Author Topic: Value investing/tilting with funds is utter crap  (Read 28464 times)

Dodge

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Value investing/tilting with funds is utter crap
« on: March 30, 2015, 02:03:54 PM »
Value investing/tilting is utter crap, meant to sell people who don't know any better on a more expensive fund that "beats the market".  I wouldn't put my money there if there were no added expense ratio, I'm definitely not paying for that.  Paying extra for a value tilt is utter crap.  Fama himself says it's reasonable to expect the market to adjust:

EFF/KRF (Fama & French): The premise is that until the last couple of decades, individual investors had limited access to diversified portfolios of small stocks and value stocks. As a result, the prices of small and value stocks were lower than they would be if all investors had easy access, and their expected returns were higher. The introduction and growth of mutual funds that invest in small-cap and value stocks would then reduce the expected returns on these securities. Since expected security returns depend on supply and demand, an increase in the average allocation to small and value stocks will reduce the size and value premiums.

Another prominent skeptic regarding the importance of a value tilt is John C. Bogle, as articulated in a 2002 speech and paper, The Telltale Chart.  Bogle looks at the data (section 2. RTM - Value Stocks vs. Growth Stocks), and shows that while the theoretical Fama-French portfolio exhibits a dramatic outperformance, the mutual fund performance of the strategy actually underperformed the market.  "So investors should not ignore the obvious costs of implementing a strategy that rises, pristinely, out of academic studies that cannot be precisely replicated in the real world."  I would prefer not to try to summarize a complicated story, and I don't see any soundbites to cherry-pick that would serve as a short summary. Perhaps it is "This too, shall pass"

Portfolio Constituency Rules and the Value Premium in the Small-Cap Space supports Mr.Bogle's conclusion regarding Value stock performance in actual mutual funds over time, and provides a possible reason.  It seems to imply that when actual mutual-funds (index or otherwise) are implemented, that the most illiquid stocks are often excluded, removing the Value Premium.
 
"...We suggest these results might go a long way in explaining why market-based growth fund returns generally equal those of their value fund counterparts over time..."


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Edit:  After reply #35, I changed the thread title from "Value investing is utter crap" to "Value investing/tilting with funds is utter crap"
« Last Edit: April 03, 2015, 08:23:24 AM by Dodge »

Aphalite

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Re: Value investing is utter crap
« Reply #1 on: March 30, 2015, 02:36:04 PM »
Dodge, everytime someone posts about value investing on these forums, they never discuss a fund of any sort - they are talking about individual businesses (with the exception of something like dividend aristocrats). I am of the opinion that if you aren't going to do value investing yourself and you're going to rely on a fund to do that for you, then you should just index total market, since at the moment you buy the value mutual fund, it's probably already lost any sort of advantage it could have held (new money into a value strategy means there needs to be NEW value purchases)

Of course, this means that the posts are about STOCK PICKING, which also goes against your ideals - but just wanted to point out that no one is arguing you should buy funds that have a focus on value investing (tilting towards value indexes is different, and in the chart linked to below, Bogle notes the actual value index does beat a growth index - funds probably underperform due to fees)

DrF

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Re: Value investing is utter crap
« Reply #2 on: March 30, 2015, 02:50:07 PM »
Fund managers are governed by rules which prohibit them from owning large percentages of small companies. Small companies often get sold during fund rebalancing. Too, funds and ETFs are usually cap-weighted which would negate the effect of any value tilt one is trying to achieve.

tj

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Re: Value investing is utter crap
« Reply #3 on: March 30, 2015, 03:50:39 PM »
Dodge, everytime someone posts about value investing on these forums, they never discuss a fund of any sort - they are talking about individual businesses (with the exception of something like dividend aristocrats). I am of the opinion that if you aren't going to do value investing yourself and you're going to rely on a fund to do that for you, then you should just index total market, since at the moment you buy the value mutual fund, it's probably already lost any sort of advantage it could have held (new money into a value strategy means there needs to be NEW value purchases)

Of course, this means that the posts are about STOCK PICKING, which also goes against your ideals - but just wanted to point out that no one is arguing you should buy funds that have a focus on value investing (tilting towards value indexes is different, and in the chart linked to below, Bogle notes the actual value index does beat a growth index - funds probably underperform due to fees)

Regarding the bolded - why wouldn' that be true fro individual stock picking??

There's nothing wrong with using value-tilted funds, especially if you're looking for income rather than growth.

LordSquidworth

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Re: Value investing is utter crap
« Reply #4 on: March 30, 2015, 05:39:27 PM »
Dodge, everytime someone posts about value investing on these forums, they never discuss a fund of any sort - they are talking about individual businesses (with the exception of something like dividend aristocrats). I am of the opinion that if you aren't going to do value investing yourself and you're going to rely on a fund to do that for you, then you should just index total market, since at the moment you buy the value mutual fund, it's probably already lost any sort of advantage it could have held (new money into a value strategy means there needs to be NEW value purchases)

Of course, this means that the posts are about STOCK PICKING, which also goes against your ideals - but just wanted to point out that no one is arguing you should buy funds that have a focus on value investing (tilting towards value indexes is different, and in the chart linked to below, Bogle notes the actual value index does beat a growth index - funds probably underperform due to fees)

IMO, the mutual fund structure voids the ability to value invest.

