized Commodity Futures did get to be a crowded trade and no longer represented value, these markets got flooded with institutional money to the extent that these markets might have been forever changed.

You seem to be saying that once somebody has given advice that it should not be changed for any reason. Pretty much, you are saying Larry should have stopped with his first book. It amazes me that you chide Larry for telling his clients that the conditions in the markets had changed, indeed it would have been utterly irresponsible of him to not say anything.

If you are driving and see a "bridge out" sign, you don't drive through the barrier and sail into the abyss for the sake of "staying the course." You would do the sensible thing and stop. I can see someone saying, "well you know those stupid mapmakers said there was a bridge here and now they have changed their mind. They must have been wrong the first time."

Larry saw a "bridge out" sign for Low Volatility and for CCFs and informed his clients even though he had previously recommended CCFs. Similarly, Mr. Bogle saw a "bridge out" sign regarding the US Stock Market in 1999 and made changes to his portfolio. He told a Morningstar conference all about this.

Markets and the economy are dynamic. Things change. I could have told you over 60 years ago to avoid stocks because bond yields are higher than the dividend yields on stocks. That is because we all knew that stocks normally had higher yields than bonds because stocks were riskier. When bond yields cross the line of stock yields, this is a flashing indicator that stocks are overvalued. When that happened in the late 1920's, we saw a terrible bear market. Well, the market changed the way that it valued stocks. Market participants, if they were smart, would have changed too. This is the problem with overdoing the "stay the course" philosophy no matter what. Mr. Bogle, our hero, made adjustments in his personal finances and in his portfolio when circumstances dictated. We ought to follow his example.
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Random Walker
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Random Walker » Wed Jun 12, 2019 5:47 pm

HomerJ wrote:
Wed Jun 12, 2019 5:13 pm
Random Walker wrote:
Wed Jun 12, 2019 4:14 pm
I don’t really see a problem. I don’t see these factors as coming and going like bell bottom jeans and leisure suits. To me it’s been a one way, unidirectional, move towards explaining the behavior of assets and portfolios.
What happened to CCFs? They don't seem to be mentioned any more.
At limits of my knowledge, but they can certainly still have a place in a diversified portfolio. A wise person will not lament owning insurance just because the risk didn’t show up and the insurance didn’t pay off. Personally, given limited tax advantaged space, I decided to drop CCFs for some of the newer alternatives: higher expected return than CCFs and still strong diversification potential.

Dave

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by klaus14 » Wed Jun 12, 2019 6:09 pm

larryswedroe wrote:
Wed Jun 12, 2019 5:01 pm
Klaus. So let me ask you, assuming you believe markets are efficient how can you not believe SV should outperform when the SD of SV over the very long term is like 34 vs. 20 for the market? Pretty simple. Not higher risk adjusted returns, just higher returns.

For my good friend Taylor who is fond of showing SV underperformance in last 10 years. But for some reason he only shows US performance. So for the last 10 and 15 year periods in US Vanguard 500 outperformed DFSVX by 2.0 and 1.1 percent, respectively. But internationally, DISVX outperformed Vanguard developed markets fund by 1.1 and 1.8 percent, respectively. And then in EM, VEIEX outperformed DFEVX for last ten years by all of 0.1%, but underperformed for last 15 by 1.4%. So think we can say for last 10 and 15 years it is a tie when you include US and international. So in one of the worst periods ever for value it basically made no difference if you tilted or not. Go back further and you see big outperformance. And now the spreads in valuations are near record highs favoring value due to the underperformance. An informed investor makes better decisions.
Best wishes
Larry
Thank you Larry for your response, and also for all your contributions. I learned a lot from you!

This makes sense. However, most of us want higher risk adjusted returns, not just high returns.

Personally, 45% of my 60% equity allocation is through multifactor funds. My understanding is that they are "safer" compared to SV.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by larryswedroe » Wed Jun 12, 2019 6:36 pm

Klaus, if you believe markets are efficient than ALL risky assets should have similar risk-adjusted returns, not similar returns but similar risk-adjusted returns.
With that said, using a tilted portfolio to create more of a risk parity strategy has very clearly provided superior risk-adjusted returns, and far less downside risk, which is important to minimize sequence risk. So yes multi-factor is more efficient due to diversification benefits.
Larry

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by klaus14 » Wed Jun 12, 2019 8:31 pm

larryswedroe wrote:
Wed Jun 12, 2019 6:36 pm
Klaus, if you believe markets are efficient than ALL risky assets should have similar risk-adjusted returns, not similar returns but similar risk-adjusted returns.
With that said, using a tilted portfolio to create more of a risk parity strategy has very clearly provided superior risk-adjusted returns, and far less downside risk, which is important to minimize sequence risk. So yes multi-factor is more efficient due to diversification benefits.
Larry
Yes i believe markets price all assets better than i ever could with risk/return estimation. there is no free lunch there. Only free lunch can come from diversification to reduce the variance of returns as you explained in your book.

But i can say that my risk tolerance profile is different than the average investor thus some assets are more appealing for me. I am a tech worker so i like how mutifactor funds underweight tech. However, i wouldn't advise a non tech worker to underweight tech.

