Small Cap Value heads Rejoice !!!

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Re: Small Cap Value heads Rejoice !!!

Post by XacTactX »

YRT70 wrote: Fri Sep 04, 2020 11:36 am
Robert T wrote: Fri Sep 04, 2020 8:04 am August 2001 to Dec 2009 -annualized returns: [post 1999 'bubble']
  • +7.4% = IJS (iShares S&P Small Cap 600 Value)
    -0.8% = IVV (iShares S&P500)
Jan 2010 to Aug 2020 - annualized returns
  • +9.4% = IJS (iShares S&P Small Cap 600 Value)
    13.6% = IVV (iShares S&P500)
This was very interesting. SCV performance has been bashed so much that I didn't realise performance has held up so well.
Just to add to this point, we all know that the stock market can have long periods of poor performance and sometimes it performs worse than cash for 10+ years. The last time this happened was April of 2000 until December of 2012, cash returned 2.08% and the stock market returned 2.01%. In that same time period small value returned 8.67%. Having exposure to size and value helped out when it was most needed and it provided a diversification benefit.

Fund 2 is the same as VTI, Fund 3 is the same as VBR
MotoTrojan wrote: Fri Sep 04, 2020 11:02 am
This document goes over their process well. I also trust the team as they mostly came from DFA, one of the earliest leaders in factor products.

https://www.avantisinvestors.com/conten ... esting.pdf

[This post has been snipped to save space]
Thank you very much for posting this, I wanted to learn more about how Avantis constructs its indexes and this is what I needed. :sharebeer
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Re: Small Cap Value heads Rejoice !!!

Post by abuss368 »

AZAttorney11 wrote: Fri Sep 04, 2020 10:16 am Except when the haystack involves international stocks, right?

And Bogle's investing advice was much more broad than you and Taylor purport on multiple posts. Here's an example:

https://www.amazon.com/Intelligent-Asse ... 1260026647

Yep, that's one of Bernstein's books arguing for portfolios beyond "owning the haystacks" and Bogle himself, on the front cover, said, "This is a GREAT book!" (emphasis Mr. Bogle's, not mine).

Please make sure you tell Mel and the followers of the "Mel's Unloved Mid Caps" what grave mistakes they are making as well.
Interesting post. No one is making a "mistake"! The philosophy is all the same. That is low cost index fund and avoid active management. Individual strategies are different as no two investors are the same.

Jack Bogle wrote in all his books and countless interviews (i.e. available on You Tube) that in his opinion international stocks and bonds were not needed. Mr. Bogle would never criticize Bill Bernstein and "This a a great book" demonstrates that.

So you are correct: own the haystack! :sharebeer
John C. Bogle: “Simplicity is the master key to financial success."
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

abuss368 wrote: Fri Sep 04, 2020 2:01 pm
AZAttorney11 wrote: Fri Sep 04, 2020 10:16 am Except when the haystack involves international stocks, right?

And Bogle's investing advice was much more broad than you and Taylor purport on multiple posts. Here's an example:

https://www.amazon.com/Intelligent-Asse ... 1260026647

Yep, that's one of Bernstein's books arguing for portfolios beyond "owning the haystacks" and Bogle himself, on the front cover, said, "This is a GREAT book!" (emphasis Mr. Bogle's, not mine).

Please make sure you tell Mel and the followers of the "Mel's Unloved Mid Caps" what grave mistakes they are making as well.
Interesting post. No one is making a "mistake"! The philosophy is all the same. That is low cost index fund and avoid active management. Individual strategies are different as no two investors are the same.

Jack Bogle wrote in all his books and countless interviews (i.e. available on You Tube) that in his opinion international stocks and bonds were not needed. Mr. Bogle would never criticize Bill Bernstein and "This a a great book" demonstrates that.

So you are correct: own the haystack! :sharebeer
My portfolio has very aggressive size/value tilts, and all of my ex-US is in small/mid-value, but I still feel it is less risky with its 35% ex-US allocation than someone 100% in the S&P500.
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Re: Small Cap Value heads Rejoice !!!

Post by absolute zero »

AZAttorney11 wrote: Fri Sep 04, 2020 10:16 am
abuss368 wrote: Thu Sep 03, 2020 7:55 pm
AZAttorney11 wrote: Thu Sep 03, 2020 7:25 pm
abuss368 wrote: Thu Sep 03, 2020 7:22 pm Jack Bogle, no surprise, is correct again. That is, simply stop looking for the needle in the haystack and own the haystack.
It's getting comical at this point. Taylor makes a statement with lots of quotes and alleged authority, ignores contradictory evidence, and then you swoop in and tell him how great he is and how great Bogle is.

P.S. Bogle endorsed a book by Bernstein that argues for a SCV tilt in the appropriate circumstance.
Our forum is titled "investing advice inspired by Jack Bogle"! Owning the haystack is the best approach and what Jack has taught all of us.
Except when the haystack involves international stocks, right?

And Bogle's investing advice was much more broad than you and Taylor purport on multiple posts. Here's an example:

https://www.amazon.com/Intelligent-Asse ... 1260026647

Yep, that's one of Bernstein's books arguing for portfolios beyond "owning the haystacks" and Bogle himself, on the front cover, said, "This is a GREAT book!" (emphasis Mr. Bogle's, not mine).

Please make sure you tell Mel and the followers of the "Mel's Unloved Mid Caps" what grave mistakes they are making as well.
Although Bogle advocated for a two fund portfolio of total US and total bond, I suspect that if he was close-minded and rigid/obsessive in his stance against all other funds and portfolios (like some people on this forum), he would have never achieved the level of success that he did.
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Re: Small Cap Value heads Rejoice !!!

Post by Forester »

abuss368 wrote: Fri Sep 04, 2020 2:01 pm
AZAttorney11 wrote: Fri Sep 04, 2020 10:16 am Except when the haystack involves international stocks, right?

And Bogle's investing advice was much more broad than you and Taylor purport on multiple posts. Here's an example:

https://www.amazon.com/Intelligent-Asse ... 1260026647

Yep, that's one of Bernstein's books arguing for portfolios beyond "owning the haystacks" and Bogle himself, on the front cover, said, "This is a GREAT book!" (emphasis Mr. Bogle's, not mine).

Please make sure you tell Mel and the followers of the "Mel's Unloved Mid Caps" what grave mistakes they are making as well.
Interesting post. No one is making a "mistake"! The philosophy is all the same. That is low cost index fund and avoid active management. Individual strategies are different as no two investors are the same.

Jack Bogle wrote in all his books and countless interviews (i.e. available on You Tube) that in his opinion international stocks and bonds were not needed. Mr. Bogle would never criticize Bill Bernstein and "This a a great book" demonstrates that.

