Small Cap Value heads Rejoice !!!

[MotoTrojan]

Is this a popular view here in this thread that a fund like AVDV with a .36% ER will likely eat up the SCV premium? The DFA int scv fund seems to have a decent history of returns and Avantis has better ERs than DFA.

Edit: I should qualify this further and ask a popular view in this thread among SCV tilters.

Based on the historical factor premia, the excess return of something like AVDV is around 4% per year. You should (of course) aim for as low ER as possible, but I don't see how the higher ER is expected to eat up most of SCV premium.

You can verify it for yourself by running something like a mean-variance analysis.

I can believe the HML factor premia has been 4%, but AVDV (if we use DISVX as a proxy) will only capture a little over 1/2 of that since it is long-only. Are you saying the full long-short HML factor premia was closer to 8% or did you misspeak?

Still a lot of room for the overall premia to come down and still justify the expense of AVDV. This sometimes makes me wonder about my choice of FNDC which has a similar ER but should result in a bit less factor exposure...

[Massdriver]

I appreciate all the insightful, kind responses. There are truly some great people in our little group here. I'm still getting settled in with AVDV so it's good to hear a variety of perspectives.

[Uncorrelated]

Is this a popular view here in this thread that a fund like AVDV with a .36% ER will likely eat up the SCV premium? The DFA int scv fund seems to have a decent history of returns and Avantis has better ERs than DFA.

Edit: I should qualify this further and ask a popular view in this thread among SCV tilters.

Based on the historical factor premia, the excess return of something like AVDV is around 4% per year. You should (of course) aim for as low ER as possible, but I don't see how the higher ER is expected to eat up most of SCV premium.

You can verify it for yourself by running something like a mean-variance analysis.

I can believe the HML factor premia has been 4%, but AVDV (if we use DISVX as a proxy) will only capture a little over 1/2 of that since it is long-only. Are you saying the full long-short HML factor premia was closer to 8% or did you misspeak?

Still a lot of room for the overall premia to come down and still justify the expense of AVDV. This sometimes makes me wonder about my choice of FNDC which has a similar ER but should result in a bit less factor exposure...

I'm saying the sum of premiums from such a fund is in the range of 4%. If we use DFSVX as a proxy:

4 factor:

Code: Select all

SmB * E[SmB] = 0.81 * 1.87%
HmL * E[HmL] = 0.62 * 2.53%
MoM * E[MoM] = -0.07 * 7.02%
total: 2.6% annually

6 factor:

Code: Select all

SmB x E[SmB] = 0.87 * 2.14%
HmL * E[HmL] = 0.39 * 2.53%
RmW * E[RmW] = 0.14 * 2.79%
CmA * E[CmA] = 0.09 * 3.01%
MoM * E[MoM] = -0.07 * 7.02%
total: 3.01% annually

It's a bit lower than I was expecting. For FNDC, I find 3.4%. For VFMF, just over 4.0%. Many of these figures are probably not statistically significantly different from each other.

Realistically speaking, you should probably discount the expected premium by half to reduce survivorship bias and then subtract a bit more to account for the increased risk, but that still leaves a healthy margin for the ER of your fund.

Factor regressions and factor historical data taken from PortfolioVisualizer.

[Steve Reading]

Is this a popular view here in this thread that a fund like AVDV with a .36% ER will likely eat up the SCV premium? The DFA int scv fund seems to have a decent history of returns and Avantis has better ERs than DFA.

Edit: I should qualify this further and ask a popular view in this thread among SCV tilters.

Based on the historical factor premia, the excess return of something like AVDV is around 4% per year. You should (of course) aim for as low ER as possible, but I don't see how the higher ER is expected to eat up most of SCV premium.

You can verify it for yourself by running something like a mean-variance analysis.

I can believe the HML factor premia has been 4%, but AVDV (if we use DISVX as a proxy) will only capture a little over 1/2 of that since it is long-only. Are you saying the full long-short HML factor premia was closer to 8% or did you misspeak?

Still a lot of room for the overall premia to come down and still justify the expense of AVDV. This sometimes makes me wonder about my choice of FNDC which has a similar ER but should result in a bit less factor exposure...

Well AVDV loads on other things aside from HmL no?

EDIT: What Uncorrolated said lol

[Elysium]

Expecting a 4% premium from Intl SCV stocks based on backtested data could be a big mistake. It certainly was for the past 25 years, as investors who tilted to Intl SCV taking away from US S&P 500 has trailed by -4% per annum. Could future be different? no one knows, but history is not on the side of talking away from highly successful companies in the US to invest in distressed small companies in rest of the world. It's for no reason Bogle & Buffett has advised against that.