Differences from average investor required for factor investing seems to be: longer horizons, more discipline and conviction. Otherwise behavioral pitfalls will prevent you from harvesting any factor premia. In this sense, market cap investing is better for average investor (almost by definition). Only if you are sure that you are very different than average investor, you should tilt away.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by HomerJ » Wed Jun 12, 2019 8:51 pm

nedsaid wrote:
Wed Jun 12, 2019 5:38 pm
HomerJ wrote:
Wed Jun 12, 2019 5:13 pm
Random Walker wrote:
Wed Jun 12, 2019 4:14 pm
I don’t really see a problem. I don’t see these factors as coming and going like bell bottom jeans and leisure suits. To me it’s been a one way, unidirectional, move towards explaining the behavior of assets and portfolios.
What happened to CCFs? They don't seem to be mentioned any more.
CCFs are not factors for one thing. We have gone over all of this before and not sure why you are bringing this up.
I'm bringing it up because advice has indeed changed over time, and hasn't been one-way or unidirectional.

That's all I meant. I'm fine with CCFs disappearing from recommended portfolios. I have no problem with anyone changing their mind when new information comes up.

But is it factors for the long run? Or shall we drop certain factors as well in a few years, as new information comes in?

If some factors are dropped in the future, I absolutely believe there will be legitimate and good (but backward-looking) reasons as to why they didn't perform as expected.

That's not going to help anyone who invested in them though.
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nedsaid
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Wed Jun 12, 2019 9:30 pm

HomerJ wrote:
Wed Jun 12, 2019 8:51 pm
nedsaid wrote:
Wed Jun 12, 2019 5:38 pm
HomerJ wrote:
Wed Jun 12, 2019 5:13 pm
Random Walker wrote:
Wed Jun 12, 2019 4:14 pm
I don’t really see a problem. I don’t see these factors as coming and going like bell bottom jeans and leisure suits. To me it’s been a one way, unidirectional, move towards explaining the behavior of assets and portfolios.
What happened to CCFs? They don't seem to be mentioned any more.
CCFs are not factors for one thing. We have gone over all of this before and not sure why you are bringing this up.
I'm bringing it up because advice has indeed changed over time, and hasn't been one-way or unidirectional.

That's all I meant. I'm fine with CCFs disappearing from recommended portfolios. I have no problem with anyone changing their mind when new information comes up.

But is it factors for the long run? Or shall we drop certain factors as well in a few years, as new information comes in?

If some factors are dropped in the future, I absolutely believe there will be legitimate and good (but backward-looking) reasons as to why they didn't perform as expected.

That's not going to help anyone who invested in them though.
The factors argument in my view boils down to this. If they are based solely on risk, the quants and the computers could arbitrage them away. If they are based on human nature, the quants and computers could hold them down for a while before human nature and human behavior, the cycle of greed and fear, rears its head again. Or the factors could be a combination of risk and behavior, in which case the spreads are narrowed. Who is right? No way to know. I believe that the factors are largely behavioral but there is disagreement on this. I have said that markets are dynamic and factors could be a casualty.
A fool and his money are good for business.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by skeptic42 » Thu Jun 13, 2019 5:55 am

nedsaid wrote:
Wed Jun 12, 2019 9:30 pm
The factors argument in my view boils down to this. If they are based solely on risk, the quants and the computers could arbitrage them away. If they are based on human nature, the quants and computers could hold them down for a while before human nature and human behavior, the cycle of greed and fear, rears its head again. Or the factors could be a combination of risk and behavior, in which case the spreads are narrowed. Who is right? No way to know. I believe that the factors are largely behavioral but there is disagreement on this. I have said that markets are dynamic and factors could be a casualty.
I think you have it backwards. If factors are risk based, then they cannot be arbitraged away.

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nedsaid
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Thu Jun 13, 2019 7:24 am

skeptic42 wrote:
Thu Jun 13, 2019 5:55 am
nedsaid wrote:
Wed Jun 12, 2019 9:30 pm
The factors argument in my view boils down to this. If they are based solely on risk, the quants and the computers could arbitrage them away. If they are based on human nature, the quants and computers could hold them down for a while before human nature and human behavior, the cycle of greed and fear, rears its head again. Or the factors could be a combination of risk and behavior, in which case the spreads are narrowed. Who is right? No way to know. I believe that the factors are largely behavioral but there is disagreement on this. I have said that markets are dynamic and factors could be a casualty.
I think you have it backwards. If factors are risk based, then they cannot be arbitraged away.
I know that Larry talks about limits to arbitrage, for example small stocks have less trading volume and thus more expensive to short because the bid/ask spreads are higher. I have read discussion that certain risks cannot be arbitraged away. With human nature, you don't know when sentiment extremes will occur or how long they will last. If you can explain your comment further, that would be appreciated.
A fool and his money are good for business.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by DaufuskieNate » Thu Jun 13, 2019 8:39 am

nedsaid wrote:
Thu Jun 13, 2019 7:24 am
skeptic42 wrote:
Thu Jun 13, 2019 5:55 am
nedsaid wrote:
Wed Jun 12, 2019 9:30 pm
The factors argument in my view boils down to this. If they are based solely on risk, the quants and the computers could arbitrage them away. If they are based on human nature, the quants and computers could hold them down for a while before human nature and human behavior, the cycle of greed and fear, rears its head again. Or the factors could be a combination of risk and behavior, in which case the spreads are narrowed. Who is right? No way to know. I believe that the factors are largely behavioral but there is disagreement on this. I have said that markets are dynamic and factors could be a casualty.
I think you have it backwards. If factors are risk based, then they cannot be arbitraged away.
I know that Larry talks about limits to arbitrage, for example small stocks have less trading volume and thus more expensive to short because the bid/ask spreads are higher. I have read discussion that certain risks cannot be arbitraged away. With human nature, you don't know when sentiment extremes will occur or how long they will last. If you can explain your comment further, that would be appreciated.
Risk-based factors simply follow the basic premise that underlies all of finance -investors demand a higher return for taking on higher risk. If markets are efficient, they price all known risks. In this sense, there is nothing left over for the quants and computers to arbitrage. Efficient markets result in all investments having similar risk-adjusted returns on an individual basis.

