Update from DFA land, TA Core funds and other issues

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Update from DFA land, TA Core funds and other issues

Post by larryswedroe »

Just came back from conference

Here are the updates people were asking about, and some other issues I thought would be of interest

1-TA domestic fund will I was told be out Oct 1. That seemed firm

2-I spoke with the key guy (Eduardo Repetto who runs research) about importance of other TA funds and how they might get them started. I believe now that they will create a TA (tax aware) int'l fund by year end and I urge them to create it as core 2 type. I also believe they will create an int'l vector fund. I also urged them to create a TA total int'l including EM to avoid the issues of say S Korea or Taiwan becoming a developed country and thus the EM would sell and create taxes. I believe they will do this--say ratio of about 6:1 developed to EM.

3-Interesting comment from Gene Fama during interview, which was great to watch. He was asked was there a bubble. He said easy to see after fact but he did little study and found that it would have taken only the development of two MICROSOFTS to justify all the total valuations. Unfortunately not one came out of that (google of course came later). He also was asked about SG and is it anomaly. Interesting answer was no. It is a risk story. Just different type of risk. Investors we know don't only care about return and SD but distribution of returns. And in the case of SG (and IPOs) we have the lottery effect--different distribution with potential for the next Microsoft. Could be perfectly rational story, just preference for different distribution. Now investors who don't care about that should then avoid SG of course--they have different preference.

4-Was study on Sarbox impact on US competiveness as center of capital raising--the NY vs London story. Study clearly showed no impact. Despite the noise NY has lost no competitiveness. Now that doesn't say anything about the other issues related to Sarbox.

5-Study on ability of pension plans and consultants to identify future winners among fund managers. Evidence showed what we would expect. Performance before hire, fantastic. After hiring, cannot distinguish from zero. Was slight outperformanc BEFORE TRANSITION costs, which would have likely turned it negative after costs--and the outperformance was not statistically significant anyway, even before costs.

6-Great presentation on the issue of Fundamental Indexing. The fundamental index story was exposed as totally a value/size story and Arnott's story that his index benefits from shifting to more growthy after value outperforms and adds value was exposed as wrong. This is total factor story.

Hope above helpful
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

one other thing

Post by larryswedroe »

Fama was asked about ETFS and DFA and here was his response. Not going to happen. They only work for simple index strategies. Not strategies like DFAs that are more complex (i.e., provider of liquidity, etc.).
barkster
Posts: 21
Joined: Fri Mar 16, 2007 8:08 am

Tax Aware Cores

Post by barkster »

Hi Larry,

Thanks for passing along this fantastic information! Do you have a sense of how much of an advantage in after-tax performance the T.A. Core 2 would have over the regular Core 2? Also, do you know when the combined Int'l EM might become available?

Thanks!
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

I don't know exact or even rough figures because regular funds in core are likely to be highly tax efficient anyway. But we do know it is basically free lunch--

One thing that is important is DFA is very aggressive at lending securities. For example the Japanese small cap fund adds 65bp a year in returns from this activity--one reason why this fund is so good. But that is tax inefficient because you lose the qualified div status when you lend securities. So a TA aware fund would only lend up to point that the impact offsets the OER of the fund, while a non TA fund would lend as much as possible.

Keep in mind also that the cores are cheaper for them to run as they have to do less trading, so you see this in lower expenses as well.

There is a small negative from tax perspective of a core--you cannot harvest at individual asset class level any longer. So net benefits still positive but not huge. But again, it is value added and lower costs on top. IMO this is the "future" of investing--core strategies with adding tilts to get loading factors you personally desire.
User avatar
gbs
Wiki Admin
Posts: 557
Joined: Tue Feb 20, 2007 12:41 pm

Post by gbs »

Thanks Larry!

Great information... could you please elaborate on what you meant by:

Interesting comment from Gene Fama during interview, which was great to watch. He was asked was there a bubble. He said easy to see after fact but he did little study and found that it would have taken only the development of two MICROSOFTS to justify all the total valuations. Unfortunately not one came out of that (google of course came later).

Was this referring to the tech bubble or to the current situation?