Red line: VFINX
Blue line: DISVX



Source

[Steve Reading]

Expecting a 4% premium from Intl SCV stocks based on backtested data could be a big mistake. It certainly was for the past 25 years, as investors who tilted to Intl SCV taking away from US S&P 500 has trailed by -4% per annum. Could future be different? no one knows, but history is not on the side of talking away from highly successful companies in the US to invest in distressed small companies in rest of the world. It's for no reason Bogle & Buffett has advised against that.

Red line: VFINX
Blue line: DISVX



Source

It's so meta to use historical performance to argue that you shouldn't use historical performance for decisions.

[Uncorrelated]

as investors who tilted to Intl SCV taking away from US S&P 500

Was that an accident or are you making these poor comparisons intentionally?

[000]

Expecting a 4% annual premium by applying a few simple screens is hubris.

[Massdriver]

Expecting a 4% premium from Intl SCV stocks based on backtested data could be a big mistake. It certainly was for the past 25 years, as investors who tilted to Intl SCV taking away from US S&P 500 has trailed by -4% per annum. Could future be different? no one knows, but history is not on the side of talking away from highly successful companies in the US to invest in distressed small companies in rest of the world. It's for no reason Bogle & Buffett has advised against that.

Red line: VFINX
Blue line: DISVX



Source

I tilt to intl SCV from my existing international allocation, not my domestic. I have no intention of going 100% U.S.

[MotoTrojan]

Expecting a 4% premium from Intl SCV stocks based on backtested data could be a big mistake. It certainly was for the past 25 years, as investors who tilted to Intl SCV taking away from US S&P 500 has trailed by -4% per annum. Could future be different? no one knows, but history is not on the side of talking away from highly successful companies in the US to invest in distressed small companies in rest of the world. It's for no reason Bogle & Buffett has advised against that.

Red line: VFINX
Blue line: DISVX



Source

It's so meta to use historical performance to argue that you shouldn't use historical performance for decisions.

Let alone to cherry-pick beyond belief and compare an ex-US fund to the S&P500...

DISVX sure seems to have picked up a nice premium compared to market-cap developed market, and even has a better Sharpe...

https://www.portfoliovisualizer.com/bac ... ion3_3=100

[Elysium]

It's so meta to use historical performance to argue that you shouldn't use historical performance for decisions.

Not accurate representation of what I said. Academic backtests are often hypothetical, not using live historical fund data. Such backtests use indexes constructed for specific purposes, often just to match the conclusion, and in many cases long-short portfolios that have never been replicated into live funds. Even with out of sample tests, it is never as good as having live fund data for practical considerations. They are excellent tools for industry research, I would agree.

[MotoTrojan]

It's so meta to use historical performance to argue that you shouldn't use historical performance for decisions.

Not accurate representation of what I said. Academic backtests are often hypothetical, not using live historical fund data. Such backtests use indexes constructed for specific purposes, often just to match the conclusion, and in many cases long-short portfolios that have never been replicated into live funds. I used two live funds.

You used a US fund to show that an ex-US small-value fund didn't provide a premium. Maybe it was an accident but it was beyond misleading.

[Elysium]

You used a US fund to show that an ex-US small-value fund didn't provide a premium. Maybe it was an accident but it was beyond misleading.

Yes, that was the intent. An investor need to make a choice whether to take away their capital from investing in US Market to a small sleeve of the global market, stocks of distressed foreign companies, in search for market beating returns. All the while they can get good returns from successful US businesses. Therefore, we have to compare the opportunity cost of that decision. Buffett & Bogle says Intl may not be needed. Based on that an investor needs to make two active decisions, first whether Intl needed, then whether to tilt to Intl SV. There is opportunity cost in both, what I showed is exactly that cost, -4% per annum over 25 years.

[Elysium]

I tilt to intl SCV from my existing international allocation, not my domestic. I have no intention of going 100% U.S.

But you have to first decide even Intl allocation is needed. This is like saying you improved one bad decision by making a slightly better bad decision. I am not against investing in Intl, in moderation, but when you go in search of elusive 4% premiums, you may end up with -4% over long periods as 25 years as shown above.

[imak]

Expecting a 4% premium from Intl SCV stocks based on backtested data could be a big mistake. It certainly was for the past 25 years, as investors who tilted to Intl SCV taking away from US S&P 500 has trailed by -4% per annum. Could future be different? no one knows, but history is not on the side of talking away from highly successful companies in the US to invest in distressed small companies in rest of the world. It's for no reason Bogle & Buffett has advised against that.

Red line: VFINX
Blue line: DISVX



Source

I never understood this kind of comparisons. For almost all buy-and-hold investors, rolling returns are more indicative of real world accumulation-withdrawal transactions. Nobody is performing single lump-sum investment in 1996 and withdrawing entirely in 2020. On a rolling returns basis, in the same simulation that you shared, we see Intl SCV provided about 9% average returns (for each 1,3,5,7,10,15 yr rolling periods). Intl SCV diversification is working as intended. Its more important to be diversified during both accumulation and withdrawal phases than performing such point-to-point comparisons.