Behavioral factors take advantage of human behaviors that may in some way deviate from the notion of pricing all known risks rationally. The quants and computers can take the other side of these trades and earn a premium above and beyond a normal risk-adjusted return. If there are no limits to these trades by the quants and computers, the premium gets arbitraged away. If there are limits, the premium can continue to be earned as long as the behavioral traits are operative.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Thu Jun 13, 2019 8:46 am

nedsaid wrote:
Thu Jun 13, 2019 7:24 am
skeptic42 wrote:
Thu Jun 13, 2019 5:55 am
nedsaid wrote:
Wed Jun 12, 2019 9:30 pm
The factors argument in my view boils down to this. If they are based solely on risk, the quants and the computers could arbitrage them away. If they are based on human nature, the quants and computers could hold them down for a while before human nature and human behavior, the cycle of greed and fear, rears its head again. Or the factors could be a combination of risk and behavior, in which case the spreads are narrowed. Who is right? No way to know. I believe that the factors are largely behavioral but there is disagreement on this. I have said that markets are dynamic and factors could be a casualty.
I think you have it backwards. If factors are risk based, then they cannot be arbitraged away.
I know that Larry talks about limits to arbitrage, for example small stocks have less trading volume and thus more expensive to short because the bid/ask spreads are higher. I have read discussion that certain risks cannot be arbitraged away. With human nature, you don't know when sentiment extremes will occur or how long they will last. If you can explain your comment further, that would be appreciated.
Arbitrage is a means for taking advantage of market inefficiencies. It is a strategy of capturing the return from assets that are mispriced: in theory at least, profits from true arbitrage are risk-free.

If factor premia are based on risks, therefore, their premiums can't be arbitraged away: there is no way to get the reward without bearing the risk.

If factor premia are based on behavioral anomalies, their premiums CAN be arbitraged away in theory (subject to practical limits of arbitrage, which you mentioned before).
Last edited by vineviz on Thu Jun 13, 2019 10:40 am, edited 1 time in total.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by skeptic42 » Thu Jun 13, 2019 9:53 am

nedsaid wrote:
Thu Jun 13, 2019 7:24 am
skeptic42 wrote:
Thu Jun 13, 2019 5:55 am
nedsaid wrote:
Wed Jun 12, 2019 9:30 pm
The factors argument in my view boils down to this. If they are based solely on risk, the quants and the computers could arbitrage them away. If they are based on human nature, the quants and computers could hold them down for a while before human nature and human behavior, the cycle of greed and fear, rears its head again. Or the factors could be a combination of risk and behavior, in which case the spreads are narrowed. Who is right? No way to know. I believe that the factors are largely behavioral but there is disagreement on this. I have said that markets are dynamic and factors could be a casualty.
I think you have it backwards. If factors are risk based, then they cannot be arbitraged away.
I know that Larry talks about limits to arbitrage, for example small stocks have less trading volume and thus more expensive to short because the bid/ask spreads are higher. I have read discussion that certain risks cannot be arbitraged away. With human nature, you don't know when sentiment extremes will occur or how long they will last. If you can explain your comment further, that would be appreciated.
Others already explained it better than I could, thanks. :happy

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Re: Larry Swedroe changed his mind.

Post by YRT70 » Thu Jun 13, 2019 11:09 am

Random Walker wrote:
Tue Jun 11, 2019 7:37 pm
For those who want to read something closer to an academic text, good starts include:
Asset Management by Andrew Ang 704 pages
Successful Investing Is A Process by Jacques Lussier 368 pages
Expected Returns by Antti Ilmanen 570 pages

For the rest of us who are interested in investing and want to appreciate the current state of academic finance, yet want a shorter, simpler, and more enjoyable read, very hard to beat one of Larry’s books or essays.
I enjoyed Larry's books a lot but it didn't really teach me how to build my own factor diversified portfolio.

Is there any source you recommend for that? Doesn't have to be academic btw.

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Re: Larry Swedroe changed his mind.

Post by hdas » Thu Jun 13, 2019 11:11 am

YRT70 wrote:
Thu Jun 13, 2019 11:09 am
Random Walker wrote:
Tue Jun 11, 2019 7:37 pm
For those who want to read something closer to an academic text, good starts include:
Asset Management by Andrew Ang 704 pages
Successful Investing Is A Process by Jacques Lussier 368 pages
Expected Returns by Antti Ilmanen 570 pages

For the rest of us who are interested in investing and want to appreciate the current state of academic finance, yet want a shorter, simpler, and more enjoyable read, very hard to beat one of Larry’s books or essays.
I enjoyed Larry's books a lot but it didn't really teach me how to build my own factor diversified portfolio.

Is there any source you recommend for that? Doesn't have to be academic btw.
Respectfully, Larry's books are more like pamphlets, and unfortunately self serving. The best resource is Andrew Ang book. :greedy
"whenever there is a randomized way of doing something, then there is a nonrandomized way that delivers better performance but requires more thought" ET Jaynes

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Random Walker
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Re: Larry Swedroe changed his mind.

Post by Random Walker » Thu Jun 13, 2019 12:01 pm

YRT70 wrote:
Thu Jun 13, 2019 11:09 am
Random Walker wrote:
Tue Jun 11, 2019 7:37 pm
For those who want to read something closer to an academic text, good starts include:
Asset Management by Andrew Ang 704 pages
Successful Investing Is A Process by Jacques Lussier 368 pages
Expected Returns by Antti Ilmanen 570 pages

For the rest of us who are interested in investing and want to appreciate the current state of academic finance, yet want a shorter, simpler, and more enjoyable read, very hard to beat one of Larry’s books or essays.
I enjoyed Larry's books a lot but it didn't really teach me how to build my own factor diversified portfolio.

