Explaining the Demise of Value Investing

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larryswedroe
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Re: Explaining the Demise of Value Investing

Post by larryswedroe » Tue Sep 10, 2019 4:35 pm

pdavi21
First, backtesting can be a problem of course --of data mining and overfitting. But that is why I apply five tests to minimize the risks of such problems. If you disagree, and feel they are not enough then nothing more to add, and I don't know how you decide then to invest in stocks vs. bonds because have same issues. Just my opinion of course.

Second, small value stocks have many obvious risk based explanations in the literature, so don't even need the volatility question, but they have been much more volatlile. But sg has also been about same vol, and their low returns are function of the dumb retail money buying lottery tickets and limits to arbitrage. Institutional investors underweight these stocks but most cannot or will not short, so anomaly persists.

If you think small value stocks are not more risky than the market, which I find hard to believe anyone could believe that, there is nothing more to discuss. We just disagree. They tend to have much higher SD of earnings, more leverage (bad combo) and many more risk traits. I was simply trying to provide a simple explanation without getting into other issues. Guess I failed.

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Larry

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Re: Explaining the Demise of Value Investing

Post by vineviz » Tue Sep 10, 2019 4:59 pm

larryswedroe wrote:
Tue Sep 10, 2019 4:35 pm
But sg has also been about same vol, and their low returns are function of the dumb retail money buying lottery tickets and limits to arbitrage.
IMHO it's not necessary to characterize these patterns as being either some form irrationality or market inefficiencies.

It may be that investors simply have preferences related to the third and fourth moments of stock returns (e.g. skewness and kurtosis) that at least partially offset their preferences related the first and second moments (e.g. mean and variance).
"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: Explaining the Demise of Value Investing

Post by pdavi21 » Tue Sep 10, 2019 5:14 pm

I agree. Small value is more volatile. Since 1996, PV has the illustrious DISVX at 17.18% stdev vs 16.87% for VGTSX. 31 basis points is almost too much volatility to bear...

EDIT: I guess this is a trolling comment. I understand that INTL small value tilts towards DM, and also someone recently suggested to me that accounting risks are less dependent on size for INTL stocks which seems reasonable.
"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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Post by Taylor Larimore » Tue Sep 10, 2019 5:34 pm

vineviz:

I am happy to see that you have made 5,000 posts on the Bogleheads Forum!

Each of your posts is scholarly and well presented. I am grateful.

Best wishes.
Taylor.
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Re: Explaining the Demise of Value Investing

Post by nedsaid » Tue Sep 10, 2019 5:57 pm

The limitations of backtesting have been discussed in detail on this forum. We all know about cognitive bias, data mining, and the like but just want to point out that nearly every investing argument refers to market history. We also make reasonable assumptions from history and project them into the future. This is an imperfect process but otherwise it would be difficult but not impossible to have rational discussions about investing. We make several assumptions here at Bogleheads that are based upon market history. Let me think of a few.

1) We assume the Equity Risk Premium. That is stocks will over long periods of time perform better than riskless T-Bills. We also assume that stocks will outperform bonds over time.
2) We assume that over long periods of time that both stocks and bonds will have real returns over inflation.
3) We assume that markets have both bull and bear phases, just as we assume that the economy will experience recessions.
4) We assume that stocks are more volatile than bonds and that bonds are more volatile than cash. This is an indication that stocks will return more than bonds which in turn will return more than cash.

These assumptions aren't just made up out of someone's head or out of thin air but from a careful study of market history. Just keep this in perspective when we discuss backtesting and data mining.
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Re: Explaining the Demise of Value Investing

Post by jdilla1107 » Tue Sep 10, 2019 6:35 pm

nedsaid wrote:
Tue Sep 10, 2019 5:57 pm
The limitations of backtesting have been discussed in detail on this forum. We all know about cognitive bias, data mining, and the like but just want to point out that nearly every investing argument refers to market history. We also make reasonable assumptions from history and project them into the future. This is an imperfect process but otherwise it would be difficult but not impossible to have rational discussions about investing. We make several assumptions here at Bogleheads that are based upon market history. Let me think of a few.

1) We assume the Equity Risk Premium. That is stocks will over long periods of time perform better than riskless T-Bills. We also assume that stocks will outperform bonds over time.
2) We assume that over long periods of time that both stocks and bonds will have real returns over inflation.
3) We assume that markets have both bull and bear phases, just as we assume that the economy will experience recessions.
4) We assume that stocks are more volatile than bonds and that bonds are more volatile than cash. This is an indication that stocks will return more than bonds which in turn will return more than cash.

These assumptions aren't just made up out of someone's head or out of thin air but from a careful study of market history. Just keep this in perspective when we discuss backtesting and data mining.
First a silly example...

Is the only reason you think the sun will rise tomorrow because it has done so for many years of observed human history? (back testing) If so, then you would be more likely to fall for someone coming along and saying, "Tomorrow will be different because XYZ". Personally, I find knowing how our solar system works to be as important of a reason for why the sun will rise tomorrow.

In a similar way, I believe that the equity premium has logical and observed reasons for existing. The observation to me is more than backtesting. I do not believe the equity premium exists solely because it has existed in the past.

The fact that no can explain past outperformance of small cap value is a philosophical problem for me which means I would not stay firm when I feel doubtful in the future.

In summary, there seems to be some sort of attempt to devolve everything about the markets into "it's all backtesting", which as a scientist and engineer, I find misguided. The difference between a stock and a bond is a fundamental component of capitalism.

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Re: Explaining the Demise of Value Investing

Post by larryswedroe » Tue Sep 10, 2019 7:26 pm

viniez, I don't really agree, though understand what you are saying and why about preferences and Fama even wrote paper on that,But it is economically irrational for investors who at same time are risk averse to buy lottery tickets, they are being "psycho-logical" not economically logical. And certainly an anomaly anyway as investors who are not risk lovers should arb that overvaluation away. But limits to arb prevent that.

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Re: Explaining the Demise of Value Investing

Post by GRP » Tue Sep 10, 2019 7:28 pm

jdilla1107 wrote:
Tue Sep 10, 2019 6:35 pm

The fact that no can explain past outperformance of small cap value is a philosophical problem for me which means I would not stay firm when I feel doubtful in the future.
Larry did explain the past outperformance, no?

You are taking on additional dimensions of risk, therefore that should give one a reasonable expectation for the existence of risk premiums.

