Author Topic: Value Stocks  (Read 3196 times)

Brokefuturedoctor

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Value Stocks
« on: June 07, 2016, 11:19:36 AM »
I have not read a discussion on the form about value index funds on the forums. I was wondering if there is a reason for this. Are they inferior to TSM? I feel as though an allocation of 30% Large Cap Value, 25% Small Cap Value, 20% International, and 25% TBM or Intermediate Bonds would be a solid allocation. Although straight 60/40, TSM/TBM is nice and simple. Thoughts on this?

forummm

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Re: Value Stocks
« Reply #1 on: June 07, 2016, 01:01:33 PM »
Generally you don't need to do anything beyond 1) live frugally, 2) save your money, and 3) invest in the total market. People get tripped up by market timing or risk higher volatility or missing out on great returns from certain segments of the market if they start to deviate from the total market. You could do it and be totally successful. But you're taking on extra risk. With good habits and the 4% rule, you just don't need to beat the market.

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

Brokefuturedoctor

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Re: Value Stocks
« Reply #2 on: June 07, 2016, 01:59:26 PM »
Thanks forummm; I agree with you plus I like it when things stay simple. I was more just curious. I was poking around on portfoliocharts.com, and I have been reading the Intelligent Investor which both illustrate and talk about value securities.

PhysicianOnFIRE

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Re: Value Stocks
« Reply #3 on: June 07, 2016, 02:31:55 PM »
Historically, there has been a slight value premium. The premium may hold true in the future, or may disappear due to an efficient (or unpredictably inefficient) market.

I tilt a little towards small value and mid value in my portfolio, but I don't think it will make a large difference over the long haul. Also, keep in mind that TSM holds all the value stocks and has a lower overall expense ratio than a sliced and diced portfolio.

Also, best of luck with the medical career! It has served me well thus far.

Best,
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k9

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Re: Value Stocks
« Reply #4 on: June 08, 2016, 07:25:46 AM »
There has always been a value premium, and it has nothing to do with market inefficiencies. Those stocks are cheaper because they are seen as more risky, so the market as a whole wants a bigger reward for owning them.

But that's the thing : they are risky. Will that risk be rewarded ? Nobody knows, by definition.

MustacheAndaHalf

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Re: Value Stocks
« Reply #5 on: June 08, 2016, 09:40:50 AM »
Do you expect the value tilt to pay off within 3 years?  If you do, I'd recommend you avoid it, if it still exists.  The historical data is clear, but can't predict the future.  But even in the historical data there are long cycles where value or growth dominate.  If you're in for a short haul profit, a value tilt can be frustrating.  If you are willing to stay in the market long term, you might want to read one of Larry Swedroe's books to reinforce why value tilts could be good.

It's possible the value tilt is caused by investor behaviors.  The popularity of Warren Buffet has probably done more to convince people to become value investors than anything else.  Note Buffet often buys an entire company, so even when you buy a "value index" you might be missing companies that Buffet bought in their entirety and made into part of his company.  Also, the popularity of value investing could be it's downfall - too many people pursuing too little profit.

Tyler

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Re: Value Stocks
« Reply #6 on: June 08, 2016, 09:54:59 AM »
There's a lot of good research out there discussing the benefits of value stocks.  Two people who write about it often are Larry Swedroe and Bill Bernstein, so if you're interested you might want to search for their books and articles. (edit: +1 to MustacheAndaHalf for the Swedroe recommendation)

That said, it's definitely a hotly debated topic.  For example, even though the historical value premium is well documented some people reasonably question whether recent advances in technology (enabling easy value screens and index funds) have minimized one's ability to practically benefit from it.  When value stocks become popular and easy to identify and buy, their price may become less of a value. 

BTW, it's important to distinguish between active stock picking strategies (that often use value metrics) and passive asset allocation using value index funds.  Many people may naturally discourage the active version but be more open to the passive asset allocation variety.

IMHO, value index funds can certainly play a nice role in a diverse asset allocation.  It's not required, though, and a total stock market or "blend" fund (that also includes value stocks) is just fine. 
« Last Edit: June 08, 2016, 12:10:06 PM by Tyler »

Aphalite

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Re: Value Stocks
« Reply #7 on: June 09, 2016, 09:17:34 AM »
Value index funds are not the same thing as being a value investor and buying undervalued stocks (ala Intelligent Investor) - one uses quantitative metrics only, which doesn't tell the whole story about a stock. The other method is a deep, integrated way to evaluate stocks. This is how you can end up with stocks that look expensive based on quantitative measures (such as P/E or P/B) being very cheap for a long term investor

forummm

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Re: Value Stocks
« Reply #8 on: June 09, 2016, 09:36:27 AM »
Value index funds are not the same thing as being a value investor and buying undervalued stocks (ala Intelligent Investor) - one uses quantitative metrics only, which doesn't tell the whole story about a stock. The other method is a deep, integrated way to evaluate stocks. This is how you can end up with stocks that look expensive based on quantitative measures (such as P/E or P/B) being very cheap for a long term investor

There are also value funds that use advisors who evaluate stocks to decide which ones are "cheap". So you're outsourcing that analysis.

Aphalite

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Re: Value Stocks
« Reply #9 on: June 09, 2016, 09:45:54 AM »
There are also value funds that use advisors who evaluate stocks to decide which ones are "cheap". So you're outsourcing that analysis.

Agree, but no value index funds, as asked by OP, dabbles in that activity

StreetCat

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Re: Value Stocks
« Reply #10 on: June 09, 2016, 11:38:15 AM »
The Alpha Architect blog is a good resource for value related research.

I have not read a discussion on the form about value index funds on the forums. I was wondering if there is a reason for this. Are they inferior to TSM?
I'm not sure why it wasn't discussed on the forums before; many folks here are die-hard TSM adherents (and for good reasons IMO) so that may have something to do with it.

But, regarding value index funds - one of the recent posts on AA blog was this: http://blog.alphaarchitect.com/2016/06/01/want-to-spot-a-real-value-investor-look-for-horrible-recent-performance/

Basically what they are saying is that many of the mainstream "value index funds" are mostly shadowing the index with a slight value tilt.  So they may not be providing much value.

MustacheAndaHalf

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Re: Value Stocks
« Reply #11 on: June 09, 2016, 11:51:29 AM »
... many of the mainstream "value index funds" are mostly shadowing the index with a slight value tilt.
That's a really important point for OP to understand.  When I looked at value tilt, I used morningstar's analysis of various funds to determine the degree of value tilt.  Morningstar evaluates with a 9-box that splits into large/medium/small and along the lines of value/blend/growth.  So you can see the percentage of value stocks, and percent of growth stocks.

For example. two small value funds from different companies: Vanguard Small Value (VBR) and iShares Small Value (JKL).
http://portfolios.morningstar.com/fund/summary?t=JKL
http://portfolios.morningstar.com/fund/summary?t=VBR

The iShares fund has 68% of assets in the "small value" corner of the 9-box.  Vanguard's fund has 32% small value stocks.  In addition, Vanguard has 34% mid cap stocks vs 9% for iShares.  So you have two index funds named the same way, but with very different amounts of value and small cap stocks.  When you pursue "value index" funds, look behind the name at the contents of the value index fund.

Brokefuturedoctor

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Re: Value Stocks
« Reply #12 on: June 09, 2016, 01:05:36 PM »
Thank you all for the advice. I am not courageous enough to be a "real" value investor in the Benjamin Graham sense. It is very early on in my investing career though. Thanks for helping me clear up the difference between value in his meaning and value in index fund sense.