[Massdriver]

I tilt to intl SCV from my existing international allocation, not my domestic. I have no intention of going 100% U.S.

But you have to first decide even Intl allocation is needed. This is like saying you improved one bad decision by making a slightly better bad decision. I am not against investing in Intl, in moderation, but when you go in search of elusive 4% premiums, you may end up with -4% over long periods as 25 years as shown above.

I already stated that I am not going 100% U.S. My decision was made 10+ years ago. You may also end up with +4% premiums over 25 years going forward. There are no crystal balls.

[MotoTrojan]

I tilt to intl SCV from my existing international allocation, not my domestic. I have no intention of going 100% U.S.

But you have to first decide even Intl allocation is needed. This is like saying you improved one bad decision by making a slightly better bad decision. I am not against investing in Intl, in moderation, but when you go in search of elusive 4% premiums, you may end up with -4% over long periods as 25 years as shown above.

You may end up with >1% of outperformance relative to an appropriate ex-US developed market benchmark is what you meant to say, as that is what DISVX has done since inception.

Real talk I have always respected your pushback but this argument that S&P500 outperforming ex-US SCV is meaningful in whether the factors worked has wiped out any respect I had for your opinion.

[MotoTrojan]

I never understood this kind of comparisons. For almost all buy-and-hold investors, rolling returns are more indicative of real world accumulation-withdrawal transactions. Nobody is performing single lump-sum investment in 1996 and withdrawing entirely in 2020. On a rolling returns basis, in the same simulation that you shared, we see Intl SCV provided about 9% average returns (for each 1,3,5,7,10,15 yr rolling periods). Intl SCV diversification is working as intended. Its more important to be diversified during both accumulation and withdrawal phases than performing such point-to-point comparisons.

I agree, and DFSVX (US small-value) has had a ~4% premium on the 7, 10, and 15 year rolling periods compared to the S&P500. Or should I compare it to Total International and get an even better differential ...

[vineviz]

Expecting a 4% annual premium by applying a few simple screens is hubris.

This mischaracterizes the discussion to which your (presumably) are referring.

In any case, running the screen is the least difficult part of the whole process and and isn’t the source of additional risk or expected return. The risk comes in actually OWNING the stocks that pass the screen.

[Elysium]

Expecting a 4% annual premium by applying a few simple screens is hubris.

This mischaracterizes the discussion to which your (presumably) are referring.

In any case, running the screen is the least difficult part of the whole process and and isn’t the source of additional risk or expected return. The risk comes in actually OWNING the stocks that pass the screen.

Disagree. There is risk that the process applied itself is wrong.

[vineviz]

Expecting a 4% annual premium by applying a few simple screens is hubris.

This mischaracterizes the discussion to which your (presumably) are referring.

In any case, running the screen is the least difficult part of the whole process and and isn’t the source of additional risk or expected return. The risk comes in actually OWNING the stocks that pass the screen.

Disagree. There is risk that the process applied itself is wrong.

I think you misread what I wrote.

[Elysium]

Real talk I have always respected your pushback but this argument that S&P500 outperforming ex-US SCV is meaningful in whether the factors worked has wiped out any respect I had for your opinion.

Okay, so what next, are you going to call me a geezer next

All in good spirits

[HippoSir]

Disagree. There is risk that the process applied itself is wrong.

I've seen a lot of posts from you in factor threads but I've always struggled to figure out what your specific argument is. Do you believe that factors do not explain returns? Do you believe that factors may explain returns, but won't have any premium going forwards? Do you believe that factor funds are improperly constructed? Do you believe that factor funds are being improperly sold to investors who expect a guaranteed short term premium out of them?

Not trying to be argumentative, I just see you post a lot in factor threads and would like to understand your thesis.

[000]

Expecting a 4% annual premium by applying a few simple screens is hubris.

This mischaracterizes the discussion to which your (presumably) are referring.

In any case, running the screen is the least difficult part of the whole process and and isn’t the source of additional risk or expected return. The risk comes in actually OWNING the stocks that pass the screen.

I understand the argument for SCV, but disagree. Namely, it has not been demonstrated to my satisfaction that SCV is and will be more risky than Total Stock Market. To wit, I think large and small stocks have different risks and there is not enough information about the future to order their risks. This fundamental view leads me to broad asset class level diversification, as opposed to optimization along factor lines.

[MotoTrojan]

Real talk I have always respected your pushback but this argument that S&P500 outperforming ex-US SCV is meaningful in whether the factors worked has wiped out any respect I had for your opinion.