And we can be confident it's not data mining because:

1) The premiums have persisted for long periods of time
2) They work out of sample
3) They are robust to different definitions
4) They works across economic regimes and geographies
5) They work across different asset classes
6) They have intuitive, risk based explanations as to why they should persist

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Re: Explaining the Demise of Value Investing

Post by larryswedroe » Tue Sep 10, 2019 7:32 pm

Jdilia
I have posted list of like two dozen papers showing the rational economic explanations for size/value premiums, and they are all pretty simple and common sense. Perhaps it's you have not read the literature? In my factor book I also cite many papers for each of the premiums providing simple and rational risk based and behavioral as appropriate explanations for those premiums. And even here I cited simple explanations, that they have much higher SD of earnings, tend to have more irreversible capital (cannot cut expenses in recessions), and more leverage, and fewer sources of capital and first to get cut off in flights to quality, and of course more volatile over time and and definitely higher trading costs---all of which investors demand risk premium for. You don't even need the volatility argument
Best wishes
Larry

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Re: Explaining the Demise of Value Investing

Post by nedsaid » Tue Sep 10, 2019 10:08 pm

jdilla1107 wrote:
Tue Sep 10, 2019 6:35 pm
nedsaid wrote:
Tue Sep 10, 2019 5:57 pm
The limitations of backtesting have been discussed in detail on this forum. We all know about cognitive bias, data mining, and the like but just want to point out that nearly every investing argument refers to market history. We also make reasonable assumptions from history and project them into the future. This is an imperfect process but otherwise it would be difficult but not impossible to have rational discussions about investing. We make several assumptions here at Bogleheads that are based upon market history. Let me think of a few.

1) We assume the Equity Risk Premium. That is stocks will over long periods of time perform better than riskless T-Bills. We also assume that stocks will outperform bonds over time.
2) We assume that over long periods of time that both stocks and bonds will have real returns over inflation.
3) We assume that markets have both bull and bear phases, just as we assume that the economy will experience recessions.
4) We assume that stocks are more volatile than bonds and that bonds are more volatile than cash. This is an indication that stocks will return more than bonds which in turn will return more than cash.

These assumptions aren't just made up out of someone's head or out of thin air but from a careful study of market history. Just keep this in perspective when we discuss backtesting and data mining.
First a silly example...

Is the only reason you think the sun will rise tomorrow because it has done so for many years of observed human history? (back testing) If so, then you would be more likely to fall for someone coming along and saying, "Tomorrow will be different because XYZ". Personally, I find knowing how our solar system works to be as important of a reason for why the sun will rise tomorrow.

In a similar way, I believe that the equity premium has logical and observed reasons for existing. The observation to me is more than backtesting. I do not believe the equity premium exists solely because it has existed in the past.

The fact that no can explain past outperformance of small cap value is a philosophical problem for me which means I would not stay firm when I feel doubtful in the future.

In summary, there seems to be some sort of attempt to devolve everything about the markets into "it's all backtesting", which as a scientist and engineer, I find misguided. The difference between a stock and a bond is a fundamental component of capitalism.
There actually is a narrative, a behavioral argument that explains the Small Value premium. It has to do with popularity and expectations. First, smaller and less known stocks are less followed by Wall Street analysts. A smaller stock has more potential to surprise Wall Street because there are fewer analysts watching it. Second, Value stocks have lower earnings expectations than Growth stocks, low expectations are easier to beat than high expectations. Third, Small stocks and Value stocks are less popular than Large Growth stocks. Large Growth can experience a bandwagon effect or momentum. Value is actually associated with negative momentum.

There is a risk story for Small Value stocks. Since smaller stocks have less financial resources and a smaller customer base than larger stocks, there is less resiliency in hard economic times. Doesn't mean that a large company can't fail and go bankrupt, just means a large company has more resources to weather hard times. Value stocks tend to have more volatile earnings and weaker balance sheets than Growth stocks. So you have unique business and economic risks for Small Value stocks.

An intuitive argument for the Size premium is that smaller companies have more growth potential than larger companies. There was a time when General Electric was so big that every time you spent a dollar, a penny went to GE. When you already a dominant force in the economy, it gets harder to grow earnings faster than the economy itself

You couple unique risks and a behavioral story of lower expectations and less popularity, a pretty good explanation can be made for the Small Value premium.

Whoops, I can see that Larry Swedroe posted above.
A fool and his money are good for business.

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Re: Explaining the Demise of Value Investing

Post by jdilla1107 » Tue Sep 10, 2019 10:31 pm

larryswedroe wrote:
Tue Sep 10, 2019 7:32 pm
. And even here I cited simple explanations, that they have much higher SD of earnings, tend to have more irreversible capital (cannot cut expenses in recessions), and more leverage, and fewer sources of capital and first to get cut off in flights to quality, and of course more volatile over time and and definitely higher trading costs---all of which investors demand risk premium for. You don't even need the volatility argument
Best wishes
Larry
My belief is that all of these things can change without a significant market dislocation. I think that the market can change to make these things no longer true. Investors can change their behaviors.

On the other hand, I believe the equity premium would essentially require the fall of capitalism to no longer hold.

So, when I review the backtests, I feel like the story is made to fit the results.

Differing opinions is what makes a market. :D

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Re: Explaining the Demise of Value Investing

Post by stlutz » Tue Sep 10, 2019 10:45 pm

GRP wrote:
Tue Sep 10, 2019 7:28 pm

And we can be confident it's not data mining because:
I think this is a good summary of the logic. But in my view it's also a good summary of where the logic breaks down--at least for me.
1) The premiums have persisted for long periods of time
2) They work out of sample
I would agree that long-term backtests looks good. Real world results---not as much. Since Fama/French was published, the small and value premiums haven't been there. Momentum has been investible in inexpensive ETF form for only a few years now. Has done great so far, but will that be the case for the next 20 years? Low volatility has done extremely well, again over a relatively short time period. I've ridden that with a small portion of my portfolio. But it has become so popular that I'm not sure that the pricing error hasn't been corrected.
3) They are robust to different definitions
Yes and no. Some definitions do get quirky in a way that suggest data mining, such as measuring momentum up through the prior month but not the current month.
4) They works across economic regimes and geographies
I'm not sure the geography thing is as significant as is assumed. It's a global economy after all. It's not like the internet impacted the US in the 1990s but not anybody else.
5) They work across different asset classes
Real world fund data is sorely lacking here. Whenever ones are suggested (and show less than encouraging results), the reply is usually that this fund is "doing it wrong" (see #3). In fairness, they replies usually do have a point. But that means we really don't actually have any decade-long real results to look at to start to judge, "Is is working?"
6) They have intuitive, risk based explanations as to why they should persist
I don't think so at all. I always say that is it here that I was convinced that the value premium was not a thing. Nobody has ever actually shown that value stocks are riskier than growth stocks. What Larry Swedore's big list of papers do is examine what the actual underlying risks are that drive the "value" risk factor. But identifying that value stocks have definable risks is not that same thing as saying they are more risky than growth stocks, unless one adopts the syllogism that I know value stocks are more risky because value outperformed and I know value will outpeform because value is riskier.

