Author Topic: Value investing/tilting with funds is utter crap  (Read 28483 times)

skyrefuge

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Re: Value investing/tilting with funds is utter crap
« Reply #100 on: April 03, 2015, 05:15:21 PM »
VTI has only existed since 2005.

But even so I suspect that if they were back tested back to the 70s or earlier, VTV would beat VTI.

VTI has actually existed since 2001, but more importantly, the mutual fund version of that ETF, VTSMX, has existed since 1992.

As has Vanguard's Large-Cap Value index mutual fund, VIVAX, which is known as VTV in the ETF world. So it's not quite the '70s, but we can compare them back to 1992, which is way more than 9 years. And hey, look, VTI beats VTV.

VFIAX (Vanguard's S&P 500 fund), which is probably a better benchmark than a total-market fund, also beats VTV/VIVAX over that period.

I think Dodge is asking "does your belief in the superiority of value funds come from theory, or evidence?" The fact that you guessed wrong in this case suggests it may come more from theory. Which, hey, may be right in the end. But hopefully the difficulty we're having in finding value funds that have actually beaten non-value funds (much less showing that any one fund's outperformance is the result of more than luck) tempers that belief a bit.

It's similar to the Dividend Aristocrats thread, where a few people have said things like "well, a long string of dividend increases is a proxy for quality, so it's not surprising that dividend funds outperform."  Except that, in reality, there is so far no evidence of dividend funds outperforming!

I also think some of Dodge's point may be that once an outperforming strategy becomes so widely known that it can be exploited via index funds, that outperformance disappears. Embracing a strategy because it performed well before anyone knew it was a strategy is fine, but it's probably a good idea to balance that with a look at what has happened since then.

PeteD01

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Re: Value investing/tilting with funds is utter crap
« Reply #101 on: April 03, 2015, 05:17:39 PM »
This can't be taken seriously. How would you have invested in Small Cap Value funds in 1801? Hell, how would you invest in ANY?

How can I not be taken seriously. The graph started in 1927. Not 1801. In 1927 all 4 funds started with $100 and the graph is the results of how they fared over the last 80+ years.

Based on the source, and the graph, this seems to be the very data the sources in the original post say is invalid, because it does not represent the returns of actual funds.

"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." ~John Bogle

Can you show that this graph is indeed the result of real world funds?

This is precisely the problem at hand.

Dodge

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Re: Value investing/tilting with funds is utter crap
« Reply #102 on: April 03, 2015, 05:18:28 PM »
See post 50 again.

The past performance of a few standout funds, over 20 years, cannot be used to show a general outperformance of the value factor in mutual funds.  Thus far, the only evidence presented looks at value funds as a whole, over 80 years, and has found no outperformance.

As I've already explained, those funds were selected based on 2 simple  criteria

1. They are passive funds
And
2.  They were the first passive funds of their kind.

They were not cherry picked. They are simply the longest available comparison for commercially available passive funds of their kind.

If you can find a longer back-testable collection of relevant funds to this discussion then please share it with the group.

That would be far more useful than your empty proclamations without a shred of evidence.

If you want asset class data please see bdbrooks' above post.

It's not that complicated.

Those criteria are vulnerable to survivorship bias.  The past performance of a few standout funds, over 20 years, cannot be used to show a general outperformance of the value factor in real world mutual funds.  Thus far, the only evidence presented which looks at value funds as a whole, does so over 80 years, and has found no outperformance.  Please provide substantiative evidence if you have it, I am genuinely curious to see if it exists.

The proclamations are not mine, the evidence is linked in the original post.

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #103 on: April 03, 2015, 05:22:47 PM »

I'm tired of some of this nonsense. Here is some data going back to the 20's.

Nice graph telling the whole story.
Small growth is not worth bothering with.
Large value and large growth is well represented in total market.
Small value is definitely where the money is but is not that easy to invest in.

The more relevant interpretation is this:

Small value beats small growth. And large value beats large growth. Aka value investing is not "total crap."

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #104 on: April 03, 2015, 05:23:00 PM »

I'm tired of some of this nonsense. Here is some data going back to the 20's.

Nice graph telling the whole story.
Small growth is not worth bothering with.
Large value and large growth is well represented in total market.
Small value is definitely where the money is but is not that easy to invest in.

The more relevant interpretation is this:

Small value beats small growth. And large value beats large growth. Aka value investing is not "total crap."

tj

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Re: Value investing/tilting with funds is utter crap
« Reply #105 on: April 03, 2015, 05:23:25 PM »
This can't be taken seriously. How would you have invested in Small Cap Value funds in 1801? Hell, how would you invest in ANY?

How can I not be taken seriously. The graph started in 1927. Not 1801. In 1927 all 4 funds started with $100 and the graph is the results of how they fared over the last 80+ years.

What 4 funds? Please identify the ticker for each fund.

PeteD01

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Re: Value investing/tilting with funds is utter crap
« Reply #106 on: April 03, 2015, 05:28:41 PM »

I'm tired of some of this nonsense. Here is some data going back to the 20's.