Real value investing involves holding individual stocks because the constraints on mutual funds really don't allow for one to value invest. Going along with my theory that most fund managers shouldn't be managing funds period, I believe the structure of mutual funds in general cause a drag on returns. Though they're that way for protection of the masses.

workathomedad

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Re: Value investing is utter crap
« Reply #5 on: March 30, 2015, 05:44:07 PM »
Buying a basket of "value" stocks has been shown (extensively) to beat a market-cap index on a historical basis. Maybe this wont continue to happen in the future. Of course high fees will destroy the excess (historical) returns.

gecko10x

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Re: Value investing is utter crap
« Reply #6 on: March 30, 2015, 05:59:34 PM »
By your tone, you clearly aren't interested in a reasoned discussion, so what exactly is the point of this post?

livetogive

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Re: Value investing is utter crap
« Reply #7 on: March 30, 2015, 07:26:44 PM »
As much as I want to agree with you (I don't value invest either) it's hard to ignore the most famous names in Wall Street...

Buffet.  Lynch.  All largely considered "value" investors...

Dodge

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Re: Value investing is utter crap
« Reply #8 on: March 30, 2015, 07:43:19 PM »
As much as I want to agree with you (I don't value invest either) it's hard to ignore the most famous names in Wall Street...

Buffet.  Lynch.  All largely considered "value" investors...

"A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth." ~Warren Buffet

"Most investors would be better off in an index fund." ~Peter Lynch


hodedofome

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Re: Value investing is utter crap
« Reply #9 on: March 30, 2015, 08:58:36 PM »
Saying value investing doesn't work and using mutual funds as proof is amateur. Can we move on from using mutual fund data for anything at all?

LordSquidworth

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Re: Value investing is utter crap
« Reply #10 on: March 30, 2015, 09:38:44 PM »
As much as I want to agree with you (I don't value invest either) it's hard to ignore the most famous names in Wall Street...

Buffet.  Lynch.  All largely considered "value" investors...

"A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth." ~Warren Buffet

"Most investors would be better off in an index fund." ~Peter Lynch



Neither of those quotes support your point.

ChrisLansing

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Re: Value investing is utter crap
« Reply #11 on: March 31, 2015, 04:59:02 AM »
Just got a used copy of "Security Analysis".   I guess there's no sense reading it.   

innerscorecard

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Re: Value investing is utter crap
« Reply #12 on: March 31, 2015, 06:20:24 AM »
By your tone, you clearly aren't interested in a reasoned discussion, so what exactly is the point of this post?

Exactly. There are dozens of points I could write to refute him or her, as well as dozens of posts by myself and others to point out the egregious flaws in his or her reasoning as well as the contrast between it and the actual world in which value investing works very well, but it would be a waste of time given this context.

Saying value investing doesn't work and using mutual funds as proof is amateur. Can we move on from using mutual fund data for anything at all?

He or she could have at least chosen a more plausible straw man than this.
« Last Edit: March 31, 2015, 06:24:06 AM by innerscorecard »

innerscorecard

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Re: Value investing is utter crap
« Reply #13 on: March 31, 2015, 06:22:50 AM »
Still, I do agree that "value tilts" are not likely to produce great returns going forward. A lot of when value investing works is when you are going beyond the standard reported GAAP numbers and actually determining the economic reality of a business. A lot of the actual 50-cent dollars these days don't screen well, or at all. You have to find them by actually doing research and doing a deep dive on a business. It's not as easy as it was in the '50s.

But it still works.

Of course, selfishly, I'm extremely happy that a blind buy-the-market, anti-value approach is still strong and perhaps stronger than ever these days.

Scandium

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Re: Value investing is utter crap
« Reply #14 on: March 31, 2015, 07:19:57 AM »
I do find this useful, as I read about small/value tilt a lot. Even on the bogleheads forum this is by no means settled, and many add SCV funds to the total market. The statistic cited claim that SCV or value outperformed the total market by several percent in CAGR over the last 90 years. On  the one hand I don't think the numbers lie, but it also feels a bit market timing like to me, and subject to "future returns=/= the past". I'm sticking to total market now, but I keep going back and forth on adding some small cap funds. If I could be convinced it's bunk that would be a relief. I need to re-read the telltale chart article in depth.

I've listen to paul merriman some lately, and he does make a convincing arguments, but his 13 fund portfolio just sounds like a tremendous pain in the ass. Not to mention some horrible overlap (a small cap, and a small value fund?). To be fair he say that small cap has greater volatility, therefore greater return. Not that risk adjusted return is greater as many claim based on fama-french.
http://paulmerriman.com/performance/

This is pretty much the basis for the Small/value outperformace claims:



The people here who insist that stock picking works as long as you do "research" (i.e. read the information everyone else can read..), or find value or whatever will never be convinced so I frankly don't care what they think. If we could keep this discussion to small/value tilt via indexing that would be great.
« Last Edit: March 31, 2015, 07:24:21 AM by Scandium »

phillyvalue

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Re: Value investing is utter crap
« Reply #15 on: March 31, 2015, 07:53:56 AM »
-As others have said, this post appears to have no purpose other than to rant. I suppose you have some vendetta against value investing. Not sure why.

-Dodge, in this post and in others, you've shown that you frankly have no clue what value investing is, so it's quite odd that you would make a post speaking so strongly about a subject you know little about.

-To others: "Value tilt" or other quantitative strategies followed by index funds are not value investing. Low P/E doesn't mean something is cheap. It's perfectly fine if you have no desire to learn more about what value investing is, as investing is very hard work and it's not practical for 99% of people to spend time thinking about. But, to bring out a quote that parallels this situation:

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

691175002

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Re: Value investing is utter crap
« Reply #16 on: March 31, 2015, 08:11:29 AM »
Amusingly enough, I just finished reading an article defending the persistence of the Value premium.  The key point was that investors in value funds often time there entries and exits very poorly, meaning that in aggregate value investors underperform despite participating in a "winning" strategy.  This suggests that the value premium is not actually being exploited/arbitraged and can persist.

http://www.researchaffiliates.com/Our%20Ideas/Insights/Fundamentals/Pages/365_Woe_Betide_the_Value_Investor.aspx

Factor persistence is a very important issue to me and there is a lot of research and speculation around it.  Many of the well known anomalies have properties that make them difficult to exploit, or are exposed to additional risk factors that make them difficult to hold long term (for example: the value premium as shown above).