So you are correct: own the haystack! :sharebeer
SCV is another haystack. Apple & Microsoft alone are larger than the entire US small cap index of 1,700 companies. If I open a car dealership or a pizza restaurant, I don't need to justify that investment decision viz-a-viz the Fortune 500, it's simply another productive asset.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

All 6 of the funds in my portfolio are in the green by a comfortable margin, rejoice!
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Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

absolute zero wrote: Fri Sep 04, 2020 2:11 pm
AZAttorney11 wrote: Fri Sep 04, 2020 10:16 am
abuss368 wrote: Thu Sep 03, 2020 7:55 pm
AZAttorney11 wrote: Thu Sep 03, 2020 7:25 pm
abuss368 wrote: Thu Sep 03, 2020 7:22 pm Jack Bogle, no surprise, is correct again. That is, simply stop looking for the needle in the haystack and own the haystack.
It's getting comical at this point. Taylor makes a statement with lots of quotes and alleged authority, ignores contradictory evidence, and then you swoop in and tell him how great he is and how great Bogle is.

P.S. Bogle endorsed a book by Bernstein that argues for a SCV tilt in the appropriate circumstance.
Our forum is titled "investing advice inspired by Jack Bogle"! Owning the haystack is the best approach and what Jack has taught all of us.
Except when the haystack involves international stocks, right?

And Bogle's investing advice was much more broad than you and Taylor purport on multiple posts. Here's an example:

https://www.amazon.com/Intelligent-Asse ... 1260026647

Yep, that's one of Bernstein's books arguing for portfolios beyond "owning the haystacks" and Bogle himself, on the front cover, said, "This is a GREAT book!" (emphasis Mr. Bogle's, not mine).

Please make sure you tell Mel and the followers of the "Mel's Unloved Mid Caps" what grave mistakes they are making as well.
Although Bogle advocated for a two fund portfolio of total US and total bond, I suspect that if he was close-minded and rigid/obsessive in his stance against all other funds and portfolios (like some people on this forum), he would have never achieved the level of success that he did.
I agree. I watched an old interview of Bogle from 1998 or 1999 and he was asked how he can reconcile the new (at the time) Vanguard Small Cap Growth Index Fund against his philosophy of owning the haystack. His response was to consider an investor whose portfolio is dominated by "blue chip" stocks in a taxable account with huge unrealized capital gains. They now realize they want to diversify their portfolio but they don't want to realize those gains. So instead they could funnel some of their new contributions into Vanguard Small Cap Growth Index Fund which, in a barbell fashion, could average out to a blend approach. I am very proud to be a member of this community named after him.
I'm just a fan of the person I got my user name from
garlandwhizzer
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Re: Small Cap Value heads Rejoice !!!

Post by garlandwhizzer »

There is no doubt that following the total collapse of the LCG tech bubble in 2000 -3, IJS, the SCV Fund, outperformed both the S&P 500 and TSM until 9/2020. In the absence of the tech bubble which reached extreme valuations that have not been seen since (including now) SCV has not outperformed since 1990, 30 years ago. The entirety of SCV outperformance for the last 30 years disappears without that extreme tech bubble. As extreme as the valuations of TSLA and AMZN are today they are nowhere near the bubble levels of 2000. In January of 1999 the S&P 500 PE was 33.5 and as earnings collapsed faster than stock prices during the crash the PE hit 46.5 in December of 2001. Back then it was all hype about the future, little in the way of actual earnings. Now the PE ratio of the S&P 500 is now 25.4, a long way from that totally irrational exuberance, and most of the tech darlings (excepting TSLA) have hugely positive cash flows, massive cash on balance sheets, and business models are more reality than sweet dream. Currently FAAMGTs are richly valued no doubt, but not to the bubble levels that were necessary to creat the SCV outperformance over the last 20 years. Most of the market at present apart from these darlings is not overvalued at all given current interest rates and inflation rates. Value and SCV are on a fire sale and a replay of 2000-3 is unlikely IMO.

l think a reasonable argument can be made that the SCV premium, even such as it is with its totally unrealistic model designed to inflate it, is entirely dependent on the creation and subsequent destruction of LCG bubbles such as the tech bubble 200O -3 and the Nifty Fifty in 1960s and 1970s. Bubbles by their nature occur in LCG, never in SVC. No one gets too excited over regional banks struggling to stay alive in a stagnant economy and zero rate environment. Whether SCV will outperform long term from where we are now and, if it does wind up outperforming, by how much--neither of these things is clear to me at present. I agree that the FAAMGTs are currently overvalued and their futures will not be as impressive as their pasts. I do not expect a wholesale disaster in tech however. Tech tech tends to innovate its way out of problems while other sectors struggle to adjust to change.

I wish all investors well whatever path they choose but I personally believe that investing lacks the predictability of science. Factor models fall into the realm of social science, which IMO is a misnomer. When you're dealing with human behavior, science is not the right word.

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Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

You are right small cap value investing looks pretty dumb when you remove the its best periods in history and compare it to Large Cap Growth without removing its best periods. It would seem more fair to me to compare SCV ignoring its outperformance during the 2000 tech bubble, the nifty fifty, and the great depression against Large Cap Growth minus its best 3 eras of the last hundred years.
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Re: Small Cap Value heads Rejoice !!!

Post by caklim00 »

Lets hope for more days like today :D

Today is a bad day to be a hedgefundie.
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Re: Small Cap Value heads Rejoice !!!

Post by nzahir »

MotoTrojan wrote: Fri Sep 04, 2020 11:34 am
nzahir wrote: Fri Sep 04, 2020 11:22 am
Hmm, I'll read more, but not so sure if active management is needed in the US. But it can be argued for small cap more easily b/c many companies have no real earnings.

.25% expense..meh
25bp is pretty cheap for the exposure (same as IJS) in my view.

I don't consider AVUV active management any more than any of the small-value index funds, it simply has different systematic rules than them.
Does it being so new not worry you?

The reason why I prefer Vanguard and Ishares is b/c of their length and rep, but what do I know
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

garlandwhizzer wrote: Fri Sep 04, 2020 2:53 pm Value and SCV are on a fire sale and a replay of 2000-3 is unlikely IMO.

l think a reasonable argument can be made that the SCV premium, even such as it is with its totally unrealistic model designed to inflate it, is entirely dependent on the creation and subsequent destruction of LCG bubbles such as the tech bubble 200O -3...

I wish all investors well whatever path they choose but I personally believe that investing lacks the predictability of science. Factor models fall into the realm of social science, which IMO is a misnomer. When you're dealing with human behavior, science is not the right word.

Garland Whizzer
Trimmed your quote down a bit. Even if 2000-2003 never repeats, how do you reconcile the performance of SCV from September 2002 (the S&P500 bottom after the TMT) to today? Sure value is having a drawdown, but the vast majority of this period was spent with a massive lead.

https://www.portfoliovisualizer.com/bac ... ion3_3=100
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

nzahir wrote: Fri Sep 04, 2020 3:39 pm
MotoTrojan wrote: Fri Sep 04, 2020 11:34 am
nzahir wrote: Fri Sep 04, 2020 11:22 am
Hmm, I'll read more, but not so sure if active management is needed in the US. But it can be argued for small cap more easily b/c many companies have no real earnings.