But in this sequence of points, the big oversight is the unwillingness to consider other explanations for outpeformance of stocks exhibiting a particular factor than the ones that seems to promise it to continue in the future (e.g. risk or behavioral error). Perhaps events unfolded in a way that simply favored those stocks in ways that could not be anticipated. Perhaps the market was simply exhibiting pricing errors--just like a person, the market can be reasonable but still be incorrect. Perhaps all of this research is simply giving the market the information it needs to correct those errors?

I'm not saying that it's been demonstrated that such alternate explanations are true. I am saying that such explanations haven't even been considered. Which makes the conclusions that have been arrived at that it's obviously risk rather suspect.

We've dug into all of these points in many, many threads over the years. Not looking to re-litigate everything here but more suggest things for folks to search for in prior threads.

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Re: Explaining the Demise of Value Investing

Post by Random Walker » Tue Sep 10, 2019 10:49 pm

One of the basic tenets of investing is that a company’s cost of capital is the expected return of its stock. To me common sense dictates that if I were lending money to firms, I’d charge a higher rate to small and distressed firms. This basic thinking makes me believe the size and value premia are not going to disappear.

Dave

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Re: Explaining the Demise of Value Investing

Post by stlutz » Tue Sep 10, 2019 11:01 pm

Random Walker wrote:
Tue Sep 10, 2019 10:49 pm
One of the basic tenets of investing is that a company’s cost of capital is the expected return of its stock. To me common sense dictates that if I were lending money to firms, I’d charge a higher rate to small and distressed firms. This basic thinking makes me believe the size and value premia are not going to disappear.

Dave
Sounds like a great argument for junk bonds, which I know you avoid. :happy

Which means that the fundamental driver of your views is not the logic you've outlined (which applies to value stocks only some of the time), but backtesting results.

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Re: Explaining the Demise of Value Investing

Post by vineviz » Wed Sep 11, 2019 12:00 am

stlutz wrote:
Tue Sep 10, 2019 10:45 pm
I'm not saying that it's been demonstrated that such alternate explanations are true. I am saying that such explanations haven't even been considered.
This is just silly talk: the idea that the fundamental bedrock principles of an entire field of science (not to mention one of the world’s largest industries) have never been subjected to any investigation is the very definition of hubristic.

“I’m not saying that it’s been demonstrated that the earth is flat, just that physicists have never considered the possibility that it might be.”
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Re: Explaining the Demise of Value Investing

Post by stlutz » Wed Sep 11, 2019 12:11 am

vineviz wrote:
Wed Sep 11, 2019 12:00 am
stlutz wrote:
Tue Sep 10, 2019 10:45 pm
I'm not saying that it's been demonstrated that such alternate explanations are true. I am saying that such explanations haven't even been considered.
This is just silly talk: the idea that the fundamental bedrock principles of an entire field of science (not to mention one of the world’s largest industries) have never been subjected to any investigation is the very definition of hubristic.

“I’m not saying that it’s been demonstrated that the earth is flat, just that physicists have never considered the possibility that it might be.”
Demonstrating my point exactly! :sharebeer

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Re: Explaining the Demise of Value Investing

Post by pdavi21 » Wed Sep 11, 2019 2:24 am

I would imagine someone figured out that owning part of a business was riskier with a higher expected return than loaning money to a business long before stocks or bonds even existed. I'm sure someone has the stone tablets or papyrus scrolls to back me up.
"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: Explaining the Demise of Value Investing

Post by YRT70 » Wed Sep 11, 2019 3:42 am

stlutz wrote:
Tue Sep 10, 2019 10:45 pm
Since Fama/French was published, the small and value premiums haven't been there.
Have you seen the data referenced by Larry here?
https://www.advisorperspectives.com/art ... me-may-say

Some Vanguard data since inception (in 2000):
VTSAX 6.81% (TSM)
VSMAX 8.95% (small caps)
Last edited by YRT70 on Wed Sep 11, 2019 7:06 am, edited 1 time in total.

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Re: Explaining the Demise of Value Investing

Post by Elysium » Wed Sep 11, 2019 6:57 am

YRT70 wrote:
Wed Sep 11, 2019 3:42 am
stlutz wrote:
Tue Sep 10, 2019 10:45 pm
Since Fama/French was published, the small and value premiums haven't been there.
Have you seen the data referenced by Larry here?
https://www.advisorperspectives.com/art ... me-may-say

Some Vanguard data since inception (in 2000):
VTSAX 6.81%
VSMAX 8.95%
Totally misleading figures using cherry picked data. A convenient mistake commonly made to look deep value funds good is to compare them with broad Total Market index funds that contains both Value and Growth.

That means the deep value fund gets the performance boost during short periods of outperformance, but the Total Market funds less so, then when Growth outperforms deep value funds lag behind, but Total Market funds do not get the full benefit of Growth outperformance since they are diluted by Value.This is especially because Total Market funds are not just Growth and Value, neither are Growth funds, but it's misleading to compare TSM with LCV and even more so with SCV.

Proper comparison is between Value and Growth funds. DFA LCV fund since existence has trailed Vanguard Large Growth fund as of this date. DFA SCV fund just about the same as Vanguard SCG fund. A few weeks or months of performance can make that shift again. We can cherry pick data and adjust start/end points all we want.

But the fact remains there has been no Value outperformance since FF study was published.

Once again, Jack Bogle correctly said all this 25 years back about Value and Growth, and he has been prescient.
Last edited by Elysium on Wed Sep 11, 2019 6:59 am, edited 1 time in total.

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Re: Explaining the Demise of Value Investing

Post by YRT70 » Wed Sep 11, 2019 7:06 am

Elysium wrote:
Wed Sep 11, 2019 6:57 am
Proper comparison is between Value and Growth funds.
I don't see it that way. I think most people consider the TSM approach vs. the tilted approach, although you may be different. The way Larry compares it makes total sense to me.

Cherrypicked? Unless I'm mistaking he uses the longest time frame possible.

And keep in mind that the last example I used only refers to the small premium:
Vanguard data since inception (in 2000):
VTSAX 6.81% (TSM)
VSMAX 8.95% (small caps)

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Re: Explaining the Demise of Value Investing

Post by Random Walker » Wed Sep 11, 2019 8:09 am

I also disagree with you Elysium. I think that it makes sense to evaluate a factor by comparison to no net factor exposure. A value fund has positive exposure to the price factor, total market index no net exposure to price factor, and growth index negative exposure to price factor. That being said, very surprising to me that VIGRX beats both VTSMX and DFLVX 1994-2019. But get very different result with value winning if exclude last two years.

