The Final, Definitive Thead on Value

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stlutz
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The Final, Definitive Thead on Value

Post by stlutz » Tue May 15, 2012 2:22 am

I think the numerous threads about the "value premium" have gotten a little old. As a public service, I thought I would put together a single post that summarized all of the views on this subject so that new people to the forum don't have to dig through the endless series of old threads.

____________

These threads can commonly start with a seeming innocuous question like, "I've been reading some of the comments about value tilting and I'm not sure. I don't really believe I can beat the market any longer, but the data seems rather convincing to me. What should I do?"

Larry Swedore will reply that yes, there is a value premium. One should be at least somewhat careful in exploiting it because value stocks are riskier, but there is also a behavioral element to it, making it more a "free stop at the dessert tray" rather than a "free lunch"

Yobria receives an alert on his smartphone anytime there is a post on Bogleheads where Larry uses the words "value", "free", and "dessert" in the same post. Upon receiving the alert he springs into action and notes that since inception, the Vanguard Small Growth Fund (a category that Larry refers to as an investing "black hole") has outperformed Small Value.

Larry responds that over a somewhat longer time period, the Fama/French Small-Value series has outperformed the S&P 500.

Someone will then opine that we should be looking at a much longer time period before making any definitive historical judgments.

Larry will then post F/F returns from 1526 to present showing that Value outperforms growth.

Someone will then criticize Larry's data, saying that data prior to 1750 is bad and that only an idiot would rely on it.

Someone will then opine that we should be looking at returns post-Fama/French, as the idea of a value premium was not well known since then. Exasperated, Larry reposts his original set of returns.

Someone will refer to John Bogle's telltale chart, which shows that value/growth funds have always reverted to the mean since the time of Christ.

Someone will then say Bogle is an idiot. Value managers actually invest in growth stocks. That's why the risky stop at the free dessert tray exists--active managers won't touch real value stocks. Hence, value stocks outperform.

Somebody will then post some S&P index returns.

Yobria will opine that you can cherry pick any period you want to, but the market is efficient and any anomalies are quickly traded away.

Larry will post more F/F returns showing value outperformance, noting that "data is data, facts are facts."

Yobria will reply that there are "lies, damn lies, and statistics."

Someone will compare Yobria to a Holocaust denier.

Someone will post some MSCI Index returns.

Stlutz will try to change the subject and claim that there is no reason to "expect" that risky investments will outperform; there is only "potential" outperformance.

Someone will tell stlutz she is and idiot and should read a first grade math textbook.

Someone will agree that stlutz is an idiot.

Someone will say that they don't care about the past, they only care about the future.

Someone will denouce Larry, claiming that he is merely trying to generate business for his firm. Moderator locks thread. Two people who had spent an hour composing what they thought were brilliant posts hit "submit" and get the message, "Thread locked." Frustrated, they go to bed.

Larry is more resourceful than the other two and starts and new thread called "Vanguard Small Value" and posts some DFA fund returns.

A DFA Advisor will say, "Great post Larry! I feel sorry for all of these idiots investing with Vanguard. They only have a 7% expected return there. If they invested with DFA value funds, their expected return would be 15%." Poster puts in 2 point font at end, "Note: expected returns and actual returns may differ."

Yobria denounces the "DFA Marketing Machine", noting that they may sell a good story but smart investors know there are no free lunches nor free stops at the dessert tray.

A new registrant to Bogleheads asks, "What's DFA?"

Larry says that DFA actually sucks and Bridgeway rules.

Nisiprius composes a long, eloquent, well thought-out post with 6 beautiful charts, concluding that if one looks at it at a portfolio level and equalizes risk between portfolios, tilting is really an uncertain proposition. Looking at historical data back to 1356 BC, you would have outperformed by about .2%, which is really just a rounding error.

Four posters will quote Nisi's entire post (including charts), and add nothing but "Great post, Nisiprius. How'd you make those charts?". Discussion resumes on page 12 of thread.