.25% expense..meh
25bp is pretty cheap for the exposure (same as IJS) in my view.

I don't consider AVUV active management any more than any of the small-value index funds, it simply has different systematic rules than them.
Does it being so new not worry you?

The reason why I prefer Vanguard and Ishares is b/c of their length and rep, but what do I know
It is run by former DFA executives whom I trust even more-so than VG or Ishares when it comes to factor products. It's age hasn't caused me to lose any sleep.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

I sometimes think I am taking crazy-pills with the way people talk about DFSVX's failure to beat the S&P500. Are we looking at the same data?

Yes I understand to actually hold this you needed to pay 1% AUM. That is no longer the case, but noted and my point still stands with that drag. Would you all not agree that rolling returns is a better way to compare these approaches than arbitrary start/end points, especially when the ending point is a historic boom in market-cap, and trough in value?

Here are the 5, 7, 10, and 15 year average annualized rolling returns:

VFINX- 8.8%, 7.7%, 7.0%, 6.4%

DFSVX - 11.1%, 11.2%, 11.0%, 10.2%

CAGR for the full period is basically even, with the spread in valuations between the two at a historic level.

So I ask, am I taking crazy pills? :sharebeer

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Small Cap Value heads Rejoice !!!

Post by rascott »

MotoTrojan wrote: Fri Sep 04, 2020 4:30 pm I sometimes think I am taking crazy-pills with the way people talk about DFSVX's failure to beat the S&P500. Are we looking at the same data?

Yes I understand to actually hold this you needed to pay 1% AUM. That is no longer the case, but noted and my point still stands with that drag. Would you all not agree that rolling returns is a better way to compare these approaches than arbitrary start/end points, especially when the ending point is a historic boom in market-cap, and trough in value?

Here are the 5, 7, 10, and 15 year average annualized rolling returns:

VFINX- 8.8%, 7.7%, 7.0%, 6.4%

DFSVX - 11.1%, 11.2%, 11.0%, 10.2%

CAGR for the full period is basically even, with the spread in valuations between the two at a historic level.

So I ask, am I taking crazy pills? :sharebeer

https://www.portfoliovisualizer.com/bac ... ion2_2=100

The zealots will always make you crazy if you actually listen to them.


I don't waste time with them.
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Re: Small Cap Value heads Rejoice !!!

Post by rascott »

garlandwhizzer wrote: Fri Sep 04, 2020 2:53 pm There is no doubt that following the total collapse of the LCG tech bubble in 2000 -3, IJS, the SCV Fund, outperformed both the S&P 500 and TSM until 9/2020. In the absence of the tech bubble which reached extreme valuations that have not been seen since (including now) SCV has not outperformed since 1990, 30 years ago. The entirety of SCV outperformance for the last 30 years disappears without that extreme tech bubble. As extreme as the valuations of TSLA and AMZN are today they are nowhere near the bubble levels of 2000. In January of 1999 the S&P 500 PE was 33.5 and as earnings collapsed faster than stock prices during the crash the PE hit 46.5 in December of 2001. Back then it was all hype about the future, little in the way of actual earnings. Now the PE ratio of the S&P 500 is now 25.4, a long way from that totally irrational exuberance, and most of the tech darlings (excepting TSLA) have hugely positive cash flows, massive cash on balance sheets, and business models are more reality than sweet dream. Currently FAAMGTs are richly valued no doubt, but not to the bubble levels that were necessary to creat the SCV outperformance over the last 20 years. Most of the market at present apart from these darlings is not overvalued at all given current interest rates and inflation rates. Value and SCV are on a fire sale and a replay of 2000-3 is unlikely IMO.

l think a reasonable argument can be made that the SCV premium, even such as it is with its totally unrealistic model designed to inflate it, is entirely dependent on the creation and subsequent destruction of LCG bubbles such as the tech bubble 200O -3 and the Nifty Fifty in 1960s and 1970s. Bubbles by their nature occur in LCG, never in SVC. No one gets too excited over regional banks struggling to stay alive in a stagnant economy and zero rate environment. Whether SCV will outperform long term from where we are now and, if it does wind up outperforming, by how much--neither of these things is clear to me at present. I agree that the FAAMGTs are currently overvalued and their futures will not be as impressive as their pasts. I do not expect a wholesale disaster in tech however. Tech tech tends to innovate its way out of problems while other sectors struggle to adjust to change.

I wish all investors well whatever path they choose but I personally believe that investing lacks the predictability of science. Factor models fall into the realm of social science, which IMO is a misnomer. When you're dealing with human behavior, science is not the right word.

Garland Whizzer

Your posts act as if it's a binary choice to invest all your money in either TSM or SCV.

Literally nobody does such a thing. TSM-only investors hold less diversified equity portfolios than tilters. That's just a fact that anyone with even a rudimentary background in finance will tell you. In the long run, fees matter more than anything.... and a TSM equity portfolio will likely meet most people's goals if they stick with it for a lifetime.

Esteemed individuals (at least on this site) such as Ferri and Bernstein advocate for a SCV tilt (and hold it themselves).

This site has become literally hysterical when discussing factor tilting. To the point where we have leaders literally staring trolling posts. And forced a very intelligent investor in Larry to leave.

I've been part of internet forums for 25 years... and it's usually the downfall when groupthink and trolling start being accepted as the norm. This place is far more mature and intelligent than most forums, and is generally well- moderated. But I do think open-minded discussion is dwindling.
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Re: Small Cap Value heads Rejoice !!!

Post by Robert T »

.
We also have the international evidence of SV, which has also performed relatively well in comparison to intl. (less tech dominant) large caps (as per portfolio visualizer link below). We also have historical data - the basis of Fama-French”s earlier work. So the small value ‘premium’ is not just a 2000-03 phenomena because of the tech crash as some seem to suggest.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
.
Last edited by Robert T on Fri Sep 04, 2020 5:12 pm, edited 1 time in total.
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Re: Small Cap Value heads Rejoice !!!

Post by vineviz »

muffins14 wrote: Thu Sep 03, 2020 5:39 pm
Steve Reading wrote: Thu Sep 03, 2020 4:49 pm [
Ex: Two firms, one twice as big as the other in every way (twice as much debt, twice as much book value, etc etc). The bigger company might be allowed to borrow twice as much, but it doesn't get to borrow any cheaper just because it's bigger.
This surprises me. My intuition would be that Google could access capital much cheaper than a small company with much lower revenue-generation capability, no?
The last time I looked at the bond ratings of companies in the S&P 600 vs the S&P 500, the small cap companies had lower average ratings than the large cap companies and thus it is safe to say their cost of capital is higher.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

rascott wrote: Fri Sep 04, 2020 4:39 pm
MotoTrojan wrote: Fri Sep 04, 2020 4:30 pm I sometimes think I am taking crazy-pills with the way people talk about DFSVX's failure to beat the S&P500. Are we looking at the same data?