Dave

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Re: Explaining the Demise of Value Investing

Post by larryswedroe » Wed Sep 11, 2019 8:23 am

jdilia
of course things can change but it can NEVER be true that companies with more irreversible capital, more financial leverage, greater SD of earnings, fewer sources of capital, are less liquid, with higher trading costs are less risky. That's the problem with STLUTZ argument as well. These are very simple and intuitive risk based explanations for SV premium as SV companies tend to have these traits.That is why they have higher costs of capital. Note I have written extensively here and in my books that IMO value is both a risk and behavioral story, with some components of both, as there is plenty of evidence for behavioral stories like the lottery stocks I have referenced which explains poor performance overall for small growth.

BTW, the reason to avoid junk bonds it that they are basically equity risk in disguise and you own one of the risks (stock or bond) in the wrong location, you have optionality due to call risks that have not been rewarded and also asymmetric (risks show up at wrong times when rates lower, if cannot call it's because credit risk showed up) and you pay higher fees---just buy CDs and stocks at lower costs and much more diversified.

Larry
Last edited by larryswedroe on Wed Sep 11, 2019 9:08 am, edited 1 time in total.

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Re: Explaining the Demise of Value Investing

Post by asif408 » Wed Sep 11, 2019 8:28 am

larryswedroe wrote:
Tue Sep 10, 2019 3:34 pm
asif

First, there really is no low volatility premium, there is a negative premium for the highest volatility stocks, but even there it isn't just high volatility, it's junk high vol (like low profits). The lowest vol stocks actually have had lower returns than the middle vol stocks. In other words we have a low vol anomaly, not a premium.

Second, cannot answer about gold as gold stocks have exposure to other risks and probably their own "factor". EM does have higher expected returns, when screening out the countries that don't follow rule of law and don't provide foreigners with equal protections. Now that doesn't mean over any subperiod you will get them. And most recent period has hurt their performance. 88-07 they far outperformed US, about 6% per annum. Now over full period about tied. But now US valuations way above average (due to strong recent returns) and EM with low valuations and much higher expected returns, I would say about 3.5-4% higher, and that assumes no mean reversion. But that is just math based on current CAPEs. Recent years performance of course hurt by "unexpected" trade war with China issues that impact them far more than US. But even international has far underperformed US in last 10 years and that should not have been expected and now has higher expected returns due to much lower valuations. Again that doesn't account for any possible mean reversion in valuations. Bottom line is likely always an EM premium, ex-ante. Though bubbles are possible there just as in US.

So yes, except for penchant for retail investors to overpay for lottery tickets, there is in fact a vol premium as vol is certainly one type of risk. But there are others, many others. (:-))

I hope that is helpful
larry
That is useful, thanks. It always made more intuitive sense to me that if there was a vol premium it would be for higher, and not lower volatility. The low vol anomaly is definitely a better way to phrase it.

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Re: Explaining the Demise of Value Investing

Post by larryswedroe » Wed Sep 11, 2019 8:41 am

asif
BTW, here's another problem with the low/high volatility anomaly and why I would not invest in it, unless someone developed fund to screen for following.

The research shows that not all high vol stocks due poorly, only the junk high vol does, and not all low vol does well, only cheap low vol that is profitable does well. Low vol is very regime dependent, underperforming market when in growth regime, outperforming when in value regime. Of course that is a tendency

Larry

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Re: Explaining the Demise of Value Investing

Post by HomerJ » Wed Sep 11, 2019 8:49 am

vineviz wrote:
Wed Sep 11, 2019 12:00 am
stlutz wrote:
Tue Sep 10, 2019 10:45 pm
I'm not saying that it's been demonstrated that such alternate explanations are true. I am saying that such explanations haven't even been considered.
This is just silly talk: the idea that the fundamental bedrock principles of an entire field of science (not to mention one of the world’s largest industries) have never been subjected to any investigation is the very definition of hubristic.

“I’m not saying that it’s been demonstrated that the earth is flat, just that physicists have never considered the possibility that it might be.”
Economics isn't a real science. Not enough data points. Unable to perform repeatable experiments. A non-static environment. The rules change every few decades.

It's more of a math game than anything. Except it's a math game where human emotions and human laws can change the rules of the game.

There are just too many variables, many of them still unknown. Very difficult to figure out the optimal way to play the game, when you don't know all the variables and the rules can change halfway through.
Last edited by HomerJ on Wed Sep 11, 2019 8:54 am, edited 1 time in total.
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Re: Explaining the Demise of Value Investing

Post by rkhusky » Wed Sep 11, 2019 8:50 am

nedsaid wrote:
Tue Sep 10, 2019 1:40 pm
rkhusky wrote:
Tue Sep 10, 2019 1:33 pm
nedsaid wrote:
Tue Sep 10, 2019 1:27 pm
Oh come on now, a 1,000 point fluctuation in the Dow 30 in one day is based upon rational response to information? I would say that is overreaction. Also could be a big hedge fund unwinding a losing bet or the trading algorithms going crazy.

Markets are pretty darned efficient and rational most of the time. But it seems to me markets experience extremes in both valuation and sentiment. Markets can experience what I call "investment religion" where beliefs get so strong that contrary evidence is ignored, you see this in times of euphoria. I still remember the DOW 36,000 book and all the talk about the new paradigm. Old and time tested benchmarks no longer applied. Still remember the strong belief that certain companies were growing earnings at 15% a year when the reality was that underlying growth was more like 6% to 8%. There was a lot of financial engineering out there. No one wanted to believe that earnings estimates were unsustainable and too optimistic. The numbers were out there for anyone to see but no one wanted to look. The euphoria just felt too good. Hence we had weird stuff like pro-forma earnings and things like that.

Markets can get so pessimistic that good news is overlooked. In a very lengthy bear market, market participants just won't take Yes for an answer or believe good news. We can see the opposite of euphoria operate in the markets.

Certainly markets have gotten more efficient over time: use of computers and trading algorithms, more smart people employed by Wall Street, more access to data, quicker analysis of that data, higher trading volumes, etc. etc. etc. Human nature, however, has not gone away.
Rationality and efficiency are two different things. You can have one without the other.
They might be different things but I am not sure markets always know that. Some really odd things can occur in the markets that seem neither efficient or rational. For all intents and purposes for the small investor, markets are pretty darned efficient and rational. It is hard for even the experts to exploit the examples I cite above. It takes courage for an analyst to announce that the Emperor has no clothes. It also takes courage to sell stocks in times of euphoria and to buy them in times of panic, it is a behaviorally difficult thing to do. There is also the being right too early problem or even being right way too early. Exploiting market anomalies is much easier said than done. Tactical asset allocation moves might be more about reducing risk than enhancing return.