On the other hand, some inefficiencies are difficult to rationalize.  There aren't very many reasons to expect dividend investing to outperform aside from its link to profitable/low-beta companies.  I'm also cautious of the low-beta anomaly because it seems to have gotten rather crowded in the past few years.

hodedofome

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Re: Value investing is utter crap
« Reply #17 on: March 31, 2015, 08:22:48 AM »
Amusingly enough, I just finished reading an article defending the persistence of the Value premium.  The key point was that investors in value funds often time there entries and exits very poorly, meaning that in aggregate value investors underperform despite participating in a "winning" strategy.  This suggests that the value premium is not actually being exploited/arbitraged and can persist.

http://www.researchaffiliates.com/Our%20Ideas/Insights/Fundamentals/Pages/365_Woe_Betide_the_Value_Investor.aspx

That's not specific to value investors. That's any fund. Most individual investors poorly time every fund they invest in.

Scandium

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Re: Value investing is utter crap
« Reply #18 on: March 31, 2015, 08:26:45 AM »

-To others: "Value tilt" or other quantitative strategies followed by index funds are not value investing. Low P/E doesn't mean something is cheap. It's perfectly fine if you have no desire to learn more about what value investing is, as investing is very hard work and it's not practical for 99% of people to spend time thinking about. But, to bring out a quote that parallels this situation:

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

Why not? Most people who aren't totally ignorant of investing know that individual stocks is stupid, so here we discuss mutual funds. And thus the value tilt. Is it too much to ask that we discuss this, rather than endless series of "argumentum ad Buffet" and how buying Coke in 1980s was a great idea?

By the way, value funds usually use price to book, to P/E.

phillyvalue

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Re: Value investing is utter crap
« Reply #19 on: March 31, 2015, 08:38:04 AM »

-To others: "Value tilt" or other quantitative strategies followed by index funds are not value investing. Low P/E doesn't mean something is cheap. It's perfectly fine if you have no desire to learn more about what value investing is, as investing is very hard work and it's not practical for 99% of people to spend time thinking about. But, to bring out a quote that parallels this situation:

"It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.”

Why not? Most people who aren't totally ignorant of investing know that individual stocks is stupid, so here we discuss mutual funds. And thus the value tilt. Is it too much to ask that we discuss this, rather than endless series of "argumentum ad Buffet" and how buying Coke in 1980s was a great idea?

By the way, value funds usually use price to book, to P/E.

Most people know that investing in individual stocks is stupid for them. Certainly not the point you made above.

There's absolutely nothing wrong with you discussing funds. What is "wrong" is using that discussion of funds employing quantitative strategies such as low P/E and low P/B to try to make a claim about value investing, which is a totally different thing.

The point about P/B certainly doesn't help the case. Book value is almost meaningless in the 21st century for non-financial companies.

Dodge

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Re: Value investing is utter crap
« Reply #20 on: March 31, 2015, 09:04:15 AM »
Dodge, everytime someone posts about value investing on these forums, they never discuss a fund of any sort

Considering the follow-up posts, I believe this assertion has been invalidated.

This post was originally posted in a Betterment thread, where it was claimed that their use of Value funds made them a superior choice.  Since most people seem to agree that individual stock picking is a horrible idea, they must have a different definition of Value investing.
« Last Edit: March 31, 2015, 09:10:57 AM by Dodge »

Dodge

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Re: Value investing is utter crap
« Reply #21 on: March 31, 2015, 09:09:54 AM »
As much as I want to agree with you (I don't value invest either) it's hard to ignore the most famous names in Wall Street...

Buffet.  Lynch.  All largely considered "value" investors...

"A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth." ~Warren Buffet

"Most investors would be better off in an index fund." ~Peter Lynch



Neither of those quotes support your point.

If you invest in Value, you would be ignoring the stated most famous names in Wall Street.

index

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Re: Value investing is utter crap
« Reply #22 on: March 31, 2015, 09:21:31 AM »
I would agree that value tilting in index funds on the surface seems silly. It tilts a portfolio toward asset heavy companies like financials, energy, industrial co's and completely ignores asset light businesses with great cash flow. The real reason a value tilt increases returns because it reduces concentration in bubbles that are inherent when investing in cap weighted indexes. Take the tech boom for instance. Buying a small cap index funds during the tech boom would concentrate an investor in expensive "hot" tech stocks. Instead of buying less tech stocks as they became more and more expensive, the index investor increased their concentration because the "hot" stocks were becoming a larger proportion of the index. Tilting to a P/BV value strategy simply diversified the investor away from the cap weighted index to a degree.

True value investing does work. Its not easy, it takes a long time, and even with the time spent, most people are not going to be good at it. It also incorporates a bunch of different strategies- Graham value basket of micro cap companies to Fisher's great companies at a fair price. 

Sometimes there really are values in the market- Visa/Mastercard when congress was evaluating CC surcharges, Fiat at $5 when Ferrari was worth ~$5 and all of Fiat and Chrysler was thrown in for free. The situations are uncertain, but the market always discounts if a situation will take a year or more to resolve. There are many times when a business loses a client representing 10% of their sales and the stock price drops 25%. There are many special situations that are easy money- Petsmart announced it was going private at $74+ and the stock traded the day of the announcement at $66; it ended up being taken out for over $80. I would say all of the above examples are types of value investing. This type of investing is far different than what many people call investing which is really just trading and it takes a great deal of time. It certainly works, but patience, knowledge about the business, time keeping up with a watch list of companies you have researched, and a bit of luck is needed in the long run.     