Okay, so what next, are you going to call me a geezer next

All in good spirits

Geezer is a bit too pointed, boomer perhaps .

[Steve Reading]

It's so meta to use historical performance to argue that you shouldn't use historical performance for decisions.

Not accurate representation of what I said. Academic backtests are often hypothetical, not using live historical fund data. Such backtests use indexes constructed for specific purposes, often just to match the conclusion, and in many cases long-short portfolios that have never been replicated into live funds. I used two live funds.

You used a US fund to show that an ex-US small-value fund didn't provide a premium. Maybe it was an accident but it was beyond misleading.

I think Elysium doesn't understand that when Uncorrelated said "4% excess return for AVDV", that claim means an excess return over its own untilted benchmark. So by posting Int SCV vs S&P 500, he's not actually showing that Uncorrelated's claim would've been a foolish expectation over the past 25 years. But he thinks he is because he didn't fundamentally understand what was being discussed.

To add insult to the injury, Uncorrelated claimed an excess return of about half of that is more realistic. And when you compare real live funds, in out-of-sample, you found the excess return about 1.5%, darn close from Uncorrelated's point after all!

But we all know Elysium. The fella hates to admit his own mistakes. We've seen it before in this very thread.

[vineviz]

To wit, I think large and small stocks have different risks and there is not enough information about the future to order their risks. This fundamental view leads me to broad asset class level diversification, as opposed to optimization along factor lines.

If you are (somehow) confident that stocks have more than one dimension of risk, then it must be true that their risks can quantified and therefore compared.

Thinking that "large and small stocks have different risks" but refusing to accept that those risks can me measured is logically inconsistent.

[Steve Reading]

Expecting a 4% annual premium by applying a few simple screens is hubris.

This mischaracterizes the discussion to which your (presumably) are referring.

In any case, running the screen is the least difficult part of the whole process and and isn’t the source of additional risk or expected return. The risk comes in actually OWNING the stocks that pass the screen.

I understand the argument for SCV, but disagree. Namely, it has not been demonstrated to my satisfaction that SCV is and will be more risky than Total Stock Market. To wit, I think large and small stocks have different risks and there is not enough information about the future to order their risks. This fundamental view leads me to broad asset class level diversification, as opposed to optimization along factor lines.

Ok you're entitled to your opinion. But would you at least admit that IF you believe SCV did have higher compensated risk (like us), then the idea that you could access it with simple screens isn't crazy right?

After all, you could have a screen of "bond or stock" in order to access what is ~6% excess return. So it's not a matter of "dumb screens shouldn't provide outperformance" but rather your OWN personal views that factors won't produce outperformance.

The difference is subtle but relevant.

[muffins14]

I think Elysium doesn't understand that when Uncorrelated said "4% excess return for AVDV", that claim means an excess return over its own untilted benchmark. So by posting Int SCV vs S&P 500, he's not actually showing that Uncorrelated's claim would've been a foolish expectation over the past 25 years. But he thinks he is because he didn't fundamentally understand what was being discussed.

To add insult to the injury, Uncorrelated claimed an excess return of about half of that is more realistic. And when you compare real live funds, in out-of-sample, you found the excess return about 1.5%, darn close from Uncorrelated's point after all!

But we all know Elysium. The fella hates to admit his own mistakes. We've seen it before in this very thread.

People seem a bit harsh on Elysium here. I think the meta point that there are always opportunity costs is valid. Investors do have to decide a US/Intl split, and do decide on Intl / factor-loaded Intl.

It just so happens that the US/Intl decision may have been a much more important one than Intl / factor Intl in the recent past

Of course hindsight is 20/20 and past returns don't imply future results, strategy != outcome etc.

Nevertheless, just investing in VTI and going to sleep for 20 years wouldn't have been _that_ bad, and is much safer than the hypoerbolic response of "OK just go invest in amazon in 1999 then"

[Day9]

Factorheads:

No need to get riled up. We are posting on a Jack Bogle enthusiast board, and his tell-tale chart shows he disagreed with our approach. So it is natural to get pushback on our strategy and we cannot expect them to stay out of this thread. With our strategy's recent underperformance againts US large growth, we should be grateful that the S&P500 folks are not "spiking the football" even harder than they are.

[000]

To wit, I think large and small stocks have different risks and there is not enough information about the future to order their risks. This fundamental view leads me to broad asset class level diversification, as opposed to optimization along factor lines.

If you are (somehow) confident that stocks have more than one dimension of risk, then it must be true that their risks can quantified and therefore compared.

Thinking that "large and small stocks have different risks" but refusing to accept that those risks can me measured is logically inconsistent.

How can we quantify the future?