Somebody opines that Nisiprius' charts suck. He tells people to check out the really cool return listings and charts from TrevH's post on page 38 of the 276 page value thread from back in 2008 (link).

Mel Lindauer says that everyone who has posted thus far is an idiot. He posts some returns showing that the Vanguard Midcap fund has outformed both TSM and SV.

Mel's post goes unloved and gets no responses.

Yobria will post quotes from Eugene Fama and William Bernstein endorsing total market investing.

Someone will denounce Yobria and say that the aforementioned authors love value stocks more than their families.

LBill will note that has has actually read the books in question and says that both writers believe there is a value premium but they aren't particular dogmatic that people should try to capture it--TSM is great too.

Someone calls LBill an idiot.

Someone will ask about the wisdom of investing *only* in small/value stocks.

Yobria will say that the idea is idioitic. That would be no different than just picking stocks headquartered in Milwaukee.

Larry will reply that there is a risk story for value; there is not a risk story for Milwaukee companies.

Someone will reply, "Have you ever been to Milwaukee?"

Someone who rarely posts in the value debates will note that among the 10 most important things in investing, whether to tilt ranks about 8th in importance. It's much more important to focus on saving a lot, having a good plan, staying the course, etc.

Discussion comes to a halt as posters don't know how to respond to such an intelligent point.

Someone will try to get things going again by posting some Russell Index returns.

Someone will say that Yobria is an idiot for abandoning RZV after it's spectacular recovery from the 2008 crash.

Someone will question whether investors really captured all of these historical returns.

Larry replies that you could have, and posts some more DFA fund returns.

Someone else says, "No you couldn't have".

Someone else says, "Could too".

Someone asks, "Don't you all have jobs?"

End of thread.

___________________

There. That should provide an adequate replay of pretty much all of these threads. Mods.: Please make this a sticky.

555
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Re: The Final, Definitive Thead on Value

Post by 555 » Tue May 15, 2012 3:05 am

stlutz wrote:Ithinkthenumerousthreadsaboutthe"valuepremium"havegottenalittleold.Asapublicservice,IthoughtIwouldputtogetherasinglepos
tthatsummarizedalloftheviewsonthissubjectsothatnewpeopletotheforumdon'thavetodigthroughtheendlessseriesofoldthreads.Thesethrea
dscancommonlystartwithaseeminginnocuousquestionlike,"I'vebeenreadingsomeofthecommentsaboutvaluetiltingandI'mnotsure.Idon'treal
lybelieveIcanbeatthemarketanylonger,butthedataseemsratherconvincingtome.WhatshouldIdo?"LarrySwedorewillreplythatyes,thereisava
luepremium.Oneshouldbeatleastsomewhatcarefulinexploitingitbecausevaluestocksareriskier,butthereisalsoabehavioralelementtoit,mak
ingitmorea"freestopatthedesserttray"ratherthana"freelunch"YobriareceivesanalertonhissmartphoneanytimethereisapostonBogleheadswh
ereLarryusesthewords"value","free",and"dessert"inthesamepost....

Nice post.

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Re: The Final, Definitive Thead on Value

Post by Alex Frakt » Tue May 15, 2012 3:27 am

stlutz wrote:There. That should provide an adequate replay of pretty much all of these threads. Mods.: Please make this a sticky.
Done (for now). Thank you for your service. :happy

ilmartello
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Re: The Final, Definitive Thead on Value

Post by ilmartello » Tue May 15, 2012 3:35 am

Ok, the whole entire top post made me laugh.

Thanks stlutz!

huntertheory
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Re: The Final, Definitive Thead on Value

Post by huntertheory » Tue May 15, 2012 6:30 am

I thoroughly enjoyed this post.