Is there any source you recommend for that? Doesn't have to be academic btw.
At the back of several of his books, perhaps Black Swans and Factor book, there are specific fund recommendations. I would look closely at Black Swans for construction ideas. A couple of thoughts:
1. Use funds that have deep exposures to the factors you want. That way you take on less market risk to achieve the desired tilts to the other factors. After all, the goal is diversify away from the market risk that already dominates the portfolio.
2. As you increase tilts to factors with expected premiums, decrease overall equity exposure and increase exposure to term with safe bonds
3. In general more efficient to achieve the tilts you want with single core funds that incorporate multiple factors. Don’t want to have one of your funds selling a stock and another fund buying the same stock. Core or total market funds are cheaper and they effectively rebalance with other people’s money as opposed to your own. If the core or TSM fund doesn’t get you the tilt you want, then start with a core fund and add a lesser amount of the more expensive specific asset class fund to get where you want.

I think the concept of core funds and using funds with deeper exposures comes specifically from his book Only Guide To Right Financial Plan.

Dave

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Re: Larry Swedroe changed his mind.

Post by Random Walker » Thu Jun 13, 2019 12:03 pm

hdas wrote:
Thu Jun 13, 2019 11:11 am
YRT70 wrote:
Thu Jun 13, 2019 11:09 am
Random Walker wrote:
Tue Jun 11, 2019 7:37 pm
For those who want to read something closer to an academic text, good starts include:
Asset Management by Andrew Ang 704 pages
Successful Investing Is A Process by Jacques Lussier 368 pages
Expected Returns by Antti Ilmanen 570 pages

For the rest of us who are interested in investing and want to appreciate the current state of academic finance, yet want a shorter, simpler, and more enjoyable read, very hard to beat one of Larry’s books or essays.
I enjoyed Larry's books a lot but it didn't really teach me how to build my own factor diversified portfolio.

Is there any source you recommend for that? Doesn't have to be academic btw.
Respectfully, Larry's books are more like pamphlets, and unfortunately self serving. The best resource is Andrew Ang book. :greedy
I own and have read significant bits and pieces of all the above books. But I haven’t been able to get myself to go cover to cover on any of them.

Dave

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Re: Larry Swedroe changed his mind.

Post by YRT70 » Thu Jun 13, 2019 12:14 pm

Random Walker wrote:
Thu Jun 13, 2019 12:01 pm
At the back of several of his books, perhaps Black Swans and Factor book, there are specific fund recommendations. I would look closely at Black Swans for construction ideas. A couple of thoughts:
1. Use funds that have deep exposures to the factors you want. That way you take on less market risk to achieve the desired tilts to the other factors. After all, the goal is diversify away from the market risk that already dominates the portfolio.
2. As you increase tilts to factors with expected premiums, decrease overall equity exposure and increase exposure to term with safe bonds
3. In general more efficient to achieve the tilts you want with single core funds that incorporate multiple factors. Don’t want to have one of your funds selling a stock and another fund buying the same stock. Core or total market funds are cheaper and they effectively rebalance with other people’s money as opposed to your own. If the core or TSM fund doesn’t get you the tilt you want, then start with a core fund and add a lesser amount of the more expensive specific asset class fund to get where you want.

I think the concept of core funds and using funds with deeper exposures comes specifically from his book Only Guide To Right Financial Plan.

Dave
Thanks for the tips and explanation. I appreciate it. I've seen the list in the back. I'm from Europe and we get slightly different funds.

I do have access to a lot of the iShares Core, Edge and Multifactor funds. I still need to work out how to use those.

So far I've seen that getting exposure to size and value is rather straight forward, combining it with momentum is a bit more tricky. I just got the book by Ang. Will start reading that now.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Random Walker » Thu Jun 13, 2019 12:23 pm

From the bits of the Ang book that I read, I came away with a big focus on portfolio efficiency. There are trade offs. A more efficient portfolio can (will) be more expensive and likely less tax efficient too. Lack of portfolio efficiency is a real cost too. Hard to decide where to draw the line in putting the portfolio together.

Dave

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by HomerJ » Thu Jun 13, 2019 12:32 pm

Random Walker wrote:
Thu Jun 13, 2019 12:23 pm
Hard to decide where to draw the line in putting the portfolio together.
Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "optimal".

"Pretty good" will still make you rich.
The J stands for Jay

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by YRT70 » Thu Jun 13, 2019 1:01 pm

HomerJ wrote:
Thu Jun 13, 2019 12:32 pm
Random Walker wrote:
Thu Jun 13, 2019 12:23 pm
Hard to decide where to draw the line in putting the portfolio together.
Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "optimal".

"Pretty good" will still make you rich.
The way the factor diversified portfolio with higher bond allocation (as suggested by Larry in his book) cuts tail risk and reduces SoRR is pretty compelling to me. In my case it may be the difference between having my financial plan succeed or fail. But who knows what will happen in the future. Time will tell.
Last edited by YRT70 on Thu Jun 13, 2019 1:09 pm, edited 1 time in total.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Thu Jun 13, 2019 1:04 pm

HomerJ wrote:
Thu Jun 13, 2019 12:32 pm
Random Walker wrote:
Thu Jun 13, 2019 12:23 pm
Hard to decide where to draw the line in putting the portfolio together.
Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "optimal".