Nice graph telling the whole story.
Small growth is not worth bothering with.
Large value and large growth is well represented in total market.
Small value is definitely where the money is but is not that easy to invest in.

The more relevant interpretation is this:

Small value beats small growth. And large value beats large growth. Aka value investing is not "total crap."

Look closely and try to put your own eyeball regression line through the last 20 to 30 years of data and you will see that the slopes of large value and growth are not that different.

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #107 on: April 03, 2015, 05:34:42 PM »
See post 50 again.

The past performance of a few standout funds, over 20 years, cannot be used to show a general outperformance of the value factor in mutual funds.  Thus far, the only evidence presented looks at value funds as a whole, over 80 years, and has found no outperformance.



As I've already explained, those funds were selected based on 2 simple  criteria

1. They are passive funds
And
2.  They were the first passive funds of their kind.

They were not cherry picked. They are simply the longest available comparison for commercially available passive funds of their kind.

If you can find a longer back-testable collection of relevant funds to this discussion then please share it with the group.

That would be far more useful than your empty proclamations without a shred of evidence.

If you want asset class data please see bdbrooks' above post.

It's not that complicated.

Those criteria are vulnerable to survivorship bias.  The past performance of a few standout funds, over 20 years, cannot be used to show a general outperformance of the value factor in real world mutual funds.  Thus far, the only evidence presented which looks at value funds as a whole, does so over 80 years, and has found no outperformance.  Please provide substantiative evidence if you have it, I am genuinely curious to see if it exists.

The proclamations are not mine, the evidence is linked in the original post.

Okay if you suspect is survivorship bias then prove it:  find one passive value index fund that predates those that I used in my analysis. 

More to the point you have presented zero evidence that there is no real world value effect.  You are the one making the claim that "value investing is crap."  Find one real world backtest of at least 20 years that proves your point that passive value is inferior to passive blend at the same cap weighting. 

I'm waiting for your real world evidence.

tj

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Re: Value investing/tilting with funds is utter crap
« Reply #108 on: April 03, 2015, 05:37:04 PM »
VTI has only existed since 2005.

But even so I suspect that if they were back tested back to the 70s or earlier, VTV would beat VTI.

VTI has actually existed since 2001, but more importantly, the mutual fund version of that ETF, VTSMX, has existed since 1992.

As has Vanguard's Large-Cap Value index mutual fund, VIVAX, which is known as VTV in the ETF world. So it's not quite the '70s, but we can compare them back to 1992, which is way more than 9 years. And hey, look, VTI beats VTV.

VFIAX (Vanguard's S&P 500 fund), which is probably a better benchmark than a total-market fund, also beats VTV/VIVAX over that period.

I think Dodge is asking "does your belief in the superiority of value funds come from theory, or evidence?" The fact that you guessed wrong in this case suggests it may come more from theory. Which, hey, may be right in the end. But hopefully the difficulty we're having in finding value funds that have actually beaten non-value funds (much less showing that any one fund's outperformance is the result of more than luck) tempers that belief a bit.

It's similar to the Dividend Aristocrats thread, where a few people have said things like "well, a long string of dividend increases is a proxy for quality, so it's not surprising that dividend funds outperform."  Except that, in reality, there is so far no evidence of dividend funds outperforming!

I also think some of Dodge's point may be that once an outperforming strategy becomes so widely known that it can be exploited via index funds, that outperformance disappears. Embracing a strategy because it performed well before anyone knew it was a strategy is fine, but it's probably a good idea to balance that with a look at what has happened since then.

All true - but all 3 of Vanguard's large value active funds have outperformed all of these over the same time period. Those would be Equity Income, Windsor and Windsor II. Coincidence? Dumb luck? Or are those managers adding value?


Dodge

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Re: Value investing/tilting with funds is utter crap
« Reply #109 on: April 03, 2015, 05:39:23 PM »
This can't be taken seriously. How would you have invested in Small Cap Value funds in 1801? Hell, how would you invest in ANY?

How can I not be taken seriously. The graph started in 1927. Not 1801. In 1927 all 4 funds started with $100 and the graph is the results of how they fared over the last 80+ years.

What 4 funds? Please identify the ticker for each fund.

Only looking at 4 funds is not sufficient, as it relies on the 1927 version of you picking the correct small-value fund which outperformed.

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #110 on: April 03, 2015, 05:42:46 PM »

I'm tired of some of this nonsense. Here is some data going back to the 20's.

Nice graph telling the whole story.
Small growth is not worth bothering with.
Large value and large growth is well represented in total market.
Small value is definitely where the money is but is not that easy to invest in.

The more relevant interpretation is this:

Small value beats small growth. And large value beats large growth. Aka value investing is not "total crap."

Look closely and try to put your own eyeball regression line through the last 20 to 30 years of data and you will see that the slopes of large value and growth are not that different.

I don't necessarily disagree with that, but its irrelevant to the analysis.  One could equally say that the 90s proved that growth stocks were superior.  Why cherry pick 30 years when we have a back test of almost 90 years?