As far as Livesoft, this is a rational strategy. Problem is that there are hedge funds, professional traders, and arbitrageurs doing the same exact thing. Also hard to tell how long euphoria or panic will last. I would recommend this only in times of extremes in market sentiment and valuation, these extremes are pretty rare occurrences. The extremes might happen 3-4 times in an investors lifetime. I have tried the longer term approach for tactical asset allocation, it seems it was more about cutting risk than enhancing returns. Not sure that any tactical moves that I made ever boosted my returns, it would take pretty detailed analysis that I don't have the tools or the time to perform.
Efficiency is a long term characteristic of a market. A market does not change from being efficient to inefficient day to day or month to month. On the other hand, an efficient market can become temporarily irrational. And perhaps very efficient markets tend to become irrational more frequently because there is less constraint on trading. Imagine if all trading had to be done via licensed brokers and snail mail, with at least 3 days between the request for a trade and execution of that trade. You wouldn't have flash crashes.

Efficiency has to do with how fast new information can be obtained and acted upon by the market. How to properly act upon the new information is a measure of the rationality of the market. If Warren Buffet starts to sell out of a market segment, what is the proper course of action for the market? - buy/sell/neutral that market segment? If the tech sector drops significantly, what is the proper future course of action for the market? - buy/sell/neutral technology stocks? If China closes down some of Apple's manufacturing sites, what is the proper course of action for the market? - buy/sell/neutral Apple stock? There are differing levels of risk involved in acting on different bits of information, which must be taken into consideration when making trading decisions. If you, as a trader, are taking extra risk, you should make sure that there is extra reward for doing so.

You mention a 1000 point one-day movement in the Dow. After the fact, one can debate whether that was rational or not. But how about in the midst of the movement? What was the rational thing to do, when you didn't know how it was going to end? As a trader are you buying/selling/neutral?

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Re: Explaining the Demise of Value Investing

Post by vineviz » Wed Sep 11, 2019 8:59 am

HomerJ wrote:
Wed Sep 11, 2019 8:49 am
Economics isn't a real science.
That view is unfair and uninformed. It makes demands on economics that are not made of other empirical disciplines, like medicine, and it ignores an emerging body of work, building on the scientific approach of last week’s winners, that is transforming economics into a field firmly grounded in fact.
. ~ Yes, Economics Is a Science by Raj Chetty in the New York Times.

I can only guess that there must be some emotional comfort in saying things like "economics isn't a science" but really: how does this advance the discussion at all? No informed observers dispute that economics is one of the sciences, but if you want to dispute it can you do so in a dedicated thread on the topic?
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Re: Explaining the Demise of Value Investing

Post by larryswedroe » Wed Sep 11, 2019 9:12 am

Viniez
Andrew Berkin and I addressed that question of is investing a science here in Journal of Investing article.
https://joi.pm-research.com/content/24/3/39
Larry

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Re: Explaining the Demise of Value Investing

Post by HomerJ » Wed Sep 11, 2019 9:55 am

vineviz wrote:
Wed Sep 11, 2019 8:59 am
HomerJ wrote:
Wed Sep 11, 2019 8:49 am
Economics isn't a real science.
That view is unfair and uninformed. It makes demands on economics that are not made of other empirical disciplines, like medicine, and it ignores an emerging body of work, building on the scientific approach of last week’s winners, that is transforming economics into a field firmly grounded in fact.
. ~ Yes, Economics Is a Science by Raj Chetty in the New York Times.

I can only guess that there must be some emotional comfort in saying things like "economics isn't a science" but really: how does this advance the discussion at all? No informed observers dispute that economics is one of the sciences, but if you want to dispute it can you do so in a dedicated thread on the topic?
That's a very good article. Thanks for posting it.

It agrees with many of my points.

It tries to compare economics to medicine (another field where there are a ton of variables, known and unknown, with changing environments every decade or two). But medicine can collect data points much easier than economists, a thousand times easier to do experiments.

Where you CAN do repeatable experiments in economics (increasing unemployment insurance duration or expanding health insurance to low-income participants), useful data can be discovered.

I agree with that. Thank you for opening my eyes a little.

But the article agrees that the "big picture" questions are still weakly understood.

So I'll agree that Economics is far more than just investing. But I still submit that investing is nowhere near as well understood as some people claim.
The J stands for Jay

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Re: Explaining the Demise of Value Investing

Post by larryswedroe » Wed Sep 11, 2019 10:47 am

One other comment on volatility. It is just one measure of risk, not the only one. And we know there is the low volatility anomaly as well. And the most volatility low profitability stocks have awful returns, tbill like or worse.

But overall volatility does explain about half the global ERP as shown in this paper "Variance Risk in Global Markets"
Geert Bekaert∗, Robert J. Hodrick†, and Andrea Kiguel‡ August 6, 2019.

Also analyses of options shows that the vast majority of the ERP is well explain by the price of puts.

But volatility clearly isn't the only factor in the determination of premiums as simple things like liquidity and trading costs matter as well, and then you get into issues of the distribution of returns (skewness and kurtosis) and of course other factors (traits or characteristics) that also help explain returns.

Hope that is helpful
Larry

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Re: Explaining the Demise of Value Investing

Post by rkhusky » Wed Sep 11, 2019 1:00 pm

larryswedroe wrote:
Tue Sep 10, 2019 7:32 pm
In my factor book I also cite many papers for each of the premiums providing simple and rational risk based and behavioral as appropriate explanations for those premiums. And even here I cited simple explanations, that they have much higher SD of earnings, tend to have more irreversible capital (cannot cut expenses in recessions), and more leverage, and fewer sources of capital and first to get cut off in flights to quality, and of course more volatile over time and and definitely higher trading costs---all of which investors demand risk premium for.
Investors should demand a risk premium for investing in riskier stocks. However, the market and investors are not always rational.

Perhaps that is the case for small value stocks over the past number of years. Perhaps small value stocks are viewed in some quarters as the new "lottery" stocks and have irrationally bid up their prices, such that their prices do not justify the risks. Or that they were bid up too high several years ago and recently their prices have been adjusting.

No one can know how long it will take before small value starts to out-perform, or whether the out-performance will be sufficient to overcome the recent years of under-performance. Perhaps the market will need to believe that value investing is truly dead before that happens. And who knows how long that will take.

Part of the issue is the conflation of the success of the Fama-French analysis in explaining past market returns, with the expectation that small-value stocks will have higher performance than the overall market. The only connection between the two is that the former was developed because of the observation of the latter in past data.

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Re: Explaining the Demise of Value Investing

Post by hdas » Wed Sep 11, 2019 1:12 pm

larryswedroe wrote:
Wed Sep 11, 2019 8:41 am
asif
BTW, here's another problem with the low/high volatility anomaly and why I would not invest in it, unless someone developed fund to screen for following.