Thanks, gbs
DiehardDisciple
Posts: 93
Joined: Mon Jul 23, 2007 11:15 pm

Post by DiehardDisciple »

Larry, thank you so much for your help with this. In another online forum, there is an emoticon that genuflects and looks like it's praying to Mecca. If that one was here, I would insert it now. Unfortunately, I have to settle for raising a cold beer in your honor. :beer
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

gbs
Tech bubble
grok87
Posts: 9148
Joined: Tue Feb 27, 2007 9:00 pm

Re: Update from DFA land, TA Core funds and other issues

Post by grok87 »

larryswedroe wrote: He also was asked about SG and is it anomaly. Interesting answer was no. It is a risk story. Just different type of risk. Investors we know don't only care about return and SD but distribution of returns. And in the case of SG (and IPOs) we have the lottery effect--different distribution with potential for the next Microsoft. Could be perfectly rational story, just preference for different distribution. Now investors who don't care about that should then avoid SG of course--they have different preference.
Larry,
First of all many thanks for the very interesting report from the DFA conference. I found the above comments on SG very interesting. Let me see if I am understanding correctly.

To oversimplify, is he saying that SG returns might be distributed like this:

90% chance 0%, 10% chance 100% ===> mean = 10%

whereas SV returns might be distributed like this:

50% chance 16%, 50% chance 8% ===> mean = 12%

and that some investors might prefer SG (despite the lower mean) because of other factors (say taxes) that make lottery type returns (and the ability to defer gains over long periods) preferable?

thanks

cheers
grok
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

grok, you got it. Especially true for small amounts of portfolio. Like people buy lottery tickets for $1 or few dollars, but they don't invest their portfolios in them. And remember SG is only about 2% of market.
User avatar
stratton
Posts: 11083
Joined: Sun Mar 04, 2007 5:05 pm
Location: Puget Sound

Post by stratton »

grok, you got it. Especially true for small amounts of portfolio. Like people buy lottery tickets for $1 or few dollars, but they don't invest their portfolios in them. And remember SG is only about 2% of market.
Has the lottery # for small growth come up? I have a small amount of Janus Venture I forgot about and its on tear up 33% over the last running year.

Paul
tuffy88
Posts: 82
Joined: Thu Mar 01, 2007 4:09 pm

Post by tuffy88 »

Larry,

DFA seems to get its outperformance at least partly from overweighting small & value. And it has worked well since 2000. Do you know if they have done any rethinking about the overweight in small & value in their portfolio's?

The reason I am interested is that I began to moderatly overweigt small & value in 2003. Moved 5% from Total Stock Market to small value and 10% of Total Stock Market to large value then. It has worked well since then in increasing returns, but many are now saying that large growth stocks are going to be coming back in fashion now. Was that discussed at the conferance? Thanks.

Charles
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

tuffy

DFA just provides tools for investors. Their portfolios are designed to get high exposure to the asset classes, in low cost and tax efficient way, with broad diversification within the asset class to minimize unsystematic risks.

It is investors who are taking the risks--that they desire.

Now DFA funds have outperformed similar funds partly because they weight more on the loading factors for size and value. There are other reasons like patient trading strategy, screens and block trading and aggressive securities lending.

As to the issue you raise. First there is no evidence on being able to time the risk factors, either beta, size or value. While value premium is "predictable" based on size of the spread between the BtMs of value and growth stocks that does no good in term of timing any more than does the fact that the P/Es "predict" the return of stocks--lower P/Es -higher future returns and vice versa. The reason is that there is always a risk premium for stocks and value stocks and it is high and persistent.
If you search the indexuniverse.com site you will find an article I wrote on this very issue. Hope you find it helpful
tuffy88
Posts: 82
Joined: Thu Mar 01, 2007 4:09 pm

Post by tuffy88 »

Larry,

Thanks for your reply. Will look up your article at index universe.

Charles
SmallHi
Posts: 1718
Joined: Wed Feb 21, 2007 6:11 pm

Post by SmallHi »

Larry,

Interesting thoughts. I was beginning to wonder what DFAs committment to the Core strategies was (US Vector owners had to wonder if the strategy wasn't "good enough" to warrant overseas versions). Looks like the assets are certainly there, but they are a bit slow to release new strategies.

On the Int'l Vector....were they thinking late 07, early 08, or too early to tell? Eduardo did say "yes, and Int'l Vector is in the works" or something to that effect, however?