And this ignores the massive chasm even recently between SCV and SCB.  This evidence is quite supportive that the original hypothesis that "value investing is utter crap" has no merit.

tj

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Re: Value investing/tilting with funds is utter crap
« Reply #111 on: April 03, 2015, 05:43:12 PM »
This can't be taken seriously. How would you have invested in Small Cap Value funds in 1801? Hell, how would you invest in ANY?

How can I not be taken seriously. The graph started in 1927. Not 1801. In 1927 all 4 funds started with $100 and the graph is the results of how they fared over the last 80+ years.

What 4 funds? Please identify the ticker for each fund.

Only looking at 4 funds is not sufficient, as it relies on the 1927 version of you picking the correct small-value fund which outperformed.

Without tickers, the graph is meaningless. I doubt the existance of a small cap value fund in 1927.

Dodge

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Re: Value investing/tilting with funds is utter crap
« Reply #112 on: April 03, 2015, 05:46:17 PM »
This can't be taken seriously. How would you have invested in Small Cap Value funds in 1801? Hell, how would you invest in ANY?

How can I not be taken seriously. The graph started in 1927. Not 1801. In 1927 all 4 funds started with $100 and the graph is the results of how they fared over the last 80+ years.

What 4 funds? Please identify the ticker for each fund.

Only looking at 4 funds is not sufficient, as it relies on the 1927 version of you picking the correct small-value fund which outperformed.

Without tickers, the graph is meaningless. I doubt the existance of a small cap value fund in 1927.

My assertion is that even with the 4 tickers, the graph is meaningless.

bdbrooks

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Re: Value investing/tilting with funds is utter crap
« Reply #113 on: April 03, 2015, 05:48:31 PM »
Based on the source, and the graph, this seems to be the very data the sources in the original post say is invalid, because it does not represent the returns of actual funds.

"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." ~John Bogle

Can you show that this graph is indeed the result of real world funds?

Based off my calculations of the graph: Small Value returned 10.1% Large Value returned 7.3% Small Growth Returned 5.5% and Large Growth returned 5.2%. How much do you think would be the marginal expense from moving from an S&P 500 index fund over to a Large Cap Value fund. Certainly not most of the added 2% return.

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2329948
If you want to skip to the results look at the last 3 pages.

You want academic research. This once again does include expenses, but it shows such a huge discrepancy between the top decile of valuation that it would easily outperform after expenses.

For portfolios rebalanced annually returns ranged from 15.3-16.6% annually depending on valuation method
For portfolios rebalanced monthly returns ranged from 17.5-19.3% annually depending on valuation method
For portfolios rebalanced monthly AND eliminating bottom half based on momentum returns ranged from 18.6%-21.6% annually depending on valuation method

Returns for the SP 500 over this period were 10.3% (Market Cap Weighted). Returns for the SP 500 Equal Weight were 13.5%.

So for 5% outperformance ... you could use Folio or Interactive Brokers and rebalance annually and easily spend less than .2% in expenses.
So for 8% outperformance ... you could use Folio or Interactive Brokers and rebalance monthly and easily spend less than 1% in expenses.

Note Folio has unlimited window trading and Interactive Brokers does trades for .005$ per share (half a penny per share).

Also note that this is even better data than if I had cherry picked funds. This shows every stock that fit into a quantitative investing system.

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #114 on: April 03, 2015, 05:48:39 PM »
This can't be taken seriously. How would you have invested in Small Cap Value funds in 1801? Hell, how would you invest in ANY?

How can I not be taken seriously. The graph started in 1927. Not 1801. In 1927 all 4 funds started with $100 and the graph is the results of how they fared over the last 80+ years.

What 4 funds? Please identify the ticker for each fund.



Only looking at 4 funds is not sufficient, as it relies on the 1927 version of you picking the correct small-value fund which outperformed.

4 truly passive funds should not deviate from their indices by any more than their expense ratios, so fund selection is not so important here.  Besides how does one prove real world superiority with out using real funds?

And dont say "include all funds ever in existence" because this lumps active funds in with passive funds which brings in the active vs passive funds issue which is sort of a settled issue.(Passive beats active obviously.)

bdbrooks

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Re: Value investing/tilting with funds is utter crap
« Reply #115 on: April 03, 2015, 05:53:27 PM »
For those that like graphical representations here is a graph selecting the top 60% of market cap of the NYSE and splitting them up into deciles based off of different valuation metrics (earnings to market, book to market, EBITDA / TEV, FCF / TEV, and GP / Market). Then they select only the top 10% and rebalance annually. Note that the returns would have been significantly bigger had they rebalanced monthly.

Dodge

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Re: Value investing/tilting with funds is utter crap
« Reply #116 on: April 03, 2015, 05:53:42 PM »
4 truly passive funds should not deviate from their indices by any more than their expense ratios

Don't you see?  The whole premise of this thread, is that evidence has been found which shows value funds deviate pretty heavily from their indices.  The deviation is so high, that the value premium is lost.

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #117 on: April 03, 2015, 05:57:30 PM »
Passive  funds to not deviate meaningfully from their indices.

If your argument is that it is not smart to invest in actively managed value funds then my response is: "duh."

If your argument is that it is not smart to invest in passively managed value funds, then you have yet to have made s coherent argument.