Yes I understand to actually hold this you needed to pay 1% AUM. That is no longer the case, but noted and my point still stands with that drag. Would you all not agree that rolling returns is a better way to compare these approaches than arbitrary start/end points, especially when the ending point is a historic boom in market-cap, and trough in value?

Here are the 5, 7, 10, and 15 year average annualized rolling returns:

VFINX- 8.8%, 7.7%, 7.0%, 6.4%

DFSVX - 11.1%, 11.2%, 11.0%, 10.2%

CAGR for the full period is basically even, with the spread in valuations between the two at a historic level.

So I ask, am I taking crazy pills? :sharebeer

https://www.portfoliovisualizer.com/bac ... ion2_2=100

The zealots will always make you crazy if you actually listen to them.


I don't waste time with them.
Indeed...

This chart looks quite similar to the VFINX vs. DFSVX since inception chart; does this mean the S&P500 failed since it underperformed long-treasuries over a long time-span, even though the rolling-returns were substantially higher and the beat only happened after a huge drawdown?

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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Re: Small Cap Value heads Rejoice !!!

Post by rascott »

vineviz wrote: Fri Sep 04, 2020 5:09 pm
muffins14 wrote: Thu Sep 03, 2020 5:39 pm
Steve Reading wrote: Thu Sep 03, 2020 4:49 pm [
Ex: Two firms, one twice as big as the other in every way (twice as much debt, twice as much book value, etc etc). The bigger company might be allowed to borrow twice as much, but it doesn't get to borrow any cheaper just because it's bigger.
This surprises me. My intuition would be that Google could access capital much cheaper than a small company with much lower revenue-generation capability, no?
The last time I looked at the bond ratings of companies in the S&P 600 vs the S&P 500, the small cap companies had lower average ratings than the large cap companies and thus it is safe to say their cost of capital is higher.

Google just issued 5 year debt at 0.45%.... the mega cap names are borrowing within a handful of basis points of the US Treasury.
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Re: Borrowing Money: Big companies vs. Small companies?

Post by Steve Reading »

To fellow SCV heads

From AQR's Fact, Fiction and the Size Effect:
"Finally, size as a characteristic that drives returns is a strange notion compared with other characteristics such as value (book-to-price), momentum (past year returns), and quality (profits-to-assets). For example, if the cost of capital were a function of size, then this by itself would be a reason to merge; we would observe more mergers, even across very different industries and types of businesses, than we actually do. Thus, size
would be an unusual return predictor in an economic model. On the other hand, when two firms merge, their value, momentum, and quality characteristics are averaged because they are ratios. Hence, the cost of capital predicted by these characteristics following a merger
would be the average cost of capital of the two firms. This makes intuitive sense."

The rest of the paper is good too.

I'm certainly open to an intuitive reason as to why a larger company, given equal fundamentals, should borrow cheaper. I just don't see one. I believe it is the case that larger companies tend to be less distressed. And the mega caps of today have such excellent fundamentals that they can borrow quite cheaply. But the FF size effect means that even when you control for such fundamentals, smaller companies have outperformed. I don't really see the logic as to why that should be the case. I don't think Cliff sees it either. But I'm open to hearing one.
Taylor Larimore wrote: Fri Sep 04, 2020 12:16 pm
Steve Reading wrote: Thu Sep 03, 2020 4:49 pm Ex: Two firms, one twice as big as the other in every way (twice as much debt, twice as much book value, etc etc). The bigger company might be allowed to borrow twice as much, but it doesn't get to borrow any cheaper just because it's bigger.
Sorry, Steve, I believe you are incorrect about big companies not being able to borrow "cheaper."

I am a CCL (Certified Commercial Lender) and once taught "Commercial Lending" to the loan officers in the largest bank in Miami. I can firmly state from experience that big companies can borrow at "cheaper" rates than small companies when other factors are the same.

Best wishes
Taylor
Jack Bogle's Words of Wisdom: "One of the seemingly indestructible myths of investing is that stocks with small market capitalizations outpace stocks with large market capitalizations over time."
I don't know what's worse:
- That the implications of your anecdote are at complete odds and incongruent with the Bogle quote.
- That you don't even realize that your anecdote is inconsistent with Bogle's quote.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Steve Reading
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

Actually, what am I doing? I'll just ask the Prof. himself:
Ben Mathew wrote: Mon Aug 26, 2019 11:44 am .
1) Ok long story short, I don't see a good, theoretical reason for why there should be a small cap premium. I get the value, quality and investment factors. I agree that, all else equal, the higher the B/P, the higher the profitability as a function of assets, and the less reinvestment a company needs to do, then technically the higher the returns. That's what the Miller and Modigliani equation tells us.

But size, I don't see why it should have an effect. I think smaller companies tend to be more distressed, with lower credit ratings. Smaller companies tend to load more on beta. Smaller companies tend to be more illiquid. But given you control for distress via fundamental factors, control for the extra beta, and control for the illiquidity premia, is there a good, theoretical or economic reason why the market cap itself should affect the cost of capital of a firm?

For reference, a couple of my earlier posts:
viewtopic.php?p=5475359#p5475359
viewtopic.php?p=5475511#p5475511

2) If anything, if you believe the market is mean-variance efficient, one should expect a large cap premium as the large caps would need to offer some incentive for the added concentration in the average investor portfolio. Since Fama believes the market is efficient, then I assume he's probably even further perplexed by a small cap premium. Am I correct in my thinking here?

Thanks man, your insight is always highly appreciated.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Small Cap Value heads Rejoice !!!

Post by Massdriver »

I’m glad Robert mentioned the favorable international evidence regarding scv which is overlooked regularly. On a side note, what Rascott said about trolling and groupthink is important, increasingly true, and deserves some consideration by everyone. I’ve lurked these forums a long time and I’ve never seen it like it is now.
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Re: Borrowing Money: Big companies vs. Small companies?

Post by muffins14 »

Steve Reading wrote: Fri Sep 04, 2020 11:33 pm To fellow SCV heads

From AQR's Fact, Fiction and the Size Effect:
" ... On the other hand, when two firms merge, their value, momentum, and quality characteristics are averaged because they are ratios. Hence, the cost of capital predicted by these characteristics following a merger
would be the average cost of capital of the two firms. This makes intuitive sense."
That doesn’t make sense to me. If something is a ratio, you need to sum the numerators and denominators and make a new ratio, not just average the ratios, right?
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Re: Small Cap Value heads Rejoice !!!

Post by nzahir »

MotoTrojan wrote: Fri Sep 04, 2020 4:13 pm
nzahir wrote: Fri Sep 04, 2020 3:39 pm
MotoTrojan wrote: Fri Sep 04, 2020 11:34 am
nzahir wrote: Fri Sep 04, 2020 11:22 am
Hmm, I'll read more, but not so sure if active management is needed in the US. But it can be argued for small cap more easily b/c many companies have no real earnings.

.25% expense..meh
25bp is pretty cheap for the exposure (same as IJS) in my view.

I don't consider AVUV active management any more than any of the small-value index funds, it simply has different systematic rules than them.
Does it being so new not worry you?