Why 6:1 Int'l to Emerging? Usually, in an investment portfolio, I see the following splits:

70%US, 20% Int'l, 10% EM (which means 66% Foreign, 34% EM)

60% US, 30% Int'l, 10% EM (75%, 25%)

50% US, 40% Int'l, 10% EM (80%, 20%)

6:1 is more like 86% Foreign, 14% Emerging....thats a lot of foreign:emerging!

SH
SmallHi
Posts: 1718
Joined: Wed Feb 21, 2007 6:11 pm

Post by SmallHi »

By the way...on the topic of Core "tracking error" from a total portfolio perspective -- look at the last 12 months:

Russell 1000 Growth = +19.5%
Russell 3000 = +16.1%
DFA US Core 1 = +16.1%
DFA US Core 2 = +15.8%
DFA US Vector = +15.0%
DFA US Target = +12.5%

Compare that with the typical component holdings:

S&P 500 = +16.1%
US Large Value = +15.2%
US Small = +13.3%
US Small Value = +12.4%
US Micro = +12.3%

I gotta say, it would seem easier to "stomach" a 0.3% to 1.1% underperformance on your entire equity allocation in US Core 2 or US Vector than as much as 3.5% in some of your sattellite holdings (such as SV and Micro).

SH
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

small hi

No commitment on dates, but it is coming. The reason they can do this with NEW funds is that they are now allowed to use cash to buy shares in existing funds--that gets them the diversification they need and minimizes the TE problem. So they should be able to come out with new funds sooner

I dont know about the ratio- probably result of what advisors use. For example in 70/30 portfolios that I see (domestic/int'l) might look like 26% int'l and 4% emerging or something like that. So my guess is that is what they will do. EM is after all a small part of total market. China today is less than Microsoft for example.

Personally I am closer to 3:1
SmallHi
Posts: 1718
Joined: Wed Feb 21, 2007 6:11 pm

Post by SmallHi »

Larry --
No commitment on dates, but it is coming. The reason they can do this with NEW funds is that they are now allowed to use cash to buy shares in existing funds--that gets them the diversification they need and minimizes the TE problem. So they should be able to come out with new funds sooner
I am not clear at all what that means. Funds meaning new $, or new strategies?

And, once I am clear on what you said, is there some new legislation allowing them more flexibility on developing these new funds or something? Not quite sure what would change to allow for greater flexibility.

Thanks for clarification.

(at last glance, I believe EM is about 7% of World Market, 47% US, and 46% Developed Int'l)

SH
uni
Posts: 23
Joined: Sun Jul 15, 2007 1:42 pm

DFA

Post by uni »

Do you have suggestions for the lowest cost and method to purchase $100,000 of DFA funds?
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

small high

Yes new legislation. Previously they had to hold stocks, Now the new funds can be funded with shares of existing funds. So they could start a new TA Core fund and with new flows instead of buying stocks (and have big tracking error until get enough funds) they can now buy the existing core fund shares. Then when get enough assets to diversify effectively they can redeem in kind.
SmallHi
Posts: 1718
Joined: Wed Feb 21, 2007 6:11 pm

Post by SmallHi »

Huh...That is interesting!

Is that the same for individual investors?

Say I have $20M split 50% US Core 2, 25% US LV, and 25% SV, and want to use that to redeem and then "fund" a TA US Vector portfolio...will DFA make the "switch" if the client has a strong desire to do so and DFA believes in the product? Or, on an individual level, will they still have to sell shares and send DFA the cash?

Pretty interesting stuff.


BTW, out of curiosity, I have kept an eye on Core assets per DFA website. C2 has taken on a lot of $ in the last 18 months. That you know of, do a lot of advisors just use that fund for 100% US exposure, or is it a bit "mild" for the average investor's target HmL/SmB goals? Or do most use, say, 70% to 80% Core 2 and a bit of LV, Micro, and SV around the edges do you assume?

(this of course applies only to the advisors who use Core)

Finally, what process does your firm go through with a client to determine their appropriate exposure to style and value. Assuming need, ability, and source of human capital warrant a S/V tilt, how does one make the distinction between 100% Core 2, 100% Vector, or 100% LV/SV (or somewhere between the 3)?

Appreciate it!

SH
SmallHi
Posts: 1718
Joined: Wed Feb 21, 2007 6:11 pm

Post by SmallHi »

Also, won't the actions you spoke of above (based on recent legislation) result in increased capital gains?