In other words I'm still waiting for an actual back test supporting your hypothesis.

Dodge

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Re: Value investing/tilting with funds is utter crap
« Reply #118 on: April 03, 2015, 05:58:52 PM »
For those that like graphical representations here is a graph selecting the top 60% of market cap of the NYSE and splitting them up into deciles based off of different valuation metrics (earnings to market, book to market, EBITDA / TEV, FCF / TEV, and GP / Market). Then they select only the top 10% and rebalance annually. Note that the returns would have been significantly bigger had they rebalanced monthly.

This doesn't seem relevant.  If you're comparing the top 60% of the NYSE, what value do you get from putting the S&P500 in there?  If you want to see how the individual factors did, you have to compare them back against the top 60% of the NYSE.  Even if that were done, how would this information be relevant to the thread?

bdbrooks

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Re: Value investing/tilting with funds is utter crap
« Reply #119 on: April 03, 2015, 06:04:21 PM »
Passive  funds to not deviate meaningfully from their indices.

If your argument is that it is not smart to invest in actively managed value funds then my response is: "duh."

If your argument is that it is not smart to invest in passively managed value funds, then you have yet to have made s coherent argument.

In other words I'm still waiting for an actual back test supporting your hypothesis.

My argument is neither of those. The original premise is that Value investing is utter crap. I was showing that there can be some active value strategies that can handsomely beat the market and that it isn't utter crap. Now if someone says that they don't think they can pick some of the few active funds out there that can beat the market then it is logical for them to buy passive index funds. To each his own. However, don't say that the other person is an idiot when they may actually be doing better than you.

tj

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Re: Value investing/tilting with funds is utter crap
« Reply #120 on: April 03, 2015, 06:07:11 PM »
Passive  funds to not deviate meaningfully from their indices.

If your argument is that it is not smart to invest in actively managed value funds then my response is: "duh."

If your argument is that it is not smart to invest in passively managed value funds, then you have yet to have made s coherent argument.

In other words I'm still waiting for an actual back test supporting your hypothesis.

My point is that it's impossible to backtest because such passive funds have not existed for very long.

bdbrooks

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Re: Value investing/tilting with funds is utter crap
« Reply #121 on: April 03, 2015, 06:08:07 PM »
This doesn't seem relevant.  If you're comparing the top 60% of the NYSE, what value do you get from putting the S&P500 in there?  If you want to see how the individual factors did, you have to compare them back against the top 60% of the NYSE.  Even if that were done, how would this information be relevant to the thread?

Look in the article. It will also show the other deciles and the further it was to the value side the better it performed and the further it was to the growth side the worse it performed. Generally the top value decile would perform at least 10% better than the lowest decile (on a monthly rebalance). This shows within those 60% being evaluated that Value added value (pun intended) to the performance.

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #122 on: April 03, 2015, 06:08:32 PM »

Passive  funds to not deviate meaningfully from their indices.

If your argument is that it is not smart to invest in actively managed value funds then my response is: "duh."

If your argument is that it is not smart to invest in passively managed value funds, then you have yet to have made s coherent argument.

In other words I'm still waiting for an actual back test supporting your hypothesis.

My point is that it's impossible to backtest because such passive funds have not existed for very long.

But as long as they have existed they have continued to outperform. See post 50.

tj

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Re: Value investing/tilting with funds is utter crap
« Reply #123 on: April 03, 2015, 06:10:46 PM »

Passive  funds to not deviate meaningfully from their indices.

If your argument is that it is not smart to invest in actively managed value funds then my response is: "duh."

If your argument is that it is not smart to invest in passively managed value funds, then you have yet to have made s coherent argument.

In other words I'm still waiting for an actual back test supporting your hypothesis.

My point is that it's impossible to backtest because such passive funds have not existed for very long.

But as long as they have existed they have continued to outperform. See post 50.

Not a long enough time horizon to draw a conclusion of where to invest for next 30-40 years. 

bdbrooks

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Re: Value investing/tilting with funds is utter crap
« Reply #124 on: April 03, 2015, 06:14:11 PM »
Don't you see?  The whole premise of this thread, is that evidence has been found which shows value funds deviate pretty heavily from their indices.  The deviation is so high, that the value premium is lost.

A value fund deviating from a blended index gives no indication that the value premium is lost. If you are arguing that they have higher volatility and therefore higher risk and are equivalent on a risk adjusted basis, then there are plenty of studies to show that they have done better on a risk adjusted basis.

bdbrooks

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Re: Value investing/tilting with funds is utter crap
« Reply #125 on: April 03, 2015, 06:17:50 PM »
If you want a real argument, then we should argue whether dividend investing is utter crap. There are very few free lunches in investing (value premium, momentum premium, and low volatility are the only that I know of). There is no reason to believe to believe dividend funds will outperform except that they may be concentrated with mostly value and low volatility companies.

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #126 on: April 03, 2015, 06:29:08 PM »
VTI has only existed since 2005.

But even so I suspect that if they were back tested back to the 70s or earlier, VTV would beat VTI.