[MotoTrojan]

I think Elysium doesn't understand that when Uncorrelated said "4% excess return for AVDV", that claim means an excess return over its own untilted benchmark. So by posting Int SCV vs S&P 500, he's not actually showing that Uncorrelated's claim would've been a foolish expectation over the past 25 years. But he thinks he is because he didn't fundamentally understand what was being discussed.

To add insult to the injury, Uncorrelated claimed an excess return of about half of that is more realistic. And when you compare real live funds, in out-of-sample, you found the excess return about 1.5%, darn close from Uncorrelated's point after all!

But we all know Elysium. The fella hates to admit his own mistakes. We've seen it before in this very thread.

People seem a bit harsh on Elysium here. I think the meta point that there are always opportunity costs is valid. Investors do have to decide a US/Intl split, and do decide on Intl / factor-loaded Intl.

It just so happens that the US/Intl decision may have been a much more important one than Intl / factor Intl in the recent past

Of course hindsight is 20/20 and past returns don't imply future results, strategy != outcome etc.

Nevertheless, just investing in VTI and going to sleep for 20 years wouldn't have been _that_ bad, and is much safer than the hypoerbolic response of "OK just go invest in amazon in 1999 then"

Agreed, those are just separate arguments. Saying that factors failed because the S&P500 beat DISVX is like saying that market-cap weighting failed because Tesla beat the S&P500.

[000]

But would you at least admit that IF you believe SCV did have higher compensated risk (like us), then the idea that you could access it with simple screens isn't crazy right?

Yes, I mostly agree in direction but not magnitude. Two issues: (1) risks don't have to be compensated over my investing timeframe and (2) stocks are still stocks and are more similar to each other than any part thereof is different from the other parts (i.e. the iron law of beta).

After all, you could have a screen of "bond or stock" in order to access what is ~6% excess return. So it's not a matter of "dumb screens shouldn't provide outperformance" but rather your OWN personal views that factors won't produce outperformance.

No, I don't think stocks are guaranteed to provide an excess return over bonds. I prefer stocks to bonds because stocks have intrinsic value (and bonds don't), not because I expect or think I deserve some premium relative to another investment. I will get whatever returns I get.

[Steve Reading]

But would you at least admit that IF you believe SCV did have higher compensated risk (like us), then the idea that you could access it with simple screens isn't crazy right?

Yes, I mostly agree in direction but not magnitude. Two issues: (1) risks don't have to be compensated over my investing timeframe and (2) stocks are still stocks and are more similar to each other than any part thereof is different from the other parts (i.e. the iron law of beta).

Never heard of the iron law of beta. My point was that IF you agreed with us in the direction and magnitude of a SCV premium, and you believe like us that it's due to risk, then it's not ridiculous to believe that "a simple screen" could access that premium. Whether the premium is realized or not is irrelevant.

Hence, this is an issue of your personal expectations of factors, not whether "simple screens" should be able to access premia. Given some personal expectations, the latter is reasonable, not hubris.

After all, you could have a screen of "bond or stock" in order to access what is ~6% excess return. So it's not a matter of "dumb screens shouldn't provide outperformance" but rather your OWN personal views that factors won't produce outperformance.

No, I don't think stocks are guaranteed to provide an excess return over bonds. I prefer stocks to bonds because stocks have intrinsic value (and bonds don't), not because I expect or think I deserve some premium relative to another investment. I will get whatever returns I get.

No, stocks don't have a guaranteed excess return. But they do have an expected premium over bonds. Whether the premium is realized depends on what occurs in the future.

I disagree with your viewpoint about stocks and bonds. Bonds are generally collaterized and backed up by plenty of intrinsic value. Even when companies go bankrupt, bond holders tend to recover most of their investment. That's why bonds don't lose much money in stock market crashes. Stocks rarely have intrinsic value in the same way. Their value is mostly the claim on future earnings (still intrinsic but in a different way). Especially today when many firms have market caps well above their book value or liquidation value. When a company goes bankrupt, stock owner's are lucky to get much, if anything at all.

But that's neither here nor there.

[000]

Never heard of the iron law of beta. My point was that IF you agreed with us in the direction and magnitude of a SCV premium, and you believe like us that it's due to risk, then it's not ridiculous to believe that "a simple screen" could access that premium. Whether the premium is realized or not is irrelevant.

Hence, this is an issue of your personal expectations of factors, not whether "simple screens" should be able to access premia. Given some personal expectations, the latter is reasonable, not hubris.

Well, yes if I were a different person... I would have different opinions.

I'm still stuck on the simple screens issue. I think risk is a multifaceted, complex, and chaotic thing. I don't think it can be modeled well with simple screens. I didn't communicate that well earlier.