For example, lets say I have $10M for a TA Vector, and DFA combines that with $10M of DFVEX to start the fund, only selling off the $10M in DFVEX as money continues to come in to buy more real stocks for the TA version.

Won't that increase taxes as DFA sells DFVEX shares, and, won't that inhibit ability to tax manage? Or will that much more in losses need to be harvested to offset gains from DFVEX sales?

Thats for the time, SH
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

no-as I said they would redeem in kind, not sell the shares.
User avatar
Drain
Posts: 1402
Joined: Mon Feb 26, 2007 1:27 pm
Location: Maryland

Re: Update from DFA land, TA Core funds and other issues

Post by Drain »

larryswedroe wrote: 3-Interesting comment from Gene Fama during interview, which was great to watch. He was asked was there a bubble. He said easy to see after fact but he did little study and found that it would have taken only the development of two MICROSOFTS to justify all the total valuations. Unfortunately not one came out of that (google of course came later).
I don't understand what he means by developing two more Microsofts. Does he mean that two more industries would become dominated by monopolies, or that two new industries would come into being? Not that either alternative would seem to solve the valuation problem, or would even be likely/possible.
He also was asked about SG and is it anomaly. Interesting answer was no. It is a risk story. Just different type of risk. Investors we know don't only care about return and SD but distribution of returns. And in the case of SG (and IPOs) we have the lottery effect--different distribution with potential for the next Microsoft. Could be perfectly rational story, just preference for different distribution. Now investors who don't care about that should then avoid SG of course--they have different preference.
Hand-waving. Anything he can't easily explain, he chalks up to "risk" that he can't identify, define, or measure. I don't think I will ever be a Fama fan.

Anyway, on the subject of vector and t-a core funds...for the sake of argument, let's say the value premium is at a typical level. (It probably is lower now, but ignore that.) In a taxable account, which kind of fund would supposedly offer the greater after-tax expected return?
Darin
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

drain

What he meant was that two companies would become Microsoft in market cap. And can you say that given the huge change brought about by the Internet that it was not possible? In fact looks like Google (which came later of course) is going to do it.


I think his answer btw on SG was very logical. We do know that people prefer certain type of distributions--that may be perfectly rational to them.


Not sure what you are asking in later question--which fund? Which FUNDS are you asking about.
User avatar
Drain
Posts: 1402
Joined: Mon Feb 26, 2007 1:27 pm
Location: Maryland

Post by Drain »

larryswedroe wrote:What he meant was that two companies would become Microsoft in market cap. And can you say that given the huge change brought about by the Internet that it was not possible?
Well, first off, maybe not, since there was only so much money to go around.

Second, you had a company like Cisco that, by some accounts, was priced as though it were about to achieve more than 100% market share in its industry. How would adding two new monopolies or industries help with that kind of valuation? Sure, the router industry might have expanded a bit due to the expansion or creation of a dependent industry, but not by THAT much.

Finally, if you buy Fama's reasoning, you can use it to justify almost any valuation you want for any stock or asset class you like. I mean, all it takes is for another huge monopoly or two and your securities could be worth twice what they are now, right?
In fact looks like Google (which came later of course) is going to do it.
How has Google's success dramatically increased the intrinsic values of other Internet stocks? I'm missing the entire concept here.
I think his answer btw on SG was very logical. We do know that people prefer certain type of distributions--that may be perfectly rational to them.
It's not so much that what he says makes no sense. It's that he states it as though he's proven something. He dismisses other views as though his vague opinion were conclusive in some way. Then again, I didn't hear him say what he said, so I may be attributing a tone that wasn't there.
Not sure what you are asking in later question--which fund? Which FUNDS are you asking about.
Sorry. Let's say Vector and TA Core. Which would have the greater expected return after taxes, given an historically typical value premium?
Darin
SmallHi
Posts: 1718
Joined: Wed Feb 21, 2007 6:11 pm

Post by SmallHi »

Let's say Vector and TA Core. Which would have the greater expected return after taxes, given an historically typical value premium?
Thats an easy one. With SmB annualized at about 2.5% historically, and HmL about 4.7%, there is very little chance Vector would be so tax inefficient (actually, should be very tax efficient) as to eliminate the higher returns from greater Size and Value exposure.