The research shows that not all high vol stocks due poorly, only the junk high vol does, and not all low vol does well, only cheap low vol that is profitable does well. Low vol is very regime dependent, underperforming market when in growth regime, outperforming when in value regime. Of course that is a tendency

Larry
As always, you conveniently ignore some very valuable research. You have been wrong on low vol for many years and continues to double down, kindly consider:

>> As opposed to value, the basket of low vol stocks is not sticky overtime.
>> You use 3 or more factors to explain low vol !!!...if you think about it, if there's a hierarchy, you have the ERP, the Vol Anomaly and then all the other style factors

Check this article
The Volatility Effect Revisited
27 Pages Posted: 26 Aug 2019
David Blitz
Robeco

Pim van Vliet
Robeco Asset Management - Quantitative Investing

Guido Baltussen
Erasmus University Rotterdam (EUR); Robeco Asset Management - Quantitative Investing

Date Written: August 26, 2019

Abstract
High-risk stocks do not have higher returns than low-risk stocks in all major stock markets. This paper provides a comprehensive overview of this low-risk effect, from the earliest asset pricing studies in the nineteen seventies to the most recent empirical findings and interpretations since. Volatility appears to be the main driver of the anomaly, which is highly persistent over time and across markets, and which cannot be explained by other factors such as value, profitability, or exposure to interest rate changes. From a practical perspective we argue that low-risk investing requires little turnover, that volatilities are more important than correlations, that low-risk indices are suboptimal and vulnerable to overcrowding, and that other factors can be efficiently integrated into a low-risk strategy. Finally, we find little evidence that the low-risk effect is being arbitraged away, as many investors are either neutrally positioned, or even on the other side of the low-risk trade.
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Re: 5,000 posts!

Post by goodenyou » Wed Sep 11, 2019 1:34 pm

Taylor Larimore wrote:
Tue Sep 10, 2019 5:34 pm
vineviz:

I am happy to see that you have made 5,000 posts on the Bogleheads Forum!

Each of your posts is scholarly and well presented. I am grateful.

Best wishes.
Taylor.
Jack Bogle's Words of Wisdom: "In investing, strip all the baloney out of it, and give people what you promise.”
I will second that. I am getting quite an education reading these post by Vineviz, Larry et al. Thanks to them for participating .

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Re: Explaining the Demise of Value Investing

Post by nedsaid » Wed Sep 11, 2019 4:06 pm

rkhusky wrote:
Wed Sep 11, 2019 8:50 am
nedsaid wrote:
Tue Sep 10, 2019 1:40 pm
rkhusky wrote:
Tue Sep 10, 2019 1:33 pm
nedsaid wrote:
Tue Sep 10, 2019 1:27 pm
Oh come on now, a 1,000 point fluctuation in the Dow 30 in one day is based upon rational response to information? I would say that is overreaction. Also could be a big hedge fund unwinding a losing bet or the trading algorithms going crazy.

Markets are pretty darned efficient and rational most of the time. But it seems to me markets experience extremes in both valuation and sentiment. Markets can experience what I call "investment religion" where beliefs get so strong that contrary evidence is ignored, you see this in times of euphoria. I still remember the DOW 36,000 book and all the talk about the new paradigm. Old and time tested benchmarks no longer applied. Still remember the strong belief that certain companies were growing earnings at 15% a year when the reality was that underlying growth was more like 6% to 8%. There was a lot of financial engineering out there. No one wanted to believe that earnings estimates were unsustainable and too optimistic. The numbers were out there for anyone to see but no one wanted to look. The euphoria just felt too good. Hence we had weird stuff like pro-forma earnings and things like that.

Markets can get so pessimistic that good news is overlooked. In a very lengthy bear market, market participants just won't take Yes for an answer or believe good news. We can see the opposite of euphoria operate in the markets.

Certainly markets have gotten more efficient over time: use of computers and trading algorithms, more smart people employed by Wall Street, more access to data, quicker analysis of that data, higher trading volumes, etc. etc. etc. Human nature, however, has not gone away.
Rationality and efficiency are two different things. You can have one without the other.
They might be different things but I am not sure markets always know that. Some really odd things can occur in the markets that seem neither efficient or rational. For all intents and purposes for the small investor, markets are pretty darned efficient and rational. It is hard for even the experts to exploit the examples I cite above. It takes courage for an analyst to announce that the Emperor has no clothes. It also takes courage to sell stocks in times of euphoria and to buy them in times of panic, it is a behaviorally difficult thing to do. There is also the being right too early problem or even being right way too early. Exploiting market anomalies is much easier said than done. Tactical asset allocation moves might be more about reducing risk than enhancing return.

As far as Livesoft, this is a rational strategy. Problem is that there are hedge funds, professional traders, and arbitrageurs doing the same exact thing. Also hard to tell how long euphoria or panic will last. I would recommend this only in times of extremes in market sentiment and valuation, these extremes are pretty rare occurrences. The extremes might happen 3-4 times in an investors lifetime. I have tried the longer term approach for tactical asset allocation, it seems it was more about cutting risk than enhancing returns. Not sure that any tactical moves that I made ever boosted my returns, it would take pretty detailed analysis that I don't have the tools or the time to perform.
Efficiency is a long term characteristic of a market. A market does not change from being efficient to inefficient day to day or month to month. On the other hand, an efficient market can become temporarily irrational. And perhaps very efficient markets tend to become irrational more frequently because there is less constraint on trading. Imagine if all trading had to be done via licensed brokers and snail mail, with at least 3 days between the request for a trade and execution of that trade. You wouldn't have flash crashes.

Efficiency has to do with how fast new information can be obtained and acted upon by the market. How to properly act upon the new information is a measure of the rationality of the market. If Warren Buffet starts to sell out of a market segment, what is the proper course of action for the market? - buy/sell/neutral that market segment? If the tech sector drops significantly, what is the proper future course of action for the market? - buy/sell/neutral technology stocks? If China closes down some of Apple's manufacturing sites, what is the proper course of action for the market? - buy/sell/neutral Apple stock? There are differing levels of risk involved in acting on different bits of information, which must be taken into consideration when making trading decisions. If you, as a trader, are taking extra risk, you should make sure that there is extra reward for doing so.

You mention a 1000 point one-day movement in the Dow. After the fact, one can debate whether that was rational or not. But how about in the midst of the movement? What was the rational thing to do, when you didn't know how it was going to end? As a trader are you buying/selling/neutral?
I am not a trader.
A fool and his money are good for business.