Scandium

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Re: Value investing is utter crap
« Reply #23 on: March 31, 2015, 09:36:48 AM »
No those aren't value investing, that's hindsight investing in stocks that had gone down for some reason or another but subsequently went up again. You're ignoring all the stocks that do badly, then stay low. Or worse.

Hey, Bear Stearns was only $2 per share in 2008, down from $159. What great value!!

Aphalite

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Re: Value investing is utter crap
« Reply #24 on: March 31, 2015, 09:52:36 AM »
Dodge, everytime someone posts about value investing on these forums, they never discuss a fund of any sort

Considering the follow-up posts, I believe this assertion has been invalidated.

This post was originally posted in a Betterment thread, where it was claimed that their use of Value funds made them a superior choice.  Since most people seem to agree that individual stock picking is a horrible idea, they must have a different definition of Value investing.

The only people discussing value funds (funds that use a market cap weight and p/e to determine what to buy) are you and Scandium, and both of you are against "value" investing

The other contributors, including, philly, hodof, squidworth are all discussing individual businesses - which is a point that you still aren't getting

Value investing: finding businesses that have moat and purchasing them at a cheap or fair price. For example, you could have bought Hersheys at 25 PE 10 years ago and compounded very well, hardly anyone would say that 25 PE is a "value" tilt

Value index funds: Mutual funds that focus on stocks that have low P/E and weigh them by market cap

You and SCandium continously confuse the two

The other thing that people seem to confuse is why small cap tends to give higher returns over a longer period of time - this is because at a small size, businesses tend to have a higher ability to compound - not because theres a magic formula that market cap < 100m = winner, just like there's no formula that says p/e<10 = winner. A value investor would never look at Bear Sterns at $2 and say that it's a good buy. Because it's not about P/E
« Last Edit: March 31, 2015, 09:54:55 AM by aphalite »

SaintM

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Re: Value investing is utter crap
« Reply #25 on: March 31, 2015, 10:09:11 AM »
I have been investing for 20 years.  In that time, I have never really understood what "value" investing is.  By whose metric is a company undervalued?  Why is my opinion or a "value fund" manager's opinion any better than Mr. Market's opinion?

Vanguard has a "value index fund."  Will someone explain to me how can there be a value index!  Someone has to decide that a company in the index is undervalued.  What happens when the company moves higher and the fund manager believes the company is fairly valued or overvalued?  Does it drop off the index or does the manager bend the rules of the so-called index?  By definition, a "value fund" has to be actively managed.

Scandium

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Re: Value investing is utter crap
« Reply #26 on: March 31, 2015, 10:15:08 AM »
Dodge started this thread so I think he has the right to determine what it's about. And (as far as I could tell) he discussed value tilt via index mutual funds (at Betterment). And that is also the discussion I would find interesting. Intelligent investors realized that mutual funds is the way to go so I'm only really interested in what they have to say. Strangely enough I feel that lately I see more stock pickers here than on seeking alpha.. If you don't like mutual funds (of any sort) why do you people bother participating in these threads?

I'm not against value tilt, I'm agnostic about it. I would like to see it discussed. A lot of smart people think there is something too it. I'm not sold on the idea, but I'd consider it pure genius compared to picking stocks that were cheap 10 years ago and proclaiming that if you had invested in it you'd be a great value investor..

index

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Re: Value investing is utter crap
« Reply #27 on: March 31, 2015, 10:19:48 AM »
No those aren't value investing, that's hindsight investing in stocks that had gone down for some reason or another but subsequently went up again. You're ignoring all the stocks that do badly, then stay low. Or worse.

Hey, Bear Stearns was only $2 per share in 2008, down from $159. What great value!!

So out of an entire post, you cherry pick two examples I gave where companies were selling at a discount and said well "hind sight is 20/20"?

To expand- Visa was selling at a price which assumed 10% forward growth and swipe fees reduced to 1%. I agree with you investing in Visa at that time was a gamble because the future was unclear, but Visa was worth more than the market price if:

a. Swipe fees stayed >1% OR
b. Visa's growth rate was >10% (it was ~20% for the 5 years before)

So yes, absolutely a bet.

What had to happen for this to turn into a loss? For arguments sake we will just keep the growth rate at 10% (half of the actual GR:

a. Every 0.1% less than 1% Visa is worth 10% less than the market price. Visa's swipe fee was at the time was ~2.8%.

What about total loss?

a. The government would have to say visa cannot take swipe fees and would wipe out the two largest payment processors in the U.S.   

What were the odds at the time? Greater than 50/50? If you are right >50.1% of the time you will make money value investing. Is it just gambling? I don't know; every once in a while the market seems to say: "idk whats going to happen, i'll just assume the worst case". Most times, the situation ends up more gray that the black and white worst case and the market corrects its previous assumption.   

index

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Re: Value investing is utter crap
« Reply #28 on: March 31, 2015, 10:35:40 AM »
Dodge started this thread so I think he has the right to determine what it's about. And (as far as I could tell) he discussed value tilt via index mutual funds (at Betterment). And that is also the discussion I would find interesting. Intelligent investors realized that mutual funds is the way to go so I'm only really interested in what they have to say. Strangely enough I feel that lately I see more stock pickers here than on seeking alpha.. If you don't like mutual funds (of any sort) why do you people bother participating in these threads?

I'm not against value tilt, I'm agnostic about it. I would like to see it discussed. A lot of smart people think there is something too it. I'm not sold on the idea, but I'd consider it pure genius compared to picking stocks that were cheap 10 years ago and proclaiming that if you had invested in it you'd be a great value investor.

Yet, when I addressed value index funds, you ignored the entire post and assumed I just wanted to champion stock picking?

I think you just want an argument.