The reason why I prefer Vanguard and Ishares is b/c of their length and rep, but what do I know
It is run by former DFA executives whom I trust even more-so than VG or Ishares when it comes to factor products. It's age hasn't caused me to lose any sleep.
Any good info on DFA?
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Re: Small Cap Value heads Rejoice !!!

Post by Cantrip »

caklim00 wrote: Thu Sep 03, 2020 9:36 pm Avantis isn't that much more expensive than Vanguard. The small ER difference doesn't explain the large QDI difference.
Sorry for responding before looking at your link from Avantis: QDI for AVDV is 85% but is only 35% for AVDVX (the mutual fund version of the same ETF)! I speculatively wonder if Avantis was somehow giving the mutual fund share class most of the unqualified dividends, and the ETF the qualified dividends for further tax efficiency. But Avantis had 100% QDI for their emerging market ETF and fund (VWO had a QDI of 38% last year), so the numbers are probably just screwy.

Given the wide variance between the ETF and mutual fund share class, I would not give either number much weight. 2019 was the first year, a partial year, of massive growth for AVDV which can distort these type of numbers. Let us see what 2020 brings.


PS
With the dividend's paid out last year on VSS of 3.6%, if VSS had the same ER as AVDV, its dividend would be 3.4% (a loss of 0.2% due to ER). With 0.47 qualified on VSS, its qualified is 1.7%, and so VSS with a 0.35 ER would be 1.7%/3.4% = 0.50 QDI expected. You are correct -- not much difference.

PSS
Due to its emerging market allocation I would expect VSS to have ~0.04 lower QDI than AVDV. So if I were to take a stab at it, compared to VSS, AVDV should have had ~55% QDI in 2019 (but these things are tough to predict, VSS had a much lower dividend and 59% QDI in 2018).
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Re: Borrowing Money: Big companies vs. Small companies?

Post by Steve Reading »

muffins14 wrote: Sat Sep 05, 2020 1:11 am
Steve Reading wrote: Fri Sep 04, 2020 11:33 pm To fellow SCV heads

From AQR's Fact, Fiction and the Size Effect:
" ... On the other hand, when two firms merge, their value, momentum, and quality characteristics are averaged because they are ratios. Hence, the cost of capital predicted by these characteristics following a merger
would be the average cost of capital of the two firms. This makes intuitive sense."
That doesn’t make sense to me. If something is a ratio, you need to sum the numerators and denominators and make a new ratio, not just average the ratios, right?
I’m sure Cliff meant “weighted average”
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

nzahir wrote: Sat Sep 05, 2020 1:36 am
MotoTrojan wrote: Fri Sep 04, 2020 4:13 pm
nzahir wrote: Fri Sep 04, 2020 3:39 pm
MotoTrojan wrote: Fri Sep 04, 2020 11:34 am
nzahir wrote: Fri Sep 04, 2020 11:22 am
Hmm, I'll read more, but not so sure if active management is needed in the US. But it can be argued for small cap more easily b/c many companies have no real earnings.

.25% expense..meh
25bp is pretty cheap for the exposure (same as IJS) in my view.

I don't consider AVUV active management any more than any of the small-value index funds, it simply has different systematic rules than them.
Does it being so new not worry you?

The reason why I prefer Vanguard and Ishares is b/c of their length and rep, but what do I know
It is run by former DFA executives whom I trust even more-so than VG or Ishares when it comes to factor products. It's age hasn't caused me to lose any sleep.
Any good info on DFA?
They are the oldest and largest provider of evidence-based factor products. Personally I think they are losing their touch as they have been apprehensive to switch to ETFs (they now offer some core funds but not their highly tilted products like Avantis offers), and stubborn about working with advisors rather than allowing people to openly access their products, but they are still trailblazers in the field. Believe they created the 1st ever small-cap fun for institutional investors when it was first discovered that small-caps outperform large.

Here is a podcast that goes over their history: https://rationalreminder.ca/podcast/201 ... d-advisors
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Steve Reading wrote: Fri Sep 04, 2020 11:59 pm
But size, I don't see why it should have an effect. I think smaller companies tend to be more distressed, with lower credit ratings. Smaller companies tend to load more on beta. Smaller companies tend to be more illiquid. But given you control for distress via fundamental factors, control for the extra beta, and control for the illiquidity premia, is there a good, theoretical or economic reason why the market cap itself should affect the cost of capital of a firm?
So just to be clear, there are logical economic reasons a small-cap index fund would be expected to outperform a large-cap one (just look at the differences in volatility) but you feel that the factors that drive that out-performance have nothing to do with size? While theoretically that makes sense, the average investor would probably struggle to expose themselves equivalently to those outperforming factors without going with a small-cap fund, no?
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

MotoTrojan wrote: Sat Sep 05, 2020 9:02 am
Steve Reading wrote: Fri Sep 04, 2020 11:59 pm
But size, I don't see why it should have an effect. I think smaller companies tend to be more distressed, with lower credit ratings. Smaller companies tend to load more on beta. Smaller companies tend to be more illiquid. But given you control for distress via fundamental factors, control for the extra beta, and control for the illiquidity premia, is there a good, theoretical or economic reason why the market cap itself should affect the cost of capital of a firm?
So just to be clear, there are logical economic reasons a small-cap index fund would be expected to outperform a large-cap one (just look at the differences in volatility) but you feel that the factors that drive that out-performance have nothing to do with size? While theoretically that makes sense, the average investor would probably struggle to expose themselves equivalently to those outperforming factors without going with a small-cap fund, no?
Well volatility isn’t sufficient reason for a premium, even though many claim just that. Take any subset of the market and it probably will be more volatile than the market, but that doesn’t mean it will have a premium.

Historically, a small cap index would’ve outperformed both because of those additional factors small caps loaded on that have nothing to do with size, and the size factor itself, which also carries a historical premium.

All of that to say: I tilt to size to the extent it lets me load on factors I do believe have strong intuition. But I couldn’t care for size itself. If I could access those factors without a size load, I would even prefer it.
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Re: Small Cap Value heads Rejoice !!!

Post by Wade Garrett »

MotoTrojan - what are your thoughts on VFVA?
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

Wade Garrett wrote: Sat Sep 05, 2020 10:39 am MotoTrojan - what are your thoughts on VFVA?
Don’t have any strong ones but have kept my eye on it. Right now I’m getting large-value exposure via my 401k (VVIAX) so I don’t have space for it. I also prefer the transparency of AVUV/QVAL’s process; I trust Vanguard but wish the process was better outlined.
Steve Reading wrote: Sat Sep 05, 2020 9:33 am
All of that to say: I tilt to size to the extent it lets me load on factors I do believe have strong intuition. But I couldn’t care for size itself. If I could access those factors without a size load, I would even prefer it.
I’d be curious Steve’s feelings on it given his admission to disliking small exposure; seems it loads up heavy on value, why do you use VBR over VFVA? Negative mom perhaps? In its short life it’s showing -0.20 on a FF 4-factor.
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Re: Small Cap Value heads Rejoice !!!