Now on to the historical returns for the Russell 2000....

livesoft
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Re: The Final, Definitive Thead on Value

Post by livesoft » Tue May 15, 2012 6:36 am

Right on! :)

Please feel encouraged to create other "Final, Definitive" threads.
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VictoriaF
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Re: The Final, Definitive Thead on Value

Post by VictoriaF » Tue May 15, 2012 7:19 am

stlutz wrote:I think the numerous threads about the "value premium" have gotten a little old. As a public service, I thought I would put together a single post that summarized all of the views on this subject so that new people to the forum don't have to dig through the endless series of old threads.
...
Number of mentions in the full post:
idiot - 8
Yobria - 9
Larry - 14
Someone - 21

Someone is a clear winner of the value debate.

Victoria
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Khanmots
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Re: The Final, Definitive Thead on Value

Post by Khanmots » Tue May 15, 2012 8:51 am

Awesome, true, and funny all in one.

Great job :)

SteveB3005
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Re: The Final, Definitive Thead on Value

Post by SteveB3005 » Tue May 15, 2012 9:16 am

And that's the way it is. Very nice insight on value threads! Thank you

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Re: The Final, Definitive Thead on Value

Post by retiredjg » Tue May 15, 2012 9:17 am

Very funny!

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nisiprius
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Re: The Final, Definitive Thead on Value

Post by nisiprius » Tue May 15, 2012 9:19 am

livesoft wrote:Right on! :) Please feel encouraged to create other "Final, Definitive" threads.
It's not a thread,

it's a thead.

A thead is a kind of snood, worn by an HTML elephant who sits at the head of a table.
Image
And that's the definitive thead.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

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Re: The Final, Definitive Thead on Value

Post by yobria » Tue May 15, 2012 9:38 am

Aww, you forgot the part where Larry calls me "a denier", finds my post "amazing, though not surprising", and notes that "In my entire life I have never seen anyone make more a fool of themselves" :)

cheapskate
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Re: The Final, Definitive Thead on Value

Post by cheapskate » Tue May 15, 2012 12:30 pm

Awesome ! Deserves a hourly bump !!

Hey but you forgot "markets don't consult the history books before deciding which way to move" - Yobria, 2012 :wink:

stlutz
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Re: The Final, Definitive Thead on Value

Post by stlutz » Tue May 15, 2012 12:30 pm

I realize I also omitted any mention of Ken Scislaw's paper and whether it's been to listen him or to Nobel Prize winners (the kind who ran LTCM). :happy

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Re: The Final, Definitive Thead on Value

Post by 3CT_Paddler » Tue May 15, 2012 12:47 pm

stlutz wrote:Nisiprius composes a long, eloquent, well thought-out post with 6 beautiful charts, concluding that if one looks at it at a portfolio level and equalizes risk between portfolios, tilting is really an uncertain proposition. Looking at historical data back to 1356 BC, you would have outperformed by about .2%, which is really just a rounding error.

Four posters will quote Nisi's entire post (including charts), and add nothing but "Great post, Nisiprius. How'd you make those charts?". Discussion resumes on page 12 of thread.
I lol'd at this part... probably guilty of being one of those eloquent Nisiprius' post admirers.

Boglehead Hall of Fame material by the OP!!! :beer

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WolfpackFan
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Re: The Final, Definitive Thead on Value

Post by WolfpackFan » Tue May 15, 2012 1:07 pm

thread of the year! 8-)

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Re: The Final, Definitive Thead on Value

Post by yobria » Tue May 15, 2012 1:18 pm

stlutz wrote:I realize I also omitted any mention of Ken Scislaw's paper and whether it's been to listen him or to Nobel Prize winners (the kind who ran LTCM). :happy
Hey now, you'll see me quoting Fama and French as much as Scislaw. I'm in complete agreement with the academic crowd. It's the marketing folks I have a beef with. :)

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Re: The Final, Definitive Thead on Value

Post by dratkinson » Tue May 15, 2012 3:08 pm

Wow! This is first value thread I've been able to follow from beginning to end.