I'll make this easy for you:

1. Do you think market cap weighting is the best way to allocate your portfolio?

2. In your opinion, what is the best way to diversify your portfolio?

3. Do you see any problems with how the indexes work?

4. If there were no fees of any kind. How would you want your money allocated? (ex: equal amounts in every company and bond, concentrate on dividends, let someone work for free and find a big list of great companies, etc...)

If you want to have a real discussion lets do it. Saying I don't know, and have no real opinion other than this group over here are idiots doesn't really do much. So what is your opinion?   

 

tj

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Re: Value investing is utter crap
« Reply #29 on: March 31, 2015, 10:41:46 AM »
Quote
Value investing: finding businesses that have moat and purchasing them at a cheap or fair price.

This is exactly what Vanguard Dividend Growth Fund attempts to do.

Dodge

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Re: Value investing is utter crap
« Reply #30 on: March 31, 2015, 10:44:07 AM »
Dodge, everytime someone posts about value investing on these forums, they never discuss a fund of any sort

Considering the follow-up posts, I believe this assertion has been invalidated.

This post was originally posted in a Betterment thread, where it was claimed that their use of Value funds made them a superior choice.  Since most people seem to agree that individual stock picking is a horrible idea, they must have a different definition of Value investing.

The only people discussing value funds (funds that use a market cap weight and p/e to determine what to buy) are you and Scandium, and both of you are against "value" investing

Original statement: "everytime someone posts about value investing on these forums, they never discuss a fund of any sort"

In order to invalidate this statement, I need only show a single person who discusses value investing with a fund.  Scandium's post accomplished that.  I need not post any further examples to invalidate your assertion.

That being said, here is the post which prompted me to create a new thread:

Not necessarily. You'll be better using LifeStrategy if the value premium doesn't show up. The value premium could certainly be more than 15bps over the investor's lifetime. No way to know. Nothing wrong with using Betterment.

Value investing is crap.  Utter crap, meant to sell people who don't know any better on a more expensive fund that "beats the market".  I wouldn't put my money there if there were no added expense ratio, I'm definitely not paying for that.  But let's not distract the thread any further.  Feel free to reply in the Betterment thread:

http://forum.mrmoneymustache.com/investor-alley/betterment-for-taxable-holdings/msg557520/#msg557520

This is a shockingly ignorant, arrogant, and downright embarrassing statement.

When you say that value investing is "crap," what you are saying is that you understand markets better than Eugene Fama, Warren Buffet, and Ken French, and Ben Graham to name a few.

Please share with us your Nobel prize, your record beating investing performance, or any other bonafides, that have led to your laughable confidence in proclaiming the truth about the market.

In general it is my observation that the surer you are, the less you should be.

Source: http://forum.mrmoneymustache.com/investor-alley/are-annuities-a-good-fit-in-retirement/msg608505/#msg608505

Scandium

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Re: Value investing is utter crap
« Reply #31 on: March 31, 2015, 10:57:08 AM »
I'll make this easy for you:

1. Do you think market cap weighting is the best way to allocate your portfolio?

2. In your opinion, what is the best way to diversify your portfolio?

3. Do you see any problems with how the indexes work?

4. If there were no fees of any kind. How would you want your money allocated? (ex: equal amounts in every company and bond, concentrate on dividends, let someone work for free and find a big list of great companies, etc...)

If you want to have a real discussion lets do it. Saying I don't know, and have no real opinion other than this group over here are idiots doesn't really do much. So what is your opinion?

uhm, now I have no idea what you're discussing, or arguing? Cap weighted index vs... something? I never said anything about that! That was never the point here. Are you in the wrong thread? This is the value tilting thread..

My opinion? Small cap and/or value have historically produced greater return, but I don't know if that will continue so at this point I have not added that to my index fund portfolio (beyond the market cap weighted allocation in VTSAX and VTISX).

PS: I'm saying that picking any stock from the past and claiming it was a great buy is hindsight and totally pointless.

skyrefuge

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Re: Value investing is utter crap
« Reply #32 on: March 31, 2015, 11:01:21 AM »
Original statement: "everytime someone posts about value investing on these forums, they never discuss a fund of any sort"

In order to invalidate this statement, I need only show a single person who discusses value investing with a fund.  Scandium's post accomplished that.  I need not post any further examples to invalidate your assertion.

Ok, if you're a robot, you win on a technicality, yay. It was pretty clear to this human that aphalite meant "everytime someone advocates for value investing on these forums, they never discuss a fund of any sort." That's also not literally true, since I'm sure someone here at some time advocated for a fund-based value-tilt, but it's true for this thread so far.

That being said, here is the post which prompted me to create a new thread:

Not necessarily. You'll be better using LifeStrategy if the value premium doesn't show up. The value premium could certainly be more than 15bps over the investor's lifetime. No way to know. Nothing wrong with using Betterment.

Value investing is crap.  Utter crap, meant to sell people who don't know any better on a more expensive fund that "beats the market".  I wouldn't put my money there if there were no added expense ratio, I'm definitely not paying for that.

When you say that value investing is "crap," what you are saying is that you understand markets better than Eugene Fama, Warren Buffet, and Ken French, and Ben Graham to name a few.

Ok, so in the very post that inspired you to start this thread, milesdividendmd had already shifted the definition from the fund-based definition you were using, to the stock-picking-based definition, which should have made you realize how important it is to define what you're talking about.

The point is, there are two, widely-divergent definitions for "value investing", and this thread would have been 90% less-dumb if you had just specified the definition you were using at the beginning.

index

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I don't understand value tilting with index funds
« Reply #33 on: March 31, 2015, 11:16:12 AM »
Agree.

Start a new thread.

hodedofome

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Re: Value investing is utter crap
« Reply #34 on: March 31, 2015, 11:22:01 AM »
Still can't believe you guys are using mutual fund data for any argument at all. But whatever.