Post by Steve Reading »

MotoTrojan wrote: Sat Sep 05, 2020 11:01 am
Steve Reading wrote: Sat Sep 05, 2020 9:33 am
All of that to say: I tilt to size to the extent it lets me load on factors I do believe have strong intuition. But I couldn’t care for size itself. If I could access those factors without a size load, I would even prefer it.
I’d be curious Steve’s feelings on it given his admission to disliking small exposure; seems it loads up heavy on value, why do you use VBR over VFVA? Negative mom perhaps? In its short life it’s showing -0.20 on a FF 4-factor.
Yes, if it’s a factor I don’t care for (ex: momentos or size), I’d rather just be neutral.
I went through the same exercise I did with my friend and the Avantis funds, with the Vanguard funds. We obtained factor loading from like the early 90s IIRC. VFVA loads heavily on neg momentum. I can achieve a far stronger exposure to all the factors I want while staying mom-neutral, at much lower cost, by using a combination of VBR, VFMF and a couple others.

I cannot achieve anywhere near as much load if staying size-neutral. So I gave myself a max size load (0.3), and picked the portfolio from there.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
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Re: Small Cap Value heads Rejoice !!!

Post by HippoSir »

MotoTrojan wrote: Sat Sep 05, 2020 11:01 am Don’t have any strong ones but have kept my eye on it. Right now I’m getting large-value exposure via my 401k (VVIAX) so I don’t have space for it. I also prefer the transparency of AVUV/QVAL’s process; I trust Vanguard but wish the process was better outlined.
It doesn't go into as much detail as I would like but:

https://advisors.vanguard.com/iwe/pdf/FASFMTH.pdf

does go over the way they build their factor portfolios. Process seems well designed IMO. Personally I chose VFMF over VFVA as, like many others, I think blending MOM+HML provides some nice factor diversification. Currently I mostly use VFMF with a little AVUV just to give a little additional pure small value boost. I also still maintain a decent slug of VTI as the backbone of the portfolio.
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Re: Small Cap Value heads Rejoice !!!

Post by garlandwhizzer »

All I'm saying is that results of value investing are period dependent. True, over the long haul since 1994, INTL LCV as measured by DFALX outperformed. However since Jan. 2007, !3 years and 8 months ago, DFALX actually underperformed VGTSX, Vanguards LCB Index Fund. Not to mention that you didn't have to pay 1% to get access to the Vanguard Fund.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

The issue raised by the current struggles of value and particularly SCV, the longest and deepest value underperformance in modern history, are twofold. First, is the premium being arbitraged away by the multitude of SCV funds chased after my so many on this forum and by professionally driven markets fully aware of the factor research? The robust long term backtesting occurred predominantly in markets where no such V or SCV funds existed and where most investors were totally unaware of factor premiums. I believe it's a bit of a stretch to say that those model premiums will remain robust in our era. Fama has commented on the wide gulf between value factor model results prior to 1993 when first described and post-description. Those are model results from a model designed to magnify the positives and neglect the negatives--cost free, long/short, no trading frictions--that has never existed in the real investing world.

Second, our current macroeconomic situation: sluggish economy, record low interest rates, persistent near zero inflation rates, and massive aggregate debt levels that currently exist and have existed for the 13 year period since the GR started. These are all quite different than periods when value shined in the past, periods of substantial inflation, robust economic growth, substantially higher interest rates, and much lower debt levels in households, corporations, and governments. Slow growth, low inflation, low rates are an environment in which value and especially SCV struggle and underperform just as they have since 2007. If you expect that the economy is going to resume robust growth, that inflation and rates are going increase substantially, I agree that value and particularly SCV which has suffered massively in the last 13 years will take off and outperform. In my view it all depends of investor sentiment, the macro-economy, inflation rate, and interest rates in the future.

Value's long term historical model premium (1927 - 2015) according to Larry's book Your Complete Guide to Factor Investing is 4.8%. I believe the odds that an investor in a value fund will achieving all or even half that premium going forward from 2015 with a real value fund is not low. It is zero. The iShares LCB fund (JKD) has massively outperformed its LCV fund (JKF) over the last 16 years, a far cry from a positive 4.8%. JKF is in a hole so deep now that it may take a decade or more of significant value outperformance to even catch up let alone outperform.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

Likewise Vanguard's S&P 500 Index Fund (LCB) has also performed its LC Value Index fund for 20 years since 2000 and that includes the popping of the LCG tech bubble. What all these results plus the more positive ones posted by factor true believers demonstrate is that investing results are highly period dependent. In terms of results from real funds, arguments can be made either way depending on start and end dates. I do not believe that factor data mining from 1927 - 1993 is reliably predictive of the long term future. Just my point of view. Others see it differently. I personally hold 75% TSM and 25% SCV and feel very fortunate to have had that 75% beta and not to have 100% SCV over the last 15 years. The long term damage that a highly volatile asset like SCV can do in difficult market circumstances can dig a deep hole for your portfolio.

Garland Whizzer
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Re: Small Cap Value heads Rejoice !!!

Post by luckyducky99 »

Steve Reading wrote: Fri Sep 04, 2020 11:59 pm is there a good, theoretical or economic reason why the market cap itself should affect the cost of capital of a firm?
Diminishing returns? Apple is a $2T company with $200B in cash. How many $2B companies hold $200M in cash? (Maybe more than I'd think -- I really don't know.)

I'd think that if Apple thought it could really move the needle on future profits with that cash hoard, it would pony up and do so.

I'd also think that on average, if you're a $2B company, there are probably good business investments you can make with $200M and get a bigger bang for the buck, so to speak.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

HippoSir wrote: Sat Sep 05, 2020 12:13 pm
MotoTrojan wrote: Sat Sep 05, 2020 11:01 am Don’t have any strong ones but have kept my eye on it. Right now I’m getting large-value exposure via my 401k (VVIAX) so I don’t have space for it. I also prefer the transparency of AVUV/QVAL’s process; I trust Vanguard but wish the process was better outlined.
It doesn't go into as much detail as I would like but:

https://advisors.vanguard.com/iwe/pdf/FASFMTH.pdf

does go over the way they build their factor portfolios. Process seems well designed IMO. Personally I chose VFMF over VFVA as, like many others, I think blending MOM+HML provides some nice factor diversification. Currently I mostly use VFMF with a little AVUV just to give a little additional pure small value boost. I also still maintain a decent slug of VTI as the backbone of the portfolio.
Thank you. I had never seen that but agree it does indeed sound like a well designed approach. In particular I liked how they equal weight the three market cap sizes, but within each one weight based on factor load (smallest company could be highest weight in that third).