[Elysium]

I think Elysium doesn't understand that when Uncorrelated said "4% excess return for AVDV", that claim means an excess return over its own untilted benchmark. So by posting Int SCV vs S&P 500, he's not actually showing that Uncorrelated's claim would've been a foolish expectation over the past 25 years. But he thinks he is because he didn't fundamentally understand what was being discussed.

To add insult to the injury, Uncorrelated claimed an excess return of about half of that is more realistic. And when you compare real live funds, in out-of-sample, you found the excess return about 1.5%, darn close from Uncorrelated's point after all!

But we all know Elysium. The fella hates to admit his own mistakes. We've seen it before in this very thread.

People seem a bit harsh on Elysium here. I think the meta point that there are always opportunity costs is valid. Investors do have to decide a US/Intl split, and do decide on Intl / factor-loaded Intl.

It just so happens that the US/Intl decision may have been a much more important one than Intl / factor Intl in the recent past

Of course hindsight is 20/20 and past returns don't imply future results, strategy != outcome etc.

Nevertheless, just investing in VTI and going to sleep for 20 years wouldn't have been _that_ bad, and is much safer than the hypoerbolic response of "OK just go invest in amazon in 1999 then"

Don't worry about me, but thanks though, you did get what I was trying to show. I did understand everything, as way before people like SteveReading and Vineviz were on these forums these discussions were going on. I did the ISCV/S&P 500 intentionally, to show opportunity cost of tilting. It isn't just hindsight, Jack Bogle did say it wasn't necessary to tilt international more than 25 years ago, and I did refer to that. If someone didn't get it then it is their own bias. Don't know if I ever mentioned, one of my relatives is highly regarded in the field and was a colleague of Dr.Fama at Chicago, now elsewhere, and I've met Dr.Fama. I think it gives comfort to people like SteveReading and Vineviz to think that I don't understand, so instead of having to defend their ideas over and over, they can dismiss it off, giving them some sort of good feeling. It's ok. We will press on. True Bogleheads do not give up on messaging.

[Steve Reading]

I think Elysium doesn't understand that when Uncorrelated said "4% excess return for AVDV", that claim means an excess return over its own untilted benchmark. So by posting Int SCV vs S&P 500, he's not actually showing that Uncorrelated's claim would've been a foolish expectation over the past 25 years. But he thinks he is because he didn't fundamentally understand what was being discussed.

To add insult to the injury, Uncorrelated claimed an excess return of about half of that is more realistic. And when you compare real live funds, in out-of-sample, you found the excess return about 1.5%, darn close from Uncorrelated's point after all!

But we all know Elysium. The fella hates to admit his own mistakes. We've seen it before in this very thread.

People seem a bit harsh on Elysium here. I think the meta point that there are always opportunity costs is valid. Investors do have to decide a US/Intl split, and do decide on Intl / factor-loaded Intl.

It just so happens that the US/Intl decision may have been a much more important one than Intl / factor Intl in the recent past

Of course hindsight is 20/20 and past returns don't imply future results, strategy != outcome etc.

Nevertheless, just investing in VTI and going to sleep for 20 years wouldn't have been _that_ bad, and is much safer than the hypoerbolic response of "OK just go invest in amazon in 1999 then"

I'm personally salty at him for saying to me a few months ago that I just didn't understand factors properly. I'm also annoyed at his inability to admit a mistake.

He'll of course claim that I'm saying he doesn't understand anything about factors in general. Which is clearly false, no need to play victim. Not only did I not say that, but I don't even believe it.

I still maintain that the comparison of Int SCV vs S&P 500 runs in no way counter to the point "AVDV has expected 4% excess return". Either he understands that and wants to be misleading with a graph, or he just didn't understand it. No fault in that, could've read the comments too quickly or not thought about it. I'd have a lot more respect for him if he just admitted his mistake and further explained than talk about how he knows Fama himself lmao.

[Steve Reading]

I think it gives comfort to people like SteveReading and Vineviz to think that I don't understand, so instead of having to defend their ideas over and over, they can dismiss it off, giving them some sort of good feeling.

Oh Moto already explained to you why it didn't make sense in the context of Uncorrelated's comment. It wasn't until I saw your response to Moto (doubling down that you made sense all along) that I decided to dismiss your logic by claiming you didn't understand what Uncorrelated said.

For the record, I do believe you understand factors. And I do believe you understand what Uncorrelated meant NOW. You just don't want to admit it for whatever reason.

Whatever, conversation is just going nowhere.

[vineviz]

People seem a bit harsh on Elysium here. I think the meta point that there are always opportunity costs is valid. Investors do have to decide a US/Intl split, and do decide on Intl / factor-loaded Intl.

I’m don’t think anyone is being “harsh”, and I’d hope that any harsh comments get reported to and deleted by moderators.