VTI has actually existed since 2001, but more importantly, the mutual fund version of that ETF, VTSMX, has existed since 1992.

As has Vanguard's Large-Cap Value index mutual fund, VIVAX, which is known as VTV in the ETF world. So it's not quite the '70s, but we can compare them back to 1992, which is way more than 9 years. And hey, look, VTI beats VTV.

VFIAX (Vanguard's S&P 500 fund), which is probably a better benchmark than a total-market fund, also beats VTV/VIVAX over that period.

I think Dodge is asking "does your belief in the superiority of value funds come from theory, or evidence?" The fact that you guessed wrong in this case suggests it may come more from theory. Which, hey, may be right in the end. But hopefully the difficulty we're having in finding value funds that have actually beaten non-value funds (much less showing that any one fund's outperformance is the result of more than luck) tempers that belief a bit.

It's similar to the Dividend Aristocrats thread, where a few people have said things like "well, a long string of dividend increases is a proxy for quality, so it's not surprising that dividend funds outperform."  Except that, in reality, there is so far no evidence of dividend funds outperforming!

I also think some of Dodge's point may be that once an outperforming strategy becomes so widely known that it can be exploited via index funds, that outperformance disappears. Embracing a strategy because it performed well before anyone knew it was a strategy is fine, but it's probably a good idea to balance that with a look at what has happened since then.

Okay then lets backtest VFIAX vs DFLVX (the oldest large cap value fund) for the maximum time period....

VFIAX is portfolio 1, DFLVX is portfolio 2.

« Last Edit: April 03, 2015, 11:53:54 PM by milesdividendmd »

Dodge

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Re: Value investing/tilting with funds is utter crap
« Reply #127 on: April 03, 2015, 06:36:56 PM »
This doesn't seem relevant.  If you're comparing the top 60% of the NYSE, what value do you get from putting the S&P500 in there?  If you want to see how the individual factors did, you have to compare them back against the top 60% of the NYSE.  Even if that were done, how would this information be relevant to the thread?

Look in the article. It will also show the other deciles and the further it was to the value side the better it performed and the further it was to the growth side the worse it performed. Generally the top value decile would perform at least 10% better than the lowest decile (on a monthly rebalance). This shows within those 60% being evaluated that Value added value (pun intended) to the performance.

I'm going to reference the fantastic survivorship bias article again.  It says:

------------------------------------------
"It is easy to do. After any process that leaves behind survivors, the non-survivors are often destroyed or muted or removed from your view. If failures becomes invisible, then naturally you will pay more attention to successes. Not only do you fail to recognize that what is missing might have held important information, you fail to recognize that there is missing information at all."

"This particular bias is especially pernicious, said Plait, because it is almost invisible by definition. ĒThe only way you can spot it is to always ask: what am I missing? Is what Iím seeing all there is? What am I not seeing?"
------------------------------------------

When I look at this, I'm immediately drawn to the missing 40%.  Why did this data choose to omit it?  Would it have a different outcome if it were the top 80%?  The top 20%?  The top 72%?  The evidence in my original post shows that the value premium is lost, possibly because, "the most illiquid stocks are often excluded".  Could the missing bottom 40% represent stocks which are too illiquid?

Then I'm compelled to ask, which value funds use the same indicators as the ones this chart says will outperform?  Why was 1974 chosen as the starting year, we have NYSE data going well beyond then?  If the 1974 version of me did this very same analysis on the previous 40 years (1934-1974), would the chart look the same, or would another factor be shown as outperforming, which underperforms in this chart?

And the all-important question, which makes this relevant to the thread, do these lines represent actual traded funds, or are they the result of a data-mining and back-testing effort to show me what a fund like this *could* have looked like, if someone followed these guidelines?

tj

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Re: Value investing/tilting with funds is utter crap
« Reply #128 on: April 03, 2015, 06:48:27 PM »
VTI has only existed since 2005.

But even so I suspect that if they were back tested back to the 70s or earlier, VTV would beat VTI.

VTI has actually existed since 2001, but more importantly, the mutual fund version of that ETF, VTSMX, has existed since 1992.

As has Vanguard's Large-Cap Value index mutual fund, VIVAX, which is known as VTV in the ETF world. So it's not quite the '70s, but we can compare them back to 1992, which is way more than 9 years. And hey, look, VTI beats VTV.

VFIAX (Vanguard's S&P 500 fund), which is probably a better benchmark than a total-market fund, also beats VTV/VIVAX over that period.

I think Dodge is asking "does your belief in the superiority of value funds come from theory, or evidence?" The fact that you guessed wrong in this case suggests it may come more from theory. Which, hey, may be right in the end. But hopefully the difficulty we're having in finding value funds that have actually beaten non-value funds (much less showing that any one fund's outperformance is the result of more than luck) tempers that belief a bit.

It's similar to the Dividend Aristocrats thread, where a few people have said things like "well, a long string of dividend increases is a proxy for quality, so it's not surprising that dividend funds outperform."  Except that, in reality, there is so far no evidence of dividend funds outperforming!