As a matter of fact, if we assume, going forward, a 5% market premium, a 2% size premium, a 4% value premium, and a 1mo t-bill return of 4%, the expected return of each is:

Core 2 = (1.05*5%)+(0.24*2%)+(0.25*4%) = +10.73%
Vector = (1.10*5%)+(0.48*2%)+(0.42*4%) = +12.14%

That is, of course, gross of fees. If we assume the expense ratio reduces the return of the fund 1:1, then (given a likely long term expense ratio of 0.2% for Core 2 and 0.3% for Vector), net returns would be:

Core 2 = 10.53%
Vector = 11.84%

So, Vector would have to give up 1.3% a year more in taxes than Core 2 in order to produce lower after tax returns.

To consider how unlikely that is, lets assume a worst case scenerio: TA Core 2 is perfectly capital gains tax efficient (which actually is probably pretty likely), and Vector is as tax efficient as US Small Value (-1.7% a year to taxes).

Under this scenerio, TA Core 2 would give back about 0.2% a year due to taxes on dividends, and Vector would give back -1.7%. Only in that scenerio does the 1.5% added loss to taxes lead to lower Vector AT returns.

To put it more broadly, if TA Core 2 is perfectly cap gains tax efficient, and Vector is only as tax efficient as US Micro, US LV, or US SV, will the AT returns of C2 offset the higher pretax returns of Vector.

thats how I see it...

SH
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

Drain

It is not that Google creates other values--it is that it wins so big that it offsets all the other losers--if you have enough of them. Fama calculated it that if you created just two Microsofts (remember it is almost $300b in value today, and was lot higher 7 years ago) then all the loses would have been offset, or at least all valuations justified.
Of course you would have had to own them all to get the return.
User avatar
Drain
Posts: 1402
Joined: Mon Feb 26, 2007 1:27 pm
Location: Maryland

Post by Drain »

larryswedroe wrote: It is not that Google creates other values--it is that it wins so big that it offsets all the other losers--if you have enough of them. Fama calculated it that if you created just two Microsofts (remember it is almost $300b in value today, and was lot higher 7 years ago) then all the loses would have been offset, or at least all valuations justified.
Of course you would have had to own them all to get the return.
I don't even understand what issue(s) this is supposed to address. I thought this was an argument that there was no bubble.

If there was a bubble at the end of the 20th century, it was a bubble because stock prices were unjustifiably higher than what intrinsic value would indicate. How does supposing two mythical companies fix the valuation problem? Fine, pretend two Googles came into existence in the late '90s. How would that suddenly make Cisco, Microsoft, DoubleClick, Yahoo, Amazon, and all the others fairly valued? For that matter, if the two Googles had existed at the time, they likely would have been overpriced, too (assuming the rest were overpriced). They would have become part of the bubble, as well.
Darin
WWV
Posts: 126
Joined: Fri Feb 23, 2007 8:58 am
Location: Northwest of Chicago

Re: Update from DFA land, TA Core funds and other issues

Post by WWV »

larryswedroe wrote:
5-Study on ability of pension plans and consultants to identify future winners among fund managers. Evidence showed what we would expect. Performance before hire, fantastic. After hiring, cannot distinguish from zero. Was slight outperformanc BEFORE TRANSITION costs, which would have likely turned it negative after costs--and the outperformance was not statistically significant anyway, even before costs.
Larry.

Is this the kind of study that gets published where we can read it? If not, then can you trust the results? Just being devils advocate! :twisted:

Thanks for sharing!!

Bob
"The average investor has only 11,000 more genes than a worm"-New York Times
User avatar
United
Posts: 447
Joined: Wed Mar 28, 2007 5:45 pm

Post by United »

His point is not that there was no bubble. He's saying that the extremely high valuations would have been justified if two random tech companies had been able to grow to Microsoft's size. In other words, it was not possible to know the bubble existed at the time without knowing that no companies would match Microsoft's performance.
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

Drain
The point is we could not predict WHICH TWO they would be-if we could then ONLY those two would have high valuations. Since we could not know which the prices of all reflected the possibility that two might. And if you owned them all--then all the prices would have been justified IN AGGREGATE
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

BOB K-yes I assume that it will be published

Study was called The Selection and Termination of Investment Management Firms by Plan Sponsors
Sunil Wahal (consultant to DFA) but also Professor of Finance at Arizona State

DFA contracts with many finance profs to get access to their research
psteinx
Posts: 3570
Joined: Tue Mar 13, 2007 2:24 pm

Post by psteinx »

Without more data, I'm skeptical of this theory (i.e. that 2 extra MSFTs would have meant the bubble wasn't really a bubble).