You saved me a lot of time. Thanks. :)



P.S. Prior to this post, my takeaway had been "...it requires a 30+% SV commitment, for 20+ years, to achieve a (barely) discernible effect."
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Re: The Final, Definitive Thead on Value

Post by ruralavalon » Tue May 15, 2012 3:31 pm

Awesome post :D, make it a wiki page :wink: .
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Re: The Final, Definitive Thead on Value

Post by Noobvestor » Tue May 15, 2012 4:13 pm

stlutz wrote:I think the numerous threads about the "value premium" have gotten a little old. As a public service, I thought I would put together a single post that summarized all of the views on this subject so that new people to the forum don't have to dig through the endless series of old threads.
My hat is off to you, sir. This is hilarious, apt, and dare I add: helpful as a sticky. Hat trick + hat tip = :sharebeer
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe

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Re: The Final, Definitive Thead on Value

Post by VictoriaF » Tue May 15, 2012 4:15 pm

livesoft wrote:Right on! :)

Please feel encouraged to create other "Final, Definitive" threads.
If the OP is looking for ideas, how about "The Final, Definitive Thread on Risk"?

Victoria
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Taylor Larimore
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"Someone"

Post by Taylor Larimore » Tue May 15, 2012 4:20 pm

Someone will refer to John Bogle's telltale chart, which shows that value/growth funds have always reverted to the mean since the time of Christ.
That "Someone" must be me. This is a link to John Bogle's telltale chart:

http://www.vanguard.com/bogle_site/sp20020626.html

Stlutz, for those of us who regularly visit this forum, your post is Classic!

Thank you and best wishes
Taylor
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Re: The Final, Definitive Thead on Value

Post by umfundi » Tue May 15, 2012 9:42 pm

VictoriaF wrote:
livesoft wrote:Right on! :)

Please feel encouraged to create other "Final, Definitive" threads.
If the OP is looking for ideas, how about "The Final, Definitive Thread on Risk"?

Victoria
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Re: The Final, Definitive Thead on Value

Post by bertilak » Wed May 16, 2012 9:19 am

umfundi wrote:
VictoriaF wrote:
livesoft wrote:Right on! :)

Please feel encouraged to create other "Final, Definitive" threads.
If the OP is looking for ideas, how about "The Final, Definitive Thread on Risk"?

Victoria
Please, first do the one on gold.

Keith
Next DCA! (Leave VA until later.)

Then do one with all those logic problems, You know, the first child, a son, not a daughter, picks one of three cards on a Tuesday and gets a King that's not a Spade, then decides to switch to Monty Hall problem.
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Re: The Final, Definitive Thead on Value

Post by gotherelate » Wed May 16, 2012 2:14 pm

OP left out the most important part of any thread - the one where chaz opines, "_______ is good."
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Re: The Final, Definitive Thead on Value

Post by ingenue » Wed May 16, 2012 7:04 pm

Yobria said:
Aww, you forgot the part where Larry calls me "a denier", finds my post "amazing, though not surprising", and notes that "In my entire life I have never seen anyone make more a fool of themselves"
Am I the only one who finds it amusing that "denier" is also a measure of linear thread density?

-ingenue

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Re: The Final, Definitive Thead on Value

Post by mickens16 » Wed May 16, 2012 7:10 pm

gotherelate wrote:OP left out the most important part of any thread - the one where chaz opines, "_______ is good."
it should say "read the wiki."

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Re: The Final, Definitive Thead on Value

Post by rustymutt » Wed May 16, 2012 8:24 pm

Spot on! I laughed so hard I choked.
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Re: The Final, Definitive Thead on Value

Post by VictoriaF » Wed May 16, 2012 8:44 pm

ingenue wrote:Yobria said:
Aww, you forgot the part where Larry calls me "a denier", finds my post "amazing, though not surprising", and notes that "In my entire life I have never seen anyone make more a fool of themselves"
Am I the only one who finds it amusing that "denier" is also a measure of linear thread density?

-ingenue
You mean a thread on linear regression with some dense participants?

Victoria
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Re: The Final, Definitive Thead on Value

Post by Alex Frakt » Thu May 17, 2012 1:40 am

We had a couple of mean-spirited replies. I'm going to lock it.

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