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Re: Explaining the Demise of Value Investing

Post by rkhusky » Wed Sep 11, 2019 4:27 pm

nedsaid wrote:
Wed Sep 11, 2019 4:06 pm
I am not a trader.
But the market is made by traders, so when we speak of irrational behavior of the market, it is the aggregate behavior of the traders. Although I'm not sure of the numerical aggregate effect of the buy/hold investor or the broad-based fund investor.

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Re: Explaining the Demise of Value Investing

Post by BigJohn » Wed Sep 11, 2019 5:04 pm

HomerJ wrote:
Wed Sep 11, 2019 8:49 am
Economics isn't a real science. Not enough data points. Unable to perform repeatable experiments. A non-static environment. The rules change every few decades.

It's more of a math game than anything. Except it's a math game where human emotions and human laws can change the rules of the game.

There are just too many variables, many of them still unknown. Very difficult to figure out the optimal way to play the game, when you don't know all the variables and the rules can change halfway through.
Totally agree and would just add that you can’t really know that the rules have changed until well after the fact. It’s considered a social science because it’s outcomes are influenced by people and society that change over time.

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Re: Explaining the Demise of Value Investing

Post by nisiprius » Wed Sep 11, 2019 5:59 pm

Economics is a social science.

Perhaps we could avoid some of this sterile debate by just agreeing to make a point of calling it that.

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Re: Explaining the Demise of Value Investing

Post by All Seasons » Wed Sep 11, 2019 7:09 pm

Careful, guys. We’re getting off topic here.
The market portfolio is always a legitimate portfolio.

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Re: Explaining the Demise of Value Investing

Post by oldcomputerguy » Wed Sep 11, 2019 7:11 pm

Indeed. Please, let's bring it back to the topic of the thread, which is the alleged demise of value investing. -- mod oldcomputerguy
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Re: Explaining the Demise of Value Investing

Post by Elysium » Wed Sep 11, 2019 9:37 pm

YRT70 wrote:
Wed Sep 11, 2019 7:06 am
Elysium wrote:
Wed Sep 11, 2019 6:57 am
Proper comparison is between Value and Growth funds.
I don't see it that way. I think most people consider the TSM approach vs. the tilted approach, although you may be different. The way Larry compares it makes total sense to me.
Market portfolio is a baseline, it can be used as a benchmark against which all portfolios can be compared, from that aspect it is fine. However, the tilted approach does not mean Value tilted, there are many tilts away from the market portfolio. Growth is a tilt away from the market and perfectly legitimate for some people to do. There may not be many here on Bogleheads that do it, but I am sure countless investors outside of this forum do that. Some beat the market, so they can post their returns and claim this is a strategy that is likely to work going forward? I don't think so, because you cannot differentiate luck vs skill in this regard. Similarly very likely Small Value had a good 4 year run 2000-04 that accounted for most of the performance, even then it is break even with SCG. As for LCV, I had already pointed out that it was underperformed LCG.

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Re: Explaining the Demise of Value Investing

Post by BigJohn » Wed Sep 11, 2019 10:38 pm

My apologies, I was not trying to be provocative or insulting. The point I was trying to make that is relevant to the topic is this. Historical investment results exist in the context of the people, society and financial systems at the time. These systems change and therefore the results may well deviate from the statistically significant correlations that have been done. The problem is that because of the low signal/noise ratio, there is no way to tell if/when that historical correlation is no longer valid until way after the fact.

So, it’s probably 10+ years too early to really know if value investing is dead or just sleeping. However, since it might be dead, I choose not to take the risk and don’t tilt my portfolio.

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Re: Explaining the Demise of Value Investing

Post by YRT70 » Thu Sep 12, 2019 6:41 am

Elysium wrote:
Wed Sep 11, 2019 9:37 pm
Market portfolio is a baseline, it can be used as a benchmark against which all portfolios can be compared, from that aspect it is fine. However, the tilted approach does not mean Value tilted, there are many tilts away from the market portfolio. Growth is a tilt away from the market and perfectly legitimate for some people to do. There may not be many here on Bogleheads that do it, but I am sure countless investors outside of this forum do that. Some beat the market, so they can post their returns and claim this is a strategy that is likely to work going forward?
Well they can claim it. People can claim practically anything they want as long as it doesn't break the forum's rules. There's no peer review here, unlike in the academic literature.

Other people can then review the support for the claim and decide if they think tilting to growth is a good idea.

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Re: Explaining the Demise of Value Investing

Post by Random Walker » Thu Sep 12, 2019 7:40 am

Elysium wrote:
Wed Sep 11, 2019 9:37 pm
Market portfolio is a baseline, it can be used as a benchmark against which all portfolios can be compared, from that aspect it is fine. However, the tilted approach does not mean Value tilted, there are many tilts away from the market portfolio. Growth is a tilt away from the market and perfectly legitimate for some people to do.
Large growth companies are less risky businesses. They would be expected to have lower cost of capital and therefore lower expected return. An investor could rationally want to invest in safer companies with lower expected return. Although LG has less business risk, many of us would say the stock has more price risk. As Fama has said, it’s basically investor preferences.

Dave

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Re: Explaining the Demise of Value Investing

Post by Elysium » Thu Sep 12, 2019 9:25 am

YRT70 wrote:
Thu Sep 12, 2019 6:41 am
Elysium wrote:
Wed Sep 11, 2019 9:37 pm
Market portfolio is a baseline, it can be used as a benchmark against which all portfolios can be compared, from that aspect it is fine. However, the tilted approach does not mean Value tilted, there are many tilts away from the market portfolio. Growth is a tilt away from the market and perfectly legitimate for some people to do. There may not be many here on Bogleheads that do it, but I am sure countless investors outside of this forum do that. Some beat the market, so they can post their returns and claim this is a strategy that is likely to work going forward?
Well they can claim it. People can claim practically anything they want as long as it doesn't break the forum's rules. There's no peer review here, unlike in the academic literature.

Other people can then review the support for the claim and decide if they think tilting to growth is a good idea.
That's my point. This forum has been examining whether various tilts were worthwhile and the consensus is still that it isn't. That includes Value tilt, various other factor tilts, alternatives, etc. I just named Growth tilt, because why not? we have quality, momentum, liquidity, low volatility, so on. Growth stocks could fit in with any of those such as Quality, Momentum, Profitability, whatever else any academic can think of in their free time.

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Re: Explaining the Demise of Value Investing

Post by YRT70 » Thu Sep 12, 2019 9:31 am

Elysium wrote:
Thu Sep 12, 2019 9:25 am
This forum has been examining whether various tilts were worthwhile and the consensus is still that it isn't.
Sounds more like your opinion than a consensus to be honest. Judging by the amount of debates on this forum and the amount of people that do tilt, it doesn't seem like there's a consensus. I think that's perfectly fine by the way, there's no need to have a consensus about this.