"Pretty good" will still make you rich.
“Even better” does the same thing as “pretty good”, just faster and/or with less risk.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by packer16 » Thu Jun 13, 2019 1:21 pm

YRT70 wrote:
Thu Jun 13, 2019 1:01 pm
HomerJ wrote:
Thu Jun 13, 2019 12:32 pm
Random Walker wrote:
Thu Jun 13, 2019 12:23 pm
Hard to decide where to draw the line in putting the portfolio together.
Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "optimal".

"Pretty good" will still make you rich.
The way the factor diversified portfolio with higher bond allocation (as suggested by Larry in his book) cuts tail risk and reduces SoRR is pretty compelling to me. In my case it may be the difference between having my financial plan succeed or fail. But who knows what will happen in the future. Time will tell.
Using this higher factor return more bonds approach does make you dependent upon whether the factor premium shows up. If it does not show up during your holding period, you will be short of your target return. Diversifying among factors may help or it may not if these factors premiums do not show up & are offset by fees & implementation slippage.

Packer
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by YRT70 » Thu Jun 13, 2019 1:29 pm

packer16 wrote:
Thu Jun 13, 2019 1:21 pm
YRT70 wrote:
Thu Jun 13, 2019 1:01 pm
HomerJ wrote:
Thu Jun 13, 2019 12:32 pm
Random Walker wrote:
Thu Jun 13, 2019 12:23 pm
Hard to decide where to draw the line in putting the portfolio together.
Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "optimal".

"Pretty good" will still make you rich.
The way the factor diversified portfolio with higher bond allocation (as suggested by Larry in his book) cuts tail risk and reduces SoRR is pretty compelling to me. In my case it may be the difference between having my financial plan succeed or fail. But who knows what will happen in the future. Time will tell.
Using this higher factor return more bonds approach does make you dependent upon whether the factor premium shows up. If it does not show up during your holding period, you will be short of your target return. Diversifying among factors may help or it may not if these factors premiums do not show up & are offset by fees & implementation slippage.

Packer
With that portfolio one is still exposed to the market factor, so depending on the goals one might still achieve sufficient returns even if the size and value premium don't show up.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by HomerJ » Thu Jun 13, 2019 1:31 pm

vineviz wrote:
Thu Jun 13, 2019 1:04 pm
HomerJ wrote:
Thu Jun 13, 2019 12:32 pm
Random Walker wrote:
Thu Jun 13, 2019 12:23 pm
Hard to decide where to draw the line in putting the portfolio together.
Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "optimal".

"Pretty good" will still make you rich.
“Even better” does the same thing as “pretty good”, just faster and/or with less risk.
My point still stands.

Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "Even better".

"Even better" is complicated. "Pretty good" is simple.
The J stands for Jay

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Thu Jun 13, 2019 1:43 pm

HomerJ wrote:
Thu Jun 13, 2019 1:31 pm
vineviz wrote:
Thu Jun 13, 2019 1:04 pm
HomerJ wrote:
Thu Jun 13, 2019 12:32 pm
Random Walker wrote:
Thu Jun 13, 2019 12:23 pm
Hard to decide where to draw the line in putting the portfolio together.
Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "optimal".

"Pretty good" will still make you rich.
“Even better” does the same thing as “pretty good”, just faster and/or with less risk.
My point still stands.

Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "Even better".

"Even better" is complicated. "Pretty good" is simple.
The only difference between “complicated” and “simple” is knowledge.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by packer16 » Thu Jun 13, 2019 1:46 pm

YRT70 wrote:
Thu Jun 13, 2019 1:29 pm
packer16 wrote:
Thu Jun 13, 2019 1:21 pm
YRT70 wrote:
Thu Jun 13, 2019 1:01 pm
HomerJ wrote:
Thu Jun 13, 2019 12:32 pm
Random Walker wrote:
Thu Jun 13, 2019 12:23 pm
Hard to decide where to draw the line in putting the portfolio together.
Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "optimal".

"Pretty good" will still make you rich.
The way the factor diversified portfolio with higher bond allocation (as suggested by Larry in his book) cuts tail risk and reduces SoRR is pretty compelling to me. In my case it may be the difference between having my financial plan succeed or fail. But who knows what will happen in the future. Time will tell.
Using this higher factor return more bonds approach does make you dependent upon whether the factor premium shows up. If it does not show up during your holding period, you will be short of your target return. Diversifying among factors may help or it may not if these factors premiums do not show up & are offset by fees & implementation slippage.

Packer
With that portfolio one is still exposed to the market factor, so depending on the goals one might still achieve sufficient returns even if the size and value premium don't show up.
I agree so IMO the conservative thing to do is to keep your exposure to equities the same (to keep expected return high) & add some SCV if you think the premium will show up during your hold period. IMO the danger is relying on the factor premium to meet your return goal as the timing (& some say if will happen at all) is uncertain.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by YRT70 » Thu Jun 13, 2019 2:05 pm

packer16 wrote:
Thu Jun 13, 2019 1:46 pm
YRT70 wrote:
Thu Jun 13, 2019 1:29 pm
packer16 wrote:
Thu Jun 13, 2019 1:21 pm
YRT70 wrote:
Thu Jun 13, 2019 1:01 pm
HomerJ wrote:
Thu Jun 13, 2019 12:32 pm


Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "optimal".

"Pretty good" will still make you rich.
The way the factor diversified portfolio with higher bond allocation (as suggested by Larry in his book) cuts tail risk and reduces SoRR is pretty compelling to me. In my case it may be the difference between having my financial plan succeed or fail. But who knows what will happen in the future. Time will tell.
Using this higher factor return more bonds approach does make you dependent upon whether the factor premium shows up. If it does not show up during your holding period, you will be short of your target return. Diversifying among factors may help or it may not if these factors premiums do not show up & are offset by fees & implementation slippage.