I assume that, mathematically, it looks something like this:

Tech Market at Bubble Peak - Tech Market post Bubble = MSFT value X 2.

If so, then I would raise the following issues:

1) Pretty much all large US growth stocks were way overpriced in spring of 2000 by historic standards, not just techs.
2) Even if a few giant MSFT-level companies had emerged, much of the value of those companies would not have gone to those who held a broad collection of tech stocks circa 2000. Some value would have been diluted by stock options, and some more value would have gone to holders of smaller companies (many of which would likely not have been public yet in 2000) who were bought up by the larger companies as they grew.
3) The whole thing strikes me a bit like a saying I heard, "If I had some ham, I could make ham and eggs, if I had some eggs".

Show me more data, and I'll reconsider...
User avatar
Drain
Posts: 1402
Joined: Mon Feb 26, 2007 1:27 pm
Location: Maryland

Post by Drain »

larryswedroe wrote:Drain
The point is we could not predict WHICH TWO they would be-if we could then ONLY those two would have high valuations. Since we could not know which the prices of all reflected the possibility that two might. And if you owned them all--then all the prices would have been justified IN AGGREGATE
Let's say the market consists of a whole bunch of stocks, all of which are grossly overpriced. Now we introduce two new stocks that are fairly valued. How does that eliminate aggregate overpricing? It lowers the multiples on average, but the overpriced stocks remain overpriced. I guess that if, instead of being fairly valued, the new stocks were drastically undervalued, they could offset the rest of the market some, but why would that ever happen? In fact, the likely reality is that the two new companies would be overvalued the same way the rest of the market was.

But besides that, the companies didn't actually exist. Is Fama suggesting that the market was discounting the possibility (certainty?) that these companies, would, in fact, come into being? If so, then I repeat, this could always be used to justify almost any market valuation.
Darin
User avatar
Drain
Posts: 1402
Joined: Mon Feb 26, 2007 1:27 pm
Location: Maryland

Post by Drain »

Wait, maybe I understand the argument now. I don't think I'm going to buy it anyway, but at least it doesn't seem quite so nonsensical. Almost, but not quite. :)

The market starts out having an aggregate intrinsic value of X and aggregate invested capital Z. The market's multiple is Z/X. Introduce the intrinsic value Y of the two new companies. Now the multiple is Z/(X+Y), which one could imagine might be an acceptable multiple.

Is that what you mean?
Darin
Topic Author
larryswedroe
Posts: 16022
Joined: Thu Feb 22, 2007 8:28 am
Location: St Louis MO

Post by larryswedroe »

drain--correct
User avatar
Drain
Posts: 1402
Joined: Mon Feb 26, 2007 1:27 pm
Location: Maryland

Post by Drain »

larryswedroe wrote:drain--correct
Okay, cool. There are different ways to go at this, but I don't want to get involved in a huge thread or anything, so I'll try to do this in a quick, amusing (to me, at least) way.

You are on record many times as having moved your equity portfolio entirely to value in '98. One must presume you did this because you thought that growth stocks were way overvalued. Maybe you'd express it as the risk outweighing the potential reward, but if so, that's a distinction without a difference. You believed the prices on growth stocks were way out of line, and if you believed it about growth stocks as a broad group, you surely must have believed it about tech stocks in particular.

This time was different. It was a new era. The old metrics for valuing stocks didn't apply anymore. You, Larry, believed none of this, but it was what investors were saying at the time.

Now, let's say it's '99 and I'm discussing the market with you. The subject turns to your own personal asset allocation, and you express your opinion that the market is quite overvalued. I respond with, "No way. Look at all these new products and technologies! New stuff is coming out every day, and it's going to continue like this from now on. The sky's the limit! The market might appear overvalued, but listen, all that has to happen is for a couple of these myriad companies to become the next Microsofts, and then the market is fairly valued!"

Be honest. What would you have thought of my investment sensibilities?
Darin
Post Reply