I know others do the same but forward P/E has always seemed strange to me.
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

garlandwhizzer wrote: Sat Sep 05, 2020 12:46 pm
Value's long term historical model premium (1927 - 2015) according to Larry's book Your Complete Guide to Factor Investing is 4.8%. I believe the odds that an investor in a value fund will achieving all or even half that premium going forward from 2015 with a real value fund is not low. It is zero.
The 4.8% is a factor exposure of 1 as achieved with a full long-short approach so I agree no long-only fund is expected to achieve that. I think you under estimate how quickly value can surge though if you don’t think half that premium can’t easily and quickly be achieved since 2015.
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Re: Small Cap Value heads Rejoice !!!

Post by langlands »

luckyducky99 wrote: Sat Sep 05, 2020 1:04 pm
Steve Reading wrote: Fri Sep 04, 2020 11:59 pm is there a good, theoretical or economic reason why the market cap itself should affect the cost of capital of a firm?
Diminishing returns? Apple is a $2T company with $200B in cash. How many $2B companies hold $200M in cash? (Maybe more than I'd think -- I really don't know.)

Here, you're essentially referring to the amount of leverage a company uses. More leverage means higher market beta. Small leveraged companies do in fact get higher return in exchange for more equity risk. But large leveraged companies also get this higher return.


I'd think that if Apple thought it could really move the needle on future profits with that cash hoard, it would pony up and do so.

I'd also think that on average, if you're a $2B company, there are probably good business investments you can make with $200M and get a bigger bang for the buck, so to speak.

Good investment prospects for the smaller company are priced in. This is why you have small growth companies with sky high P/E's (although these days sky high P/E's exist across the size spectrum).
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Re: Small Cap Value heads Rejoice !!!

Post by nzahir »

Kind of lost on which SCV to pick. How do you guys decide?

VIOV, VBR, IJS, SLYV, and RWJ (Invesco Small Cap Revenue ETF)

I want to learn a lot more about RWJ or any ETF that has to do with SCV companies that are somewhat filtered.

I believe that is what AVUV tries to do, but I am a bit lost

Any more thoughts?
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Re: Small Cap Value heads Rejoice !!!

Post by 000 »

nzahir wrote: Sat Sep 05, 2020 5:22 pm Kind of lost on which SCV to pick. How do you guys decide?
If faced with a lack of clarity among choices, I choose the least expensive one available.

For more information, lookup Cost Matters Hypothesis.
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Re: Small Cap Value heads Rejoice !!!

Post by luckyducky99 »

langlands wrote: Sat Sep 05, 2020 3:44 pm
luckyducky99 wrote: Sat Sep 05, 2020 1:04 pm
Steve Reading wrote: Fri Sep 04, 2020 11:59 pm is there a good, theoretical or economic reason why the market cap itself should affect the cost of capital of a firm?
Diminishing returns? Apple is a $2T company with $200B in cash. How many $2B companies hold $200M in cash? (Maybe more than I'd think -- I really don't know.)

Here, you're essentially referring to the amount of leverage a company uses. More leverage means higher market beta. Small leveraged companies do in fact get higher return in exchange for more equity risk. But large leveraged companies also get this higher return.


I'd think that if Apple thought it could really move the needle on future profits with that cash hoard, it would pony up and do so.

I'd also think that on average, if you're a $2B company, there are probably good business investments you can make with $200M and get a bigger bang for the buck, so to speak.

Good investment prospects for the smaller company are priced in. This is why you have small growth companies with sky high P/E's (although these days sky high P/E's exist across the size spectrum).
That's helpful and clearly explained -- Thanks.
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Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

A recent comment made the claim that value is dead because factor premiums disappear post-publication. That is an old saw that has been debunked many times, but there is some truth to it. Swedroe gives the historical premium a one-third haircut due to its publication.

https://www.etf.com/sections/index-inve ... ed-returns
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Re: Small Cap Value heads Rejoice !!!

Post by neurosphere »

000 wrote: Sat Sep 05, 2020 5:37 pm
nzahir wrote: Sat Sep 05, 2020 5:22 pm Kind of lost on which SCV to pick. How do you guys decide?
If faced with a lack of clarity among choices, I choose the least expensive one available.

For more information, lookup Cost Matters Hypothesis.
way back when, I updated and kept this wiki page current (as in, 2013 way back). I just checked in again, and it seems it's being kept current by a host of other volunteers! https://www.bogleheads.org/wiki/US_small_cap_value
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Re: Small Cap Value heads Rejoice !!!

Post by Ben Mathew »

Steve Reading wrote: Fri Sep 04, 2020 11:59 pm I'll just ask the Prof. himself:
I should clarify, in case there is any confusion: I worked as a professor for a few years after my PhD, but left that position several years ago. So I'm no longer a professor, except to my kids who sometimes have to listen to my lectures.
Steve Reading wrote: Fri Sep 04, 2020 11:59 pm 1) Ok long story short, I don't see a good, theoretical reason for why there should be a small cap premium. I get the value, quality and investment factors. I agree that, all else equal, the higher the B/P, the higher the profitability as a function of assets, and the less reinvestment a company needs to do, then technically the higher the returns. That's what the Miller and Modigliani equation tells us.

But size, I don't see why it should have an effect. I think smaller companies tend to be more distressed, with lower credit ratings. Smaller companies tend to load more on beta. Smaller companies tend to be more illiquid. But given you control for distress via fundamental factors, control for the extra beta, and control for the illiquidity premia, is there a good, theoretical or economic reason why the market cap itself should affect the cost of capital of a firm?

For reference, a couple of my earlier posts:
viewtopic.php?p=5475359#p5475359
viewtopic.php?p=5475511#p5475511

2) If anything, if you believe the market is mean-variance efficient, one should expect a large cap premium as the large caps would need to offer some incentive for the added concentration in the average investor portfolio. Since Fama believes the market is efficient, then I assume he's probably even further perplexed by a small cap premium. Am I correct in my thinking here?

Thanks man, your insight is always highly appreciated.
The only factor that emerges easily from basic economics is the market correlation (beta) factor. The rest are all complicated, and whether they are better explained by risk or mispricing is debatable. To me, the mispricing story is more believable.

But first, why basic economics tells us that market correlation should work: Assets that are highly correlated to the market should be cheap (have higher expected returns) because they are paying out in good times, when everything else is doing well. So they are not as valuable to us as the assets that pay out when times are tough. This explains why stocks are cheaper (have higher expected returns) than bonds, and why call options on a market index have higher expected returns than put options on a market index.

Once market beta is taken into account, it's not obvious why size, book to market, profitability, quality, momentum, and anything else should matter any more than the name of the company or whether the CEO plays golf. Note that it's critical to control for market beta when evaluating a story. Often the reasons given for why value companies deserves a higher expected return is that these companies are under duress and if the economy tanks, then they will do badly. But that story is not controlling for market beta. Controlling for market beta means there is a premium over and above what is merited by how the company will do when the economy tanks. We would have to explain why even when they pay out in tough times, people don't seem to want to hold it and demand a premium for holding it. That is a much harder story to tell.