I also think some of Dodge's point may be that once an outperforming strategy becomes so widely known that it can be exploited via index funds, that outperformance disappears. Embracing a strategy because it performed well before anyone knew it was a strategy is fine, but it's probably a good idea to balance that with a look at what has happened since then.

Okay then lets backtest VFIAX vs DFALX (the oldest large cap value fund) for the maximum time period....

VFIAX is portfolio 1, DFALX is portfolio 2.



You're welcome to make investing decisions based on 15 years data. I think that's ridiculous.

skyrefuge

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Re: Value investing/tilting with funds is utter crap
« Reply #129 on: April 03, 2015, 06:55:46 PM »
Okay then lets backtest VFIAX vs DFALX (the oldest large cap value fund) for the maximum time period....

I guess you typed a ticker symbol wrong or something? DFALX appears to be a Large Cap International (so not to be compared with VFIAX) Non-Value fund started in 1993, not 2001?

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #130 on: April 03, 2015, 11:56:07 PM »
Okay then lets backtest VFIAX vs DFALX (the oldest large cap value fund) for the maximum time period....

I guess you typed a ticker symbol wrong or something? DFALX appears to be a Large Cap International (so not to be compared with VFIAX) Non-Value fund started in 1993, not 2001?

You are correct.  I typed DFALX where I should have typed DFLVX.  But the graph is in fact VFIAX v DFLVX.  (Test for yourself to confirm.)  Original post is amended to reflect this.

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #131 on: April 03, 2015, 11:57:37 PM »
VTI has only existed since 2005.

But even so I suspect that if they were back tested back to the 70s or earlier, VTV would beat VTI.

VTI has actually existed since 2001, but more importantly, the mutual fund version of that ETF, VTSMX, has existed since 1992.

As has Vanguard's Large-Cap Value index mutual fund, VIVAX, which is known as VTV in the ETF world. So it's not quite the '70s, but we can compare them back to 1992, which is way more than 9 years. And hey, look, VTI beats VTV.

VFIAX (Vanguard's S&P 500 fund), which is probably a better benchmark than a total-market fund, also beats VTV/VIVAX over that period.

I think Dodge is asking "does your belief in the superiority of value funds come from theory, or evidence?" The fact that you guessed wrong in this case suggests it may come more from theory. Which, hey, may be right in the end. But hopefully the difficulty we're having in finding value funds that have actually beaten non-value funds (much less showing that any one fund's outperformance is the result of more than luck) tempers that belief a bit.

It's similar to the Dividend Aristocrats thread, where a few people have said things like "well, a long string of dividend increases is a proxy for quality, so it's not surprising that dividend funds outperform."  Except that, in reality, there is so far no evidence of dividend funds outperforming!

I also think some of Dodge's point may be that once an outperforming strategy becomes so widely known that it can be exploited via index funds, that outperformance disappears. Embracing a strategy because it performed well before anyone knew it was a strategy is fine, but it's probably a good idea to balance that with a look at what has happened since then.

Okay then lets backtest VFIAX vs DFALX (the oldest large cap value fund) for the maximum time period....

VFIAX is portfolio 1, DFALX is portfolio 2.



You're welcome to make investing decisions based on 15 years data. I think that's ridiculous.

I think 80 years of data is perfectly reasonable thank you very much (see post 15.)

And the fact remains that your side of the argument is completely incapable of presenting any real world (or even index) data supporting your hypothesis.  And there is a good reason for that.  Your view is undisciplined and completely divorced from reality.
« Last Edit: April 04, 2015, 12:00:31 AM by milesdividendmd »

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #132 on: April 04, 2015, 12:05:51 AM »
This doesn't seem relevant.  If you're comparing the top 60% of the NYSE, what value do you get from putting the S&P500 in there?  If you want to see how the individual factors did, you have to compare them back against the top 60% of the NYSE.  Even if that were done, how would this information be relevant to the thread?

Look in the article. It will also show the other deciles and the further it was to the value side the better it performed and the further it was to the growth side the worse it performed. Generally the top value decile would perform at least 10% better than the lowest decile (on a monthly rebalance). This shows within those 60% being evaluated that Value added value (pun intended) to the performance.

I'm going to reference the fantastic survivorship bias article again.  It says:

------------------------------------------
"It is easy to do. After any process that leaves behind survivors, the non-survivors are often destroyed or muted or removed from your view. If failures becomes invisible, then naturally you will pay more attention to successes. Not only do you fail to recognize that what is missing might have held important information, you fail to recognize that there is missing information at all."

"This particular bias is especially pernicious, said Plait, because it is almost invisible by definition. ĒThe only way you can spot it is to always ask: what am I missing? Is what Iím seeing all there is? What am I not seeing?"
------------------------------------------

When I look at this, I'm immediately drawn to the missing 40%.  Why did this data choose to omit it?  Would it have a different outcome if it were the top 80%?  The top 20%?  The top 72%?  The evidence in my original post shows that the value premium is lost, possibly because, "the most illiquid stocks are often excluded".  Could the missing bottom 40% represent stocks which are too illiquid?