Packer
With that portfolio one is still exposed to the market factor, so depending on the goals one might still achieve sufficient returns even if the size and value premium don't show up.
I agree so IMO the conservative thing to do is to keep your exposure to equities the same (to keep expected return high) & add some SCV if you think the premium will show up during your hold period. IMO the danger is relying on the factor premium to meet your return goal as the timing (& some say if will happen at all) is uncertain.

Packer
You're making a good point. Thanks for bringing it to my awareness. I still need to think through thoroughly how I will set up my portfolio.

And correct me if I'm wrong but if one diversifies across several factors (size, value, momentum, quality, term) it becomes quite likely at least some of the premiums will show up sooner or later (and of course I understand there are no guarantees as to what will happen in the future).

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by HomerJ » Thu Jun 13, 2019 2:13 pm

vineviz wrote:
Thu Jun 13, 2019 1:43 pm
HomerJ wrote:
Thu Jun 13, 2019 1:31 pm
vineviz wrote:
Thu Jun 13, 2019 1:04 pm
HomerJ wrote:
Thu Jun 13, 2019 12:32 pm
Random Walker wrote:
Thu Jun 13, 2019 12:23 pm
Hard to decide where to draw the line in putting the portfolio together.
Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "optimal".

"Pretty good" will still make you rich.
“Even better” does the same thing as “pretty good”, just faster and/or with less risk.
My point still stands.

Investing can actually be quite simple, if you guys would just accept "pretty good" instead of shooting for "Even better".

"Even better" is complicated. "Pretty good" is simple.
The only difference between “complicated” and “simple” is knowledge.
Economics is not a science like physics. There is very little actual knowledge. There are just guesses and best fits on very limited data and probabilities with huge error bars.

(And even in fields where there is actual knowledge, complicated is still complicated. A nuclear sub is more complicated than a row boat, even if you have the requisite knowledge - if you're just trying to get across a slow moving river, simple is better)

My apologies for diverting the thread. I'll back off now. If you guys want to discuss complicated strategies to hopefully eke out a bit more return, have at it.
The J stands for Jay

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Thu Jun 13, 2019 2:20 pm

HomerJ wrote:
Thu Jun 13, 2019 2:13 pm

Economics is not a science like physics. There is very little actual knowledge.
Science only looks like magic until you understand it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by packer16 » Thu Jun 13, 2019 2:58 pm

That is the theory & is true if the factors are truly independent, persistent & create enough premium to overcome the cost of implementation. I have not seen a successful multi-factor fund that has truly done better than the TSM funds. I have seen single factor funds do this, SCV is an example. One example of multi-factor fund discussed here is AQR's QSPIX. This fund has underperformed expectations based upon historical premiums quite a bit. IMO once you start adding factors you add to probability that you will underperform. Therefore, IMO picking one you understand & feel comfortable with & can ride through a downturn is very important.

To a certain extent factors are like taste/fashion trends always changing in unpredictable ways (this is I think is the Bogle view). They may also have persistent characteristics going forward (based upon persistence in the past & across markets) (this I think is the Swedroe view) but the persistence shows up (if it does at all) at unknowable times. The strategy here is to hold on over a long enough period of time for them to show up.

One issue with factors IMO is how do you know if it stops working? You only know after a period of underperformance which does not revert, the subject of the Karsten thread. The practical issue I see as an investor is your holding period close to the period at which the factor premium will show up. Some folks are of the opinion that the incremental potential gain is not worth the "show up" risk, incremental fees & slippage between theoretical portfolios & ones that can be put together with large pools of money (mutual funds to gain exposure to factors). This is up to each investor to decide.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by vineviz » Thu Jun 13, 2019 3:18 pm

packer16 wrote:
Thu Jun 13, 2019 2:58 pm
That is the theory & is true if the factors are truly independent, persistent & create enough premium to overcome the cost of implementation. I have not seen a successful multi-factor fund that has truly done better than the TSM funds. I have seen single factor funds do this, SCV is an example.
Virtually every fund that differs in any material way from TSM is a multi-factor fund.

Every long-only small cap value fund contains exposure to at least three factors (market beta, size, and value) for example.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by klaus14 » Thu Jun 13, 2019 3:19 pm

packer16 wrote:
Thu Jun 13, 2019 2:58 pm
I have not seen a successful multi-factor fund that has truly done better than the TSM funds.
Small sample but INTF did better than TSM funds since inception. ISCF did even better.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by packer16 » Thu Jun 13, 2019 3:34 pm

vineviz wrote:
Thu Jun 13, 2019 3:18 pm
packer16 wrote:
Thu Jun 13, 2019 2:58 pm
That is the theory & is true if the factors are truly independent, persistent & create enough premium to overcome the cost of implementation. I have not seen a successful multi-factor fund that has truly done better than the TSM funds. I have seen single factor funds do this, SCV is an example.
Virtually every fund that differs in any material way from TSM is a multi-factor fund.

Every long-only small cap value fund contains exposure to at least three factors (market beta, size, and value) for example.
What is was referring to are funds that are targeting multi-factor exposure. A few international examples are below. If the factor diversification strategy is obviously better we would no doubt see examples of successful portfolios following this strategy all above. I am just wondering if the multi-factor strategy has any better odds of doing better than an index than does active management. In theory it should be the case.