For a value fund to appeal to me, Gary Antonnacci sums it up:

http://www.dualmomentum.net/2014/10/value-investing-redux.html

1)    It should combine value with quality and/or profitability screens.
2)    It should determine value based on multiple value metrics and/or a value metric that incorporates the enterprise multiple.
3)    It should re-balance at least quarterly to reduce possible style drift and to increase expected profits.
4)    It should not dilute returns by having an overly broad portfolio. In Chapter 6 of my new book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk, I show that many so-called smart beta funds are like closet index funds with modest stylistic tilts. Unfortunately, most value funds are the same. Even though the value effect is more pronounced in the top 10-20% of value rated stocks, most funds dilute this effect by using the top third or top half of value stocks instead of the more profitable top 10-20%.
5)    The expense ratio should be reasonable. (This is true of all investments.)
6)    For taxable accounts, ETFs are preferred over mutual funds and hedge funds. Tax liabilities usually only occur when you sell your ETF holdings, whereas mutual funds have yearly taxable distributions of dividends and capital gains.


The problem with almost all value funds is that the fees are too high, it is market cap weighted, and they hold too many stocks. Here is the order of importance for 99% of all strategies out there:

1) The markets/stocks you'll trade
2) Position sizing.
3) Exit strategy
4) Entry strategy

Almost all funds out there, no matter which way they tilt, still weight the stocks by market cap. They are killing their returns this way and it's no wonder they can't outperform a regular cap weighted index. They are essentially doing the same thing. They need better position sizing in order to differentiate themselves from a regular index fund.

Give me a low cost value fund that that holds a concentrated portfolio of stocks (less than 100) and holds them equal weight and I'll bite.

Dodge

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Re: Value investing is utter crap
« Reply #35 on: March 31, 2015, 11:28:02 AM »
Original statement: "everytime someone posts about value investing on these forums, they never discuss a fund of any sort"

In order to invalidate this statement, I need only show a single person who discusses value investing with a fund.  Scandium's post accomplished that.  I need not post any further examples to invalidate your assertion.

Ok, if you're a robot, you win on a technicality, yay. It was pretty clear to this human that aphalite meant "everytime someone advocates for value investing on these forums, they never discuss a fund of any sort." That's also not literally true, since I'm sure someone here at some time advocated for a fund-based value-tilt, but it's true for this thread so far.

That being said, here is the post which prompted me to create a new thread:

Not necessarily. You'll be better using LifeStrategy if the value premium doesn't show up. The value premium could certainly be more than 15bps over the investor's lifetime. No way to know. Nothing wrong with using Betterment.

Value investing is crap.  Utter crap, meant to sell people who don't know any better on a more expensive fund that "beats the market".  I wouldn't put my money there if there were no added expense ratio, I'm definitely not paying for that.

When you say that value investing is "crap," what you are saying is that you understand markets better than Eugene Fama, Warren Buffet, and Ken French, and Ben Graham to name a few.

Ok, so in the very post that inspired you to start this thread, milesdividendmd had already shifted the definition from the fund-based definition you were using, to the stock-picking-based definition, which should have made you realize how important it is to define what you're talking about.

The point is, there are two, widely-divergent definitions for "value investing", and this thread would have been 90% less-dumb if you had just specified the definition you were using at the beginning.

Literally is the best kind of true :) There are many posts I can link to which advocate for value-tilts, this is irrelevant to the discussion.

In all my back and forth posts with milesdividendmd, Value investing has always been discussed within the context of Betterment.  I am very sure his post was not advocating buying individual stocks.  From my experience on this forum (particularly the Betterment threads), and Bogleheads, I did not anticipate that the majority of respondents would agree that Value-tilting with funds is silly, and I did not anticipate that most in this thread would be advocating for buying individual stocks.

The general response of, "Of course value funds are silly, that's why I'm performing in-depth analysis and buying INDIVIDUAL STOCKS!"...is so far away from what I expected on the MMM forums, that I'm not sure where to take it.  For now I'll change the thread title.

Aphalite

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Re: Value investing is utter crap
« Reply #36 on: March 31, 2015, 11:37:45 AM »
That being said, here is the post which prompted me to create a new thread:

Ah, we're discussing two different things then - you're basically saying that paying extra for a mutual fund allocation other than market cap is stupid - that's probably true and I agree with you there

When you say value investing, I (and probably some other members here) don't automatically think value funds, we're thinking the strategy that involves individual stock picking. As you and Scand have clarified, you believe this be a foolish endeavor - on this point I have a different opinion than you, that's all.

theoverlook

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Re: Value investing/tilting with funds is utter crap
« Reply #37 on: March 31, 2015, 11:40:51 AM »

Aphalite

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Re: Value investing is utter crap
« Reply #38 on: March 31, 2015, 11:42:43 AM »
The general response of, "Of course value funds are silly, that's why I'm performing in-depth analysis and buying INDIVIDUAL STOCKS!"...is so far away from what I expected on the MMM forums, that I'm not sure where to take it.  For now I'll change the thread title.

Probably the increasing (but still small) amount of sentiment in that direction is because of the links people have been sharing to Joshua Kennon's writings

I think it's probably safe to say that even the majority of people who advocate for individual stocks do not have a high percentage (at least not yet) of their holdings in individual companies. But the logic (and case studies - survivorship bias abound!) seems sound

Scandium

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Re: Value investing is utter crap
« Reply #39 on: March 31, 2015, 11:48:52 AM »

The general response of, "Of course value funds are silly, that's why I'm performing in-depth analysis and buying INDIVIDUAL STOCKS!"...is so far away from what I expected on the MMM forums, that I'm not sure where to take it.  For now I'll change the thread title.