I can’t tell sometimes whether posts like the one being discussed are merely the result of bafflement or intentional provocation. More importantly, though, I don’t think it matters.

If the “meta point” is that people typically have finite amounts of capital to invest and must choose their investments in the face of an uncertain future, the only response I can offer is “yes, and?”.

Of course there are opportunity costs, and that’s exactly WHY the estimation of expected risk and return parameters is such a big deal: asset allocation depends, either implicitly or explicitly, on comparing the expected risk and return of various portfolios.

The nature of whatever risk factors (if any) are associated with SCV stocks and price I can expect to receive for accepting those risks (or pay to avoid them) plays directly into my decision about how to allocate my portfolio.

Elysium got pushback on his example because it had nothing to do with the question being discussed (I.e whether the aggregate risk exposures of SCV are accompanied by a 4%, 1%, or 0% expected return premium). Others have patiently pointed this out.

[Elysium]

I think it gives comfort to people like SteveReading and Vineviz to think that I don't understand, so instead of having to defend their ideas over and over, they can dismiss it off, giving them some sort of good feeling.

Oh Moto already explained to you why it didn't make sense in the context of Uncorrelated's comment. It wasn't until I saw your response to Moto (doubling down that you made sense all along) that I decided to dismiss your logic by claiming you didn't understand what Uncorrelated said.

For the record, I do believe you understand factors. And I do believe you understand what Uncorrelated meant NOW. You just don't want to admit it for whatever reason.

Whatever, conversation is just going nowhere.

Was busy all day, and posting in between quick breaks, so didn't even read Uncorrelated comment properly, you'll notice I did not respond to his comment. Why did you assume that I read Uncorrelated comment, did or not understand? All I saw he said something like the comparison was poor, and I already responded to others why I made the comparison the way I did.

Look, there is no reason to get all riled up, I am not saying you do personally, I think you are a thoughtful poster, notwithstanding the high horse approach sometimes, but few others get riled up. All I posted was one graph and there were 10 replies soon after. This is not life and death, or even going to make huge impacts to our financial lives. We've got what matters right mostly, costs, passive, don't market time, so on... the rest is just icing on the cake.

[Elysium]

Disagree. There is risk that the process applied itself is wrong.

I've seen a lot of posts from you in factor threads but I've always struggled to figure out what your specific argument is.

I got some time now, let me see if I can explain. First, I was responding in between breaks, so I am not sure if Vineviz meant something different, I have to go back and check.

Second, about your specific questions:

Do you believe that factors do not explain returns?

I think they do. They are helpful for explaining returns post-fact.

Do you believe that factors may explain returns, but won't have any premium going forwards?

The word premium itself is misleading. It can be negative or positive. Calling something that can be negative as a "premium" is a twist on the whole thing. Even if the idea was originated by FF, I think it was popularized by industry hungry for selling products. I do not think it is possible to systemically capture an excess return premium in any reliable manner over any reliable period of time. It may not even happen in your lifetime. I reject the argument that all these factors are to be viewed same as equity risk premium. I think there is a huge difference, much of it has to do with behavioral aspects of it. I believe market ranks ERP higher than any other factor premium. I cannot prove it, but nether can other side disprove it.

I do not know for sure whether there will be premium from investing in SCV or not, no one does, and to repeat myself, I don't think it's the same as thinking there will be an equity premium going forward. I see no reason why the market should reward you for investing in a company that is about to go bankrupt, for all you know this company will go bankrupt and you'll lose everything. Now, the theory goes that if you select a portfolio of thousands of such stocks then a few winners will come out of it, because as the academics like to call they "surprised" the market (instead of the word mispricing). The idea is that such few winners win so big to earn an excess premium. So, goes the theory behind SCV. Do you see why I find it hard to believe that this phenomenon will happen reliably in my lifetime? Possible, but should I do it. Bogle says, even if you tilt limit yourself to 15%, I think that's reasonable.

Do you believe that factor funds are improperly constructed? Do you believe that factor funds are being improperly sold to investors who expect a guaranteed short term premium out of them?

Yes, and no - to both. Some, not all are improperly constructed. Those that are constructed properly sticks to the fundamentals, others have added on several things, including the AQR long/short strategies are found to have flaws, which even they cannot figure out. Professionally, I am a technology leader, I build complex systems with many moving parts, my approach to building systems is to build them with only the needed moving parts, just enough to get to the desired goals, anymore and I am adding more complexity and more errors that needs to be chased down. Same goes for factor products, more algorithms, more room for errors.

Some companies take advantage of it, for instance I saw the other day a fund advertised as "high yield factor" fund or "floating rate factor" fund. What is stopping someone to claim they discovered another factor that was proven in backtests, then market it, if they are slick at marketing they could make big bucks. Investor beware in this regard is my motto.