Then I'm compelled to ask, which value funds use the same indicators as the ones this chart says will outperform?  Why was 1974 chosen as the starting year, we have NYSE data going well beyond then?  If the 1974 version of me did this very same analysis on the previous 40 years (1934-1974), would the chart look the same, or would another factor be shown as outperforming, which underperforms in this chart?

And the all-important question, which makes this relevant to the thread, do these lines represent actual traded funds, or are they the result of a data-mining and back-testing effort to show me what a fund like this *could* have looked like, if someone followed these guidelines?

You once again conveniently ignore the fact that survivorship bias is largely irrelevant when you are comparing passive funds.  All that matters is the performance of the underlying indices minus the expense ratios.

(And still I wait for your first bit of real world data supporting your capricious and poorly considered  theory.)  It seems you can not find any data to support your own viewpoint.  Quite predictable really.

Dodge

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Re: Value investing/tilting with funds is utter crap
« Reply #133 on: April 04, 2015, 12:58:21 AM »

This doesn't seem relevant.  If you're comparing the top 60% of the NYSE, what value do you get from putting the S&P500 in there?  If you want to see how the individual factors did, you have to compare them back against the top 60% of the NYSE.  Even if that were done, how would this information be relevant to the thread?

Look in the article. It will also show the other deciles and the further it was to the value side the better it performed and the further it was to the growth side the worse it performed. Generally the top value decile would perform at least 10% better than the lowest decile (on a monthly rebalance). This shows within those 60% being evaluated that Value added value (pun intended) to the performance.

I'm going to reference the fantastic survivorship bias article again.  It says:

------------------------------------------
"It is easy to do. After any process that leaves behind survivors, the non-survivors are often destroyed or muted or removed from your view. If failures becomes invisible, then naturally you will pay more attention to successes. Not only do you fail to recognize that what is missing might have held important information, you fail to recognize that there is missing information at all."

"This particular bias is especially pernicious, said Plait, because it is almost invisible by definition. ĒThe only way you can spot it is to always ask: what am I missing? Is what Iím seeing all there is? What am I not seeing?"
------------------------------------------

When I look at this, I'm immediately drawn to the missing 40%.  Why did this data choose to omit it?  Would it have a different outcome if it were the top 80%?  The top 20%?  The top 72%?  The evidence in my original post shows that the value premium is lost, possibly because, "the most illiquid stocks are often excluded".  Could the missing bottom 40% represent stocks which are too illiquid?

Then I'm compelled to ask, which value funds use the same indicators as the ones this chart says will outperform?  Why was 1974 chosen as the starting year, we have NYSE data going well beyond then?  If the 1974 version of me did this very same analysis on the previous 40 years (1934-1974), would the chart look the same, or would another factor be shown as outperforming, which underperforms in this chart?

And the all-important question, which makes this relevant to the thread, do these lines represent actual traded funds, or are they the result of a data-mining and back-testing effort to show me what a fund like this *could* have looked like, if someone followed these guidelines?

You once again conveniently ignore the fact that survivorship bias is largely irrelevant when you are comparing passive funds.  All that matters is the performance of the underlying indices minus the expense ratios.

(And still I wait for your first bit of real world data supporting your capricious and poorly considered  theory.)  It seems you can not find any data to support your own viewpoint.  Quite predictable really.

The evidence is in the original post.

Dodge

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Re: Value investing/tilting with funds is utter crap
« Reply #134 on: April 04, 2015, 01:03:03 AM »

Don't you see?  The whole premise of this thread, is that evidence has been found which shows value funds deviate pretty heavily from their indices.  The deviation is so high, that the value premium is lost.

A value fund deviating from a blended index gives no indication that the value premium is lost.

That's not the claim. I recommend reading the sources in the original post.

bdbrooks

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Re: Value investing/tilting with funds is utter crap
« Reply #135 on: April 04, 2015, 08:31:29 AM »
That's not the claim. I recommend reading the sources in the original post.

Maybe it would help if you read the sources you quoted. "even the increased risk-adjusted return of 11.2% for growth stocks falls one percentage point short of the value outcome." As I said before Value stocks tend to outperform (by 2.6 percent) but with higher standard deviation (which by the way is a lazy and poor determinant of risk, Sortino ratio is much better for this). However, they still outperform by a full percentage point on a risk adjusted basis.

Also, your claim that since the value premium has been discovered it will now be washed away due to people flooding it, this is balderdash.

Vanguard Value Index Fund Institutional Shares (VIVIX) https://personal.vanguard.com/us/funds/snapshot?FundId=0867&FundIntExt=INT has $38 billion invested in it
Vanguard Growth Index Fund Institutional Shares (VIGIX) https://personal.vanguard.com/us/funds/snapshot?FundId=0868&FundIntExt=INT has $48 billion invested in it

This is the opposite of your claim in your original post that Value will get over crowded. Also these are institutional shares. This includes the big bucks that actually have enough weight to start moving the market, but they are if anything giving more credence to the value premium persisting on. I believe it is a foolish statement to say that somethings that has persisted for 80+ years has all of a sudden disappeared especially with a lack of evidence. This isn't to say that market cap indexing is foolish, I'm just saying there are other quantitative methods for gaining alpha and you'd be foolish to say they don't exist (it would be reasonable for you to say that you don't trust yourself to find them so you are just going to market cap index).