This is my reaction too. I thought there was decent overlap between bogleheads/MMM, but apparently it has more in common with seeking alpha.. I'm getting a bit tired of the endless individual stocks vs index discussions here so maybe I should leave Investor alley and hang out in the bogleheads forum instead for quality adult discussion of investing.

tj

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Re: Value investing is utter crap
« Reply #40 on: March 31, 2015, 12:00:33 PM »

The general response of, "Of course value funds are silly, that's why I'm performing in-depth analysis and buying INDIVIDUAL STOCKS!"...is so far away from what I expected on the MMM forums, that I'm not sure where to take it.  For now I'll change the thread title.

This is my reaction too. I thought there was decent overlap between bogleheads/MMM, but apparently it has more in common with seeking alpha.. I'm getting a bit tired of the endless individual stocks vs index discussions here so maybe I should leave Investor alley and hang out in the bogleheads forum instead for quality adult discussion of investing.

Agree - I would never bother with individual stocks. I might throw a bone Buffett's way, but that's about it.

phillyvalue

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Re: Value investing is utter crap
« Reply #41 on: March 31, 2015, 12:09:06 PM »

The general response of, "Of course value funds are silly, that's why I'm performing in-depth analysis and buying INDIVIDUAL STOCKS!"...is so far away from what I expected on the MMM forums, that I'm not sure where to take it.  For now I'll change the thread title.

This is my reaction too. I thought there was decent overlap between bogleheads/MMM, but apparently it has more in common with seeking alpha.. I'm getting a bit tired of the endless individual stocks vs index discussions here so maybe I should leave Investor alley and hang out in the bogleheads forum instead for quality adult discussion of investing.

If you don't want to discuss investing in individual stocks, then don't bring up strategies - such as value investing - that necessarily require (a) investing in active managers who pick individual stocks, or (b) investing in individual stocks yourself.

If you want "quality adult discussions" of investing, it would be a good idea to at least understand the terms you are using. Clearly the OP / others still do not understand what value investing means. Again, that's fine, there's no need for you to know about everything in life. But don't start forum posts proclaiming yourself an expert on a subject you don't understand.

LordSquidworth

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Re: Value investing is utter crap
« Reply #42 on: March 31, 2015, 12:18:48 PM »
As much as I want to agree with you (I don't value invest either) it's hard to ignore the most famous names in Wall Street...

Buffet.  Lynch.  All largely considered "value" investors...

"A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth." ~Warren Buffet

"Most investors would be better off in an index fund." ~Peter Lynch



Neither of those quotes support your point.

If you invest in Value, you would be ignoring the stated most famous names in Wall Street.

Those stated most famous names aren't saying anything negative about value investing, as two of them value invest themselves. They're saying most of you are better off indexing, because you don't have the skill/resources they have to value invest.

Scandium

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Re: Value investing is utter crap
« Reply #43 on: March 31, 2015, 12:19:40 PM »

The general response of, "Of course value funds are silly, that's why I'm performing in-depth analysis and buying INDIVIDUAL STOCKS!"...is so far away from what I expected on the MMM forums, that I'm not sure where to take it.  For now I'll change the thread title.

This is my reaction too. I thought there was decent overlap between bogleheads/MMM, but apparently it has more in common with seeking alpha.. I'm getting a bit tired of the endless individual stocks vs index discussions here so maybe I should leave Investor alley and hang out in the bogleheads forum instead for quality adult discussion of investing.

If you don't want to discuss investing in individual stocks, then don't bring up strategies - such as value investing - that necessarily require (a) investing in active managers who pick individual stocks, or (b) investing in individual stocks yourself.

If you want "quality adult discussions" of investing, it would be a good idea to at least understand the terms you are using. Clearly the OP / others still do not understand what value investing means. Again, that's fine, there's no need for you to know about everything in life. But don't start forum posts proclaiming yourself an expert on a subject you don't understand.

Wrong. There are plenty of value funds, Vanguard has several. Just because you don't like the way they do things doesn't mean nobody is considering them. For one thing it seems like Betterment does.

Like Dodge said, we both thought everyone here understood that index funds is the optimal strategy and nobody is considering individual stocks, so it would be unnecessary to specify that. Apparently not.

Aphalite

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Re: Value investing is utter crap
« Reply #44 on: March 31, 2015, 12:32:29 PM »
we both thought everyone here understood that index funds is the optimal strategy and nobody is considering individual stocks, so it would be unnecessary to specify that. Apparently not.

You're basically validating philly's point here - Dodge is correct that statistically speaking, indexing is the best outcome (top quartile of performances), the difference is that he is attributing the rest of the top quartile and those who beat the index to luck. I would say that the school of Graham investing that produced seven different well known and successful investors (again, you can definitely claim survivorship bias) who all practice "value" investing but took different ways to get there is proof that it's not only luck

Have you looked into WHY Bogle created the index fund? It wasn't because weighing 500 stocks by their market cap is the best way to get returns for your portfolio, it's because index funds replicates two of the three conditions within value investing that makes it so powerful - compounding/time in the market (aka buy and hold), and low costs/fees/taxes due to lack of turnover. What's missing is buying at a lower price, but even Buffett admits that this isn't necessary and that buying good stocks at a fair price can be muc more productive
« Last Edit: March 31, 2015, 12:34:20 PM by aphalite »

forummm

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Re: Value investing/tilting with funds is utter crap
« Reply #45 on: March 31, 2015, 12:40:50 PM »
People are talking past each other. Look at the evidence and put your money where your mouth is. It's your life. Good luck with your investments everyone.

hodedofome

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Re: Value investing is utter crap
« Reply #46 on: March 31, 2015, 12:54:22 PM »
In all my back and forth posts with milesdividendmd, Value investing has always been discussed within the context of Betterment.  I am very sure his post was not advocating buying individual stocks.  From my experience on this forum (particularly the Betterment threads), and Bogleheads, I did not anticipate that the majority of respondents would agree that Value-tilting with funds is silly, and I did not anticipate that most in this thread would be advocating for buying individual stocks.