My take is that factor premiums are due to mispricing. We know there are bubbles--from tulips to bitcoin to tech stocks. People get too excited about certain things at certain times. Run-ups in prices draw more people in driven not by fundamentals but by recent price increases. Dramatic bubbles might be infrequent. But some chronic low-grade overexcitement might be more prevalent, and will result in some stocks being chronically overpriced and some chronically underpriced. If so, we might expect that big, popular, growing firms will be overpriced and small, unpopular, embattled firms will be underpriced.

There is another thing that I find really telling--factorheads are almost always tilted towards small and value, and rarely towards large and growth. If this was all really about risk, then there is no reason why factorheads wouldn't be evenly distributed across the factors. So why aren't they? The fact that they are all tilted in one direction suggests that they seem to think it's mispricing, not risk. Who digs deeply into Fama-French, believes that the factor premiums exist, and then decides that they should tilt towards large growth and not small value? [Edit to clarify: I'm not saying I would expect the same person to tilt towards both small-value and large-growth. Different people should tilt to different things. The question is why are factorheads as a group tilted almost exclusively towards small-value. Where are the risk averse factorheads who read this literature, believe it to be empirically sound, and then decide to tilt towards large-growth?]
Last edited by Ben Mathew on Sat Sep 05, 2020 10:17 pm, edited 2 times in total.
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Re: Small Cap Value heads Rejoice !!!

Post by Random Walker »

Day9 wrote: Sat Sep 05, 2020 6:23 pm A recent comment made the claim that value is dead because factor premiums disappear post-publication. That is an old saw that has been debunked many times, but there is some truth to it. Swedroe gives the historical premium a one-third haircut due to its publication.

https://www.etf.com/sections/index-inve ... ed-returns
I believe in his new book, The Incredible Shrinking Alpha 2nd ed, he describes about 50% haircut to published factor premia. I was a little surprised; I had the 1/3 number in my head too. Check out two studies described in Chapter 4 of Larry’s new book.

Dave
Day9
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Re: Small Cap Value heads Rejoice !!!

Post by Day9 »

Ben Mathew wrote: Sat Sep 05, 2020 8:43 pm...
There is another thing that I find really telling--factorheads are almost always tilted towards small and value, and rarely towards large and growth. If this was all really about risk, then there is no reason why factorheads wouldn't be evenly distributed across the factors. So why aren't they? The fact that they are all tilted in one direction suggests that they seem to think it's mispricing, not risk. Who digs deeply into Fama-French, believes that the factor premiums exist, and then decides that they should tilt towards large growth and not small value?
Large and Growth are not factors. The factors are Small-Minus-Big and HmL (high minus low, aka value).
I'm just a fan of the person I got my user name from
langlands
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Re: Small Cap Value heads Rejoice !!!

Post by langlands »

Ben Mathew wrote: Sat Sep 05, 2020 8:43 pm
The only factor that emerges easily from basic economics is the market correlation (beta) factor. The rest are all complicated, and whether they are better explained by risk or mispricing is debatable. To me, the mispricing story is more believable.

But first, why basic economics tells us that market correlation should work: Assets that are highly correlated to the market should be cheap (have higher expected returns) because they are paying out in good times, when everything else is doing well. So they are not as valuable to us as the assets that pay out when times are tough. This explains why stocks are cheaper (have higher expected returns) than bonds, and why call options on a market index have higher expected returns than put options on a market index.

Once market beta is taken into account, it's not obvious why size, book to market, profitability, quality, momentum, and anything else should matter any more than the name of the company or whether the CEO plays golf. Note that it's critical to control for market beta when evaluating a story. Often the reasons given for why value companies deserves a higher expected return is that these companies are under duress and if the economy tanks, then they will do badly. But that story is not controlling for market beta. Controlling for market beta means there is a premium over and above what is merited by how the company will do when the economy tanks. We would have to explain why even when they pay out in tough times, people don't seem to want to hold it and demand a reasonable premium for holding it. That is a much harder story to tell.

My take is that factor premiums are due to mispricing. We know there are bubbles--from tulips to bitcoin to tech stocks. People get too excited about certain things at certain times. Run-ups in prices draw more people in driven not by fundamentals but by recent price increases. Dramatic bubbles might be infrequent. But some chronic low-grade overexcitement might be more prevalent, and will result in some stocks being chronically overpriced and some chronically underpriced. If so, we might expect that big, popular, growing firms will be overpriced and small, unpopular, embattled firms will be underpriced.

There is another thing that I find really telling--factorheads are almost always tilted towards small and value, and rarely towards large and growth. If this was all really about risk, then there is no reason why factorheads wouldn't be evenly distributed across the factors. So why aren't they? The fact that they are all tilted in one direction suggests that they seem to think it's mispricing, not risk. Who digs deeply into Fama-French, believes that the factor premiums exist, and then decides that they should tilt towards large growth and not small value?
Hm, I don't think I agree with your negative assessment of the risk premium explanation for the value factor. I believe that historically, growth stocks actually have higher market betas on average than value stocks. And yet the story is that despite less market exposure, value stocks still drop more than growth stocks during an economic recession. So I believe the story does control for market beta.

Aren't large growth and small value opposites? Why would factor heads tilt towards both? If small value has a positive premium, large growth would have a negative premium (I mean unless there is some complicated interaction term). I think some SCV people do incorporate other factors like momentum.
rkhusky
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Re: Small Cap Value heads Rejoice !!!

Post by rkhusky »

Ben Mathew wrote: Sat Sep 05, 2020 8:43 pm There is another thing that I find really telling--factorheads are almost always tilted towards small and value, and rarely towards large and growth. If this was all really about risk, then there is no reason why factorheads wouldn't be evenly distributed across the factors. So why aren't they? The fact that they are all tilted in one direction suggests that they seem to think it's mispricing, not risk. Who digs deeply into Fama-French, believes that the factor premiums exist, and then decides that they should tilt towards large growth and not small value?
Because the Fama-French model is irrelevant as to whether one should tilt towards SV or LG. That decision is all about looking at historical returns and deciding that since SV had a premium in the past, it will have a premium in the future. Or making the argument that since SV stocks have more risk than the market, it is likely that they will have higher return then the market (or if you are naive, that SV is guaranteed to have higher return if you wait long enough).
MotoTrojan
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Re: Small Cap Value heads Rejoice !!!

Post by MotoTrojan »

nzahir wrote: Sat Sep 05, 2020 5:22 pm Kind of lost on which SCV to pick. How do you guys decide?

VIOV, VBR, IJS, SLYV, and RWJ (Invesco Small Cap Revenue ETF)

I want to learn a lot more about RWJ or any ETF that has to do with SCV companies that are somewhat filtered.

I believe that is what AVUV tries to do, but I am a bit lost

Any more thoughts?
Pure revenue weight (RWJ) doesn’t pass my sniff test. VIOV/IJS/SLYV are essentially identical funds; all have a slight quality component as they must have had a year of positive earnings for S&P600 inclusion. VBR is cheapest and more 50/50 mid/small-cap which some prefer. AVUV is the only that specifically screens/weights based on profitability from your list.

What’s the purpose of your SCV tilt?
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