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by packer16 » Thu Jun 13, 2019 3:38 pm

klaus14 wrote:
Thu Jun 13, 2019 3:19 pm
packer16 wrote:
Thu Jun 13, 2019 2:58 pm
I have not seen a successful multi-factor fund that has truly done better than the TSM funds.
Small sample but INTF did better than TSM funds since inception. ISCF did even better.
The first group appears pretty close (no where near the 2% difference folks have been talking about). For the second group is there a small cap international ETF to compare to? TIA

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by skeptic42 » Thu Jun 13, 2019 3:47 pm

packer16 wrote:
Thu Jun 13, 2019 3:38 pm
klaus14 wrote:
Thu Jun 13, 2019 3:19 pm
packer16 wrote:
Thu Jun 13, 2019 2:58 pm
I have not seen a successful multi-factor fund that has truly done better than the TSM funds.
Small sample but INTF did better than TSM funds since inception. ISCF did even better.
The first group appears pretty close (no where near the 2% difference folks have been talking about). For the second group is there a small cap international ETF to compare to? TIA

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Random Walker » Thu Jun 13, 2019 3:57 pm

YRT70 wrote:
Thu Jun 13, 2019 2:05 pm
And correct me if I'm wrong but if one diversifies across several factors (size, value, momentum, quality, term) it becomes quite likely at least some of the premiums will show up sooner or later (and of course I understand there are no guarantees as to what will happen in the future).
Basically yes. Take a look at chapter 9 of Larry’s factor book. There are two relevant charts. The first shows the correlations between the various factors; they are mostly effectively uncorrelated. The second looks at the odds of a negative outcome for each factor over different time periods, and at the bottom looks at the odds of a negative outcome for 1/n portfolios diversified across the factors. Factor diversification has decreased the odds of negative outcomes over all time frames 1-20 years in the past.

Dave

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The difference between Simple and Complicated

Post by Taylor Larimore » Thu Jun 13, 2019 7:07 pm

Bogleheads:
The only difference between “complicated” and “simple” is knowledge.
Bogleheads:

This is true:

Simple: The Three-Fund Portfolio

Complicated: http://math.uchicago.edu/~may/REU2017/REUPapers/Yoo.pdf
Albert Einstein: "The five ascending levels of intellect are: smart, intelligent, brilliant, genius, simple."
Best wishes.
Taylor
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by larryswedroe » Thu Jun 13, 2019 7:43 pm

Taylor, So skip the bonds for the moment and you recommend a two equity fund portfolio and I recommend investors also consider a two equity fund portfolio. Both are simple two fund portfolios. IMO the whole simplicity argument is so far overblown to be almost absurd. You don't need complex 12 fund portfolios to diversify sources of risk in equities. Now if you want to add other sources of unique risks then yes you need to add a few more funds, but no need for say a dozen. And finally the real answer is things should be as simple as needed, but not simpler, Not simple is best.
Again nothing wrong with the portfolio you recommend but it does concentrate risks and it is also way more exposed to bubble risks (which have happened several times) than a more diversified portfolio---and that can create sequence risks as well if you happen to retire say in 29 or 66 or 2000 or 2008. At very least investors need to understand both sides of that story, not just the one side. Then can make an informed decision.
Best wishes
Larry

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Bogle vs. the Industry

Post by Taylor Larimore » Thu Jun 13, 2019 8:22 pm

At very least investors need to understand both sides of that story, not just the one side. Then can make an informed decision.
Larry:

We must remember that this form's headline states "Investing Advice Inspired by Jack Bogle."

I believe we may benefit from hearing contrary opinions--of which you are a leader. My concern is that Jack's voice (primarily low cost and simplicity) is being drowned-out by contrary opinions inspired by the investment industry's desire for profit (from our returns). Nobel Laureate's agree with Bogle:

Harry Markowitz: "A foolish attempt to beat the market and get rich quickly will make one's broker rich and oneself much less so."

Eugene Fama: "Whether you decide to tilt toward value depends on whether you are willing to bear the associated risk...The market portfolio is always efficient...For most people, the market portfolio is the most sensible decision."

Paul Samuelson: "The most efficient way to diversify a stock portfolio is with a low-fee index fund. Statistically, a broadly based stock index fund will outperform most actively managed equity portfolios."

William Sharpe: "You may think your opinion is superior, but it pays to be humble, investing in the market rather than trying to beat it."

Robert Shiller: "A portfolio approximating the market may be the most important portfolio."

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by nedsaid » Thu Jun 13, 2019 8:26 pm

vineviz wrote:
Thu Jun 13, 2019 8:46 am
nedsaid wrote:
Thu Jun 13, 2019 7:24 am
skeptic42 wrote:
Thu Jun 13, 2019 5:55 am
nedsaid wrote:
Wed Jun 12, 2019 9:30 pm
The factors argument in my view boils down to this. If they are based solely on risk, the quants and the computers could arbitrage them away. If they are based on human nature, the quants and computers could hold them down for a while before human nature and human behavior, the cycle of greed and fear, rears its head again. Or the factors could be a combination of risk and behavior, in which case the spreads are narrowed. Who is right? No way to know. I believe that the factors are largely behavioral but there is disagreement on this. I have said that markets are dynamic and factors could be a casualty.
I think you have it backwards. If factors are risk based, then they cannot be arbitraged away.
I know that Larry talks about limits to arbitrage, for example small stocks have less trading volume and thus more expensive to short because the bid/ask spreads are higher. I have read discussion that certain risks cannot be arbitraged away. With human nature, you don't know when sentiment extremes will occur or how long they will last. If you can explain your comment further, that would be appreciated.
Arbitrage is a means for taking advantage of market inefficiencies. It is a strategy of capturing the return from assets that are mispriced: in theory at least, profits from true arbitrage are risk-free.

If factor premia are based on risks, therefore, their premiums can't be arbitraged away: there is no way to get the reward without bearing the risk.