The general response of, "Of course value funds are silly, that's why I'm performing in-depth analysis and buying INDIVIDUAL STOCKS!"...is so far away from what I expected on the MMM forums, that I'm not sure where to take it.  For now I'll change the thread title.

People that are ok with buying individual stocks don't hang out in a forum dedicated to index investing (Bogleheads). This forum isn't Bogleheads so you're going to get a mix of folks.

Dodge

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Re: Value investing is utter crap
« Reply #47 on: March 31, 2015, 12:57:10 PM »
As much as I want to agree with you (I don't value invest either) it's hard to ignore the most famous names in Wall Street...

Buffet.  Lynch.  All largely considered "value" investors...

"A low-cost index fund is the most sensible equity investment for the great majority of investors. My mentor, Ben Graham, took this position many years ago, and everything I have seen since convinces me of its truth." ~Warren Buffet

"Most investors would be better off in an index fund." ~Peter Lynch



Neither of those quotes support your point.

If you invest in Value, you would be ignoring the stated most famous names in Wall Street.

Those stated most famous names aren't saying anything negative about value investing, as two of them value invest themselves. They're saying most of you are better off indexing, because you don't have the skill/resources they have to value invest.

Correct.  You would be ignoring their advice if you invested in Value.

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #48 on: March 31, 2015, 07:16:43 PM »
Saying I prefer investing in broad index funds to tilting towards tilting my index funds holdings value (or size, or momentum, or quality) is perfectly defensible.

Saying the following  is just utter nonsense.

Quote
Value investing is crap.  Utter crap, meant to sell people who don't know any better on a more expensive fund that "beats the market".

Value funds do not cost more because of slick marketing or sales angles, (Is Vanguard shady in its marketing of it's style funds?  Is the style fund side of their business separated from the ethical broad index fund side?) they cost more because they are not cap weighted and require periodic trading (ie. transaction costs.)

Saying that "value investing is crap" is to posit that the capital asset pricing model is correct, which has been debunked for what 30 years?  In such a fantasy world the momentum, value, quality, and size effects don't exist, despite the fact that they have been demonstrated time and time again in out of sample and out of market analyses.

Suggesting that Fama who first codified the 3 factor model would agree with your idiotic statement despite the fact that he,

A. won a Nobel for a model that used the value factor to explain excess returns over the CAPM,
and
B. Helped design the first passive value funds for DFA and still works for them

is completely ridiculous.

Furthermore simple real world back testing of gives empiric proof that value has had demonstrable value after fees to date.

VFINX vs DFLVX (US large cap vs US LCV) finds that DFLVX has a higher CAGR (10.46 vs 9.33) and a higher Sharp ratio (.50 vs .49).

 Even more convincing is Small cap (VSMAX vs small value (DFSMX)  DFSVX wins in both CAGR (11.82 vs 9.08) and Sharp ratio (.56 vs .46)

Finally  Foreign large cap value (DFIVX) shows consistency with the above value dominance over Foreign large(VTMGX).  CaGR (5.76 vs 2.58)  Sharp (0.29 vs 0.13)

each back test uses the maximum timeframe allowed for the longest available passive vs blend  funds.

Again these results are all after fees!

So the original statement could not be more transparently false.   

In fact the original argument was so patently absurd that I feel like I just wasted 15 minutes arguing that the moon is not made of cheese.  It was an easy but pointless exercise.









Dodge

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Re: Value investing/tilting with funds is utter crap
« Reply #49 on: March 31, 2015, 08:15:53 PM »
Saying I prefer investing in broad index funds to tilting towards tilting my index funds holdings value (or size, or momentum, or quality) is perfectly defensible.

Saying the following  is just utter nonsense.

Quote
Value investing is crap.  Utter crap, meant to sell people who don't know any better on a more expensive fund that "beats the market".

Value funds do not cost more because of slick marketing or sales angles, (Is Vanguard shady in its marketing of it's style funds?  Is the style fund side of their business separated from the ethical broad index fund side?) they cost more because they are not cap weighted and require periodic trading (ie. transaction costs.)

Saying that "value investing is crap" is to posit that the capital asset pricing model is correct, which has been debunked for what 30 years?  In such a fantasy world the momentum, value, quality, and size effects don't exist, despite the fact that they have been demonstrated time and time again in out of sample and out of market analyses.

Suggesting that Fama who first codified the 3 factor model would agree with your idiotic statement despite the fact that he,

A. won a Nobel for a model that used the value factor to explain excess returns over the CAPM,
and
B. Helped design the first passive value funds for DFA and still works for them

is completely ridiculous.

Furthermore simple real world back testing of gives empiric proof that value has had demonstrable value after fees to date.

VFINX vs DFLVX (US large cap vs US LCV) finds that DFLVX has a higher CAGR (10.46 vs 9.33) and a higher Sharp ratio (.50 vs .49).

 Even more convincing is Small cap (VSMAX vs small value (DFSMX)  DFSVX wins in both CAGR (11.82 vs 9.08) and Sharp ratio (.56 vs .46)

Finally  Foreign large cap value (DFIVX) shows consistency with the above value dominance over Foreign large(VTMGX).  CaGR (5.76 vs 2.58)  Sharp (0.29 vs 0.13)

each back test uses the maximum timeframe allowed for the longest available passive vs blend  funds.

Again these results are all after fees!

So the original statement could not be more transparently false.   

In fact the original argument was so patently absurd that I feel like I just wasted 15 minutes arguing that the moon is not made of cheese.  It was an easy but pointless exercise.

Linking to a few individual funds which beat the market over the last 20 years, does not invalidate the findings of studies which look at funds as a whole, over 80 years.