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Re: Explaining the Demise of Value Investing

Post by Elysium » Thu Sep 12, 2019 9:41 am

Random Walker wrote:
Thu Sep 12, 2019 7:40 am
Elysium wrote:
Wed Sep 11, 2019 9:37 pm
Market portfolio is a baseline, it can be used as a benchmark against which all portfolios can be compared, from that aspect it is fine. However, the tilted approach does not mean Value tilted, there are many tilts away from the market portfolio. Growth is a tilt away from the market and perfectly legitimate for some people to do.
Large growth companies are less risky businesses. They would be expected to have lower cost of capital and therefore lower expected return. An investor could rationally want to invest in safer companies with lower expected return. Although LG has less business risk, many of us would say the stock has more price risk. As Fama has said, it’s basically investor preferences.

Dave
RW, all these labels and definitions that some academics have applied is perfectly fine for them to place equities into neat buckets for their experiments and studies that they can publish. They need some structure to put these into buckets for their data mining, so statisticians are prone to do that.

In real life stocks move in and out of styles. Was Microsoft a Growth stock few years back when it was trading at $30 per share? It is now trading above $130. Similarly was Apple a Growth stock when it was trading at $95 few years back when Buffett loaded up on it, it is trading over $200 today. Was Amazon a safe company with low expected returns when it was trading around $70 about 10 years back, it was trading above $2000 not so long ago. The lower expected returns and safety theory doesn't fit in these instances.

All of these stocks I mentioned was probably found in both Value and Growth indexes over time, and most certainly so in the TSM Index where there is no need to trade them in and out as they move from one style to another. Can you tell me how much share of the profit MSFT, AAPL, and AMZN made can be attributed to the time they were a Value stocks vs. a Growth stocks? I have no idea, I would guess net result is about same, possibly one made more money as Value stock and other as Growth stock. The sum of all of this including hundreds of other such stocks evens out over really long periods like 25-30 years.
Last edited by Elysium on Thu Sep 12, 2019 9:48 am, edited 4 times in total.

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Re: Explaining the Demise of Value Investing

Post by Elysium » Thu Sep 12, 2019 9:44 am

YRT70 wrote:
Thu Sep 12, 2019 9:31 am
Elysium wrote:
Thu Sep 12, 2019 9:25 am
This forum has been examining whether various tilts were worthwhile and the consensus is still that it isn't.
Sounds more like your opinion than a consensus to be honest. Judging by the amount of debates on this forum and the amount of people that do tilt, it doesn't seem like there's a consensus. I think that's perfectly fine by the way, there's no need to have a consensus about this.
I strongly believe the overall guiding principles and philosophy of this forum is rooted in Jack Bogle's teachings. Are you disagreeing with that?

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Re: Explaining the Demise of Value Investing

Post by YRT70 » Thu Sep 12, 2019 9:54 am

Elysium wrote:
Thu Sep 12, 2019 9:44 am
YRT70 wrote:
Thu Sep 12, 2019 9:31 am
Elysium wrote:
Thu Sep 12, 2019 9:25 am
This forum has been examining whether various tilts were worthwhile and the consensus is still that it isn't.
Sounds more like your opinion than a consensus to be honest. Judging by the amount of debates on this forum and the amount of people that do tilt, it doesn't seem like there's a consensus. I think that's perfectly fine by the way, there's no need to have a consensus about this.
I strongly believe the overall guiding principles and philosophy of this forum is rooted in Jack Bogle's teachings. Are you disagreeing with that?
I was disagreeing with the statement that on this forum there's a consensus that the various tilts aren't worthwhile.

I see a few people that are strongly committed to this belief, but I also see quite a few people that believe tilting can be worthwhile. If there truly was a consensus, I don't think we would see this much debate.

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Re: Explaining the Demise of Value Investing

Post by pdavi21 » Thu Sep 12, 2019 10:04 am

The key to small and value outperformance and volatility over the TSM in Fama and French is partially due to the fact that the "small" and "value" groups were smaller than the other groups by market cap. The group that currently represents 2% of the market can beat the market by ~50% if the other 99.5% loses to the market by 1%. On the other hand, the top 70%-90 can never outperform the market more than the bottom 10-30% underperforms. Eventually, there is a size of total market cap, where large caps simply cannot perform differently to the total market (because Microcaps aren't able beat/lose to the market by the amount required for that to happen). This prevents large caps from being significantly more volatile than the market, while tying large cap volatility to the market's and decoupling small cap volatility from the market's.

This is a Mathematical fact and has nothing to do with compensated risk. Simply, the smaller corner of a market you pick, the better your chances of greatly outperforming or greatly underperforming that market.

That is why 1) the total market and small cannot be compared fairly and 2) value cannot be compared fairly to growth (and/or market minus value) unless it is split out at 50/50 by market cap.
Last edited by pdavi21 on Thu Sep 12, 2019 10:13 am, edited 3 times in total.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

Elysium
Posts: 1663
Joined: Mon Apr 02, 2007 6:22 pm

Re: Explaining the Demise of Value Investing

Post by Elysium » Thu Sep 12, 2019 10:05 am

YRT70 wrote:
Thu Sep 12, 2019 9:54 am
Elysium wrote:
Thu Sep 12, 2019 9:44 am
YRT70 wrote:
Thu Sep 12, 2019 9:31 am
Elysium wrote:
Thu Sep 12, 2019 9:25 am
This forum has been examining whether various tilts were worthwhile and the consensus is still that it isn't.
Sounds more like your opinion than a consensus to be honest. Judging by the amount of debates on this forum and the amount of people that do tilt, it doesn't seem like there's a consensus. I think that's perfectly fine by the way, there's no need to have a consensus about this.
I strongly believe the overall guiding principles and philosophy of this forum is rooted in Jack Bogle's teachings. Are you disagreeing with that?
I was disagreeing with the statement that on this forum there's a consensus that the various tilts aren't worthwhile.

I see a few people that are strongly committed to this belief, but I also see quite a few people that believe tilting can be worthwhile. If there truly was a consensus, I don't think we would see this much debate.
These debates are usually by a handful of people always, and while I agree it makes interesting conversations, there is a large silent majority on this forum who have no interest in any of this. The vast number of new posters who come here seeking advice can't even understand basic investing ideas let alone all the complexities of factor investing and the various models discussed here. Many have no time and/or interest to learn. The average investor cannot stay with a tilted portfolio for longer than 3 years if it starts underperforming the markets. A good number of forum participants strives to help average investors seeking help and that is the reason Taylor and many others always seek simplicity. That is of course the philosophy of Jack Bogle, who have repeatedly stated these principles during his lifetime.
Last edited by Elysium on Thu Sep 12, 2019 10:11 am, edited 2 times in total.

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