If factor premia are based on behavioral anomalies, their premiums CAN be arbitraged away in theory (subject to practical limits of arbitrage, which you mentioned before).
It seems that you are assuming that the quants can predict human behavior, people do weird things at the wrong time and that is why markets do inexplicable things. It seems to me that all the computers, the automation, the algorithms seem to amplify the effects of human nature and behavior and not diminish it. Then you add to the mix shorting, leverage, and a massive derivatives market and these behavioral effects are magnified further. Both euphoria and panic can last longer than anyone expects and panic can occur unexpectedly. I also recall experts saying that subprime was a tempest in a teapot and they were tragically wrong. Things that we don't know about or at least the extent of things we think we know and the things that we know that just ain't so.

Also there is disagreement as to what risk really is, hence Bernstein's essay on deep and shallow risk. Among practitioners of the Value discipline, there are differences in how they try to capture whatever Value premium is out there, indeed there are differences of opinion as to the definition of Value in the first place. I suppose this carries over to other factors. There is disagreement over what constitutes proper diversification. There is disagreement as to the reliability of financial data, and if the time since 1926 is long enough to draw meaningful conclusions about much of anything. Hard to arbitrage something away if there isn't agreement on what that something is.

I think there is broad agreement on these issues: risk, factors, diversification until you start getting really specific. There is a lot of nuance here, there might be 80% or maybe 90% agreement but that 10%-20% makes a big difference. On the Value question, one question that might be asked is the efficacy of book value, it seems to be of declining importance. There is big disagreement on the data itself and whether this is just all fancy data mining. The quants and the math are very important but we are trying to make precise measurements on data that isn't really precise to begin with. For one thing, earnings numbers are not precise as the accountants have to make judgments, things like accruals. Accruals themselves might be based upon estimates.

Also interesting the history of quant funds that try to improve on the indexes, what I call index optimization. The quants have not been able to improve the indexes and I doubt they will be able to take away the factors. Just my two cents.
A fool and his money are good for business.

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nedsaid
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Re: Larry Swedroe changed his mind.

Post by nedsaid » Thu Jun 13, 2019 8:30 pm

Random Walker wrote:
Thu Jun 13, 2019 12:03 pm
hdas wrote:
Thu Jun 13, 2019 11:11 am
YRT70 wrote:
Thu Jun 13, 2019 11:09 am
Random Walker wrote:
Tue Jun 11, 2019 7:37 pm
For those who want to read something closer to an academic text, good starts include:
Asset Management by Andrew Ang 704 pages
Successful Investing Is A Process by Jacques Lussier 368 pages
Expected Returns by Antti Ilmanen 570 pages

For the rest of us who are interested in investing and want to appreciate the current state of academic finance, yet want a shorter, simpler, and more enjoyable read, very hard to beat one of Larry’s books or essays.
I enjoyed Larry's books a lot but it didn't really teach me how to build my own factor diversified portfolio.

Is there any source you recommend for that? Doesn't have to be academic btw.
Respectfully, Larry's books are more like pamphlets, and unfortunately self serving. The best resource is Andrew Ang book. :greedy
I own and have read significant bits and pieces of all the above books. But I haven’t been able to get myself to go cover to cover on any of them.

Dave
If a Medical Doctor can't get through these more academic and scholarly books, then I don't feel so bad.
A fool and his money are good for business.

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Taylor Larimore
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Larry Swedroe and Jack Bogle's books

Post by Taylor Larimore » Thu Jun 13, 2019 8:44 pm

Respectfully, Larry's books are more like pamphlets, and unfortunately self serving. The best resource is Andrew Ang book. :greedy
I own and have read significant bits and pieces of all the above books. But I haven’t been able to get myself to go cover to cover on any of them.

Dave:
Bogleheads:

I believe that I own and have read all of Larry's books and all of Jack Bogle's books. Much of what I know about investing came from their books and I am very grateful.

Bogleheads can read important excerpts from both authors HERE.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Gemini
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Re: Excellent Larry Swedroe Podcast Interview: Factors For The Long Run

Post by Gemini » Thu Jun 13, 2019 9:40 pm

packer16 wrote:
Thu Jun 13, 2019 2:58 pm
That is the theory & is true if the factors are truly independent, persistent & create enough premium to overcome the cost of implementation. I have not seen a successful multi-factor fund that has truly done better than the TSM funds. I have seen single factor funds do this, SCV is an example. One example of multi-factor fund discussed here is AQR's QSPIX. This fund has underperformed expectations based upon historical premiums quite a bit. IMO once you start adding factors you add to probability that you will underperform. Therefore, IMO picking one you understand & feel comfortable with & can ride through a downturn is very important.

To a certain extent factors are like taste/fashion trends always changing in unpredictable ways (this is I think is the Bogle view). They may also have persistent characteristics going forward (based upon persistence in the past & across markets) (this I think is the Swedroe view) but the persistence shows up (if it does at all) at unknowable times. The strategy here is to hold on over a long enough period of time for them to show up.

One issue with factors IMO is how do you know if it stops working? You only know after a period of underperformance which does not revert, the subject of the Karsten thread. The practical issue I see as an investor is your holding period close to the period at which the factor premium will show up. Some folks are of the opinion that the incremental potential gain is not worth the "show up" risk, incremental fees & slippage between theoretical portfolios & ones that can be put together with large pools of money (mutual funds to gain exposure to factors). This is up to each investor to decide.

Packer
Your having not seen does not mean it may not occur in the future. Factor premiums may or may not occur but strong evidence suggests that factors add diversification, which is the only free lunch in investing.

This is also the same strategy when you hold beta aka TSM.

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