[Elysium]

[I think Elysium doesn't understand that when Uncorrelated said "4% excess return for AVDV", that claim means an excess return over its own untilted benchmark.

Of course, I did. Why would I not. A premium can only be compared to its own benchmark by the narrow definition used in this context (by Uncorrelated). My argument was orthogonal to it, taking it entirely to a different context, by broadening the spectrum of comparison that by the narrow definition may appear poorly constructed, but when looked at in the proper context would make whole lot of sense. It starts with the argument that Intl SCV premium being discussed here does not even matter when Intl investing itself does not matter, so then you can bring in S&P 500 for comparison, because it allows one to use the opportunity cost argument. If I do not accept the premise of value premium, or even the need for international investing, then why should I subject myself to the narrow definition used for "AVDV" premium. Jack Bogle rejected both, said both were not necessary, why should I reject Jack Bogle when he has been prescient over this.

[caklim00]

I recall reading an article in either USA Today or NY Times 10 years ago talking about how for the last 10 years the S&P 500 gained nothing. The tilters that were around then weren't bashing large cap folks over the head like we see happening now in reverse.

[Elysium]

I'm personally salty at him for saying to me a few months ago that I just didn't understand factors properly.

SteveReading: It is an excellent human trait to let go of things. There is no need to be salty over things anonymous people have said over on internet forums. When you were new member here many months ago, I did not know whether you were performance chasing or truly knew what you were talking about it. Perhaps as a new member you should have had less expectations of being accepted readily as a "factor expert" - think about it.

[MotoTrojan]

I'm personally salty at him for saying to me a few months ago that I just didn't understand factors properly.

SteveReading: It is an excellent human trait to let go of things. There is no need to be salty over things anonymous people have said over on internet forums. When you were new member here many months ago, I did not know whether you were performance chasing or truly knew what you were talking about it. Perhaps as a new member you should had have less expectations of being accepted readily as a "factor expert" - think about it.

The username may be new but the user isn’t .

[Robert T]

.
We make decisions based on information we have at the time.

If I went back 18 years to the start again, I would make the same decisions.

Potential opportunity costs are assessed ex-ante (at the time of the decision) based on expected return difference and expected downside risks. They are not assessed ex-post with 2020 hindsight. As Ken French puts it: https://www.dimensional.com/us-en/insig ... ed-returns

Investment returns have two parts: the expected return and the unexpected return. The expected return is the best guess of what will happen based on all the information currently available. The unexpected return is the surprise, the difference between what does happen and what was expected. Investors should base their portfolio decisions on expected future returns, not recent realized returns, and the two can differ by a lot.

So what are the current expected returns (and expected opportunity costs). From Research Affiliates: Expected 10-year nominal returns (all are higher than respective market returns).

7.0% = US RAFI Fundamental
9.0% = US RAFI Fundamental Small Cap
8.8% = Developed Markets RAFI Fundamental
8.0% = Developed Markets RAFI Fundamental Small Cap
12.0% = Emerging Markets RAFI Fundamental
0.3% = Current yield on Vanguard Intermediate Treasuries

According to Research Affiliates, my 75:25 stock:bond portfolio expected return is close to 6% annualized (8% for stock portion). Expected return of a corresponding market portfolio = 5% annualized (6.5% for stock portion). Expected return of a corresponding US market portfolio = 4.7% (6.1% for stock portion). Market returns are from AQR Capital Market Assumptions. So biggest return “opportunity cost” = bonds.

Obviously no guarantees.
.

[MotoTrojan]

So what are the current expected returns (and expected opportunity costs). From Research Affiliates: Expected 10-year nominal returns (all are higher than respective market returns).

7.0% = US RAFI Fundamental
9.0% = US RAFI Fundamental Small Cap
8.8% = Developed Markets RAFI Fundamental
8.0% = Developed Markets RAFI Fundamental Small Cap
12.0% = Emerging Markets RAFI Fundamental
0.3% = Current yield on Vanguard Intermediate Treasuries

Surprised these are so high, in particular the US large cap.

[nzahir]

Any other funds similar to DEMSX (small cap emerging) that are more easily accessible?

Not FNDC

[MotoTrojan]

Any other funds similar to DEMSX (small cap emerging) that are more easily accessible?

Not FNDC

FNDC is developed not emerging. DGS is one of your only options if you are set on small-value. There are many more value funds (AVEM for example).

[manlymatt83]

Any other funds similar to DEMSX (small cap emerging) that are more easily accessible?

Not FNDC

FNDC is developed not emerging. DGS is one of your only options if you are set on small-value. There are many more value funds (AVEM for example).

Is AVEM actually value or just emerging markets in general? And if someone is holding AVUV and AVDV isn’t the trifecta ETF DGS over AVEM?