PeteD01

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Re: Value investing/tilting with funds is utter crap
« Reply #136 on: April 04, 2015, 09:44:11 AM »

I'm tired of some of this nonsense. Here is some data going back to the 20's.

Nice graph telling the whole story.
Small growth is not worth bothering with.
Large value and large growth is well represented in total market.
Small value is definitely where the money is but is not that easy to invest in.

The more relevant interpretation is this:

Small value beats small growth. And large value beats large growth. Aka value investing is not "total crap."

Look closely and try to put your own eyeball regression line through the last 20 to 30 years of data and you will see that the slopes of large value and growth are not that different.

I don't necessarily disagree with that, but its irrelevant to the analysis.  One could equally say that the 90s proved that growth stocks were superior.  Why cherry pick 30 years when we have a back test of almost 90 years?

And this ignores the massive chasm even recently between SCV and SCB.  This evidence is quite supportive that the original hypothesis that "value investing is utter crap" has no merit.

Using the last twenty or thirty years isn't really cherry picking but takes into account the typical investor's investing time frame and the phenomenon that the future is more likely like the present than any other alternative individually.
From a practical standpoint, the chart informs me that large value and large growth are not perfectly correlated and one should be in both for that reason. Cap weighted total market does that nicely.
The small value premium does hold up much better but is hampered by execution of the investment.
I have looked into it but it did not turn out to be practical for me.
I really do not disagree with the analysis at hand but looking at it from the perspective of a financial plan, in which set and forget is a major feature, it does not work well.
Not even the apparently superior risk adjusted returns of value investing will change my mind about small value tilting as tinkering is required and tinkering is the biggest risk an individual investor's portfolio can be exposed to. This particular risk cannot be easily quantified but has to be taken into account.

So I end up with two statements which seem to be contradictory but really aren't:

1. The optimal equity portfolio in an overall financial plan, using the Pareto principle as guidance, is a cap weighted total market portfolio.

2. The highest return equity portfolio, disregarding investor behavioral issues, is to the best of our current knowledge a total market portfolio with a small value tilt.

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #137 on: April 04, 2015, 09:55:32 AM »


I'm tired of some of this nonsense. Here is some data going back to the 20's.

Nice graph telling the whole story.
Small growth is not worth bothering with.
Large value and large growth is well represented in total market.
Small value is definitely where the money is but is not that easy to invest in.

The more relevant interpretation is this:

Small value beats small growth. And large value beats large growth. Aka value investing is not "total crap."

Look closely and try to put your own eyeball regression line through the last 20 to 30 years of data and you will see that the slopes of large value and growth are not that different.

I don't necessarily disagree with that, but its irrelevant to the analysis.  One could equally say that the 90s proved that growth stocks were superior.  Why cherry pick 30 years when we have a back test of almost 90 years?

And this ignores the massive chasm even recently between SCV and SCB.  This evidence is quite supportive that the original hypothesis that "value investing is utter crap" has no merit.

Using the last twenty or thirty years isn't really cherry picking but takes into account the typical investor's investing time frame and the phenomenon that the future is more likely like the present than any other alternative individually.
From a practical standpoint, the chart informs me that large value and large growth are not perfectly correlated and one should be in both for that reason. Cap weighted total market does that nicely.
The small value premium does hold up much better but is hampered by execution of the investment.
I have looked into it but it did not turn out to be practical for me.
I really do not disagree with the analysis at hand but looking at it from the perspective of a financial plan, in which set and forget is a major feature, it does not work well.
Not even the apparently superior risk adjusted returns of value investing will change my mind about small value tilting as tinkering is required and tinkering is the biggest risk an individual investor's portfolio can be exposed to. This particular risk cannot be easily quantified but has to be taken into account.

So I end up with two statements which seem to be contradictory but really aren't:

1. The optimal equity portfolio in an overall financial plan, using the Pareto principle as guidance, is a cap weighted total market portfolio.

2. The highest return equity portfolio, disregarding investor behavioral issues, is to the best of our current knowledge a total market portfolio with a small value tilt.

I can find nothing to disagree with you about here.

But keep in mind the topic of discussion. The question is not whether one should use a small value tilt in his/her real world portfolio.  The answer to that question can be debated forever, and intelligently.

The question posed is whether or not value investing is "utter crap."  And the answer to that question isn't really debatable at all, in any intelligent fashion.

And based on your statement it appears that you are in full agreement that value investing is quite demonstrably not "crap."

Aphalite

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Re: Value investing/tilting with funds is utter crap
« Reply #138 on: April 04, 2015, 12:07:23 PM »
Guys, please stop associating beta with "risk". Just because a stock price is more volatile doesn't necessarily mean it's more risky. A company is more risky if it requires short term debt to fund long term assets or engages in derivative activity that exposes it to more collateral demand than it has liquidity, for example. But just because investor feeling on something gyrates doesn't make mean the business is risky.

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Re: Value investing/tilting with funds is utter crap
« Reply #139 on: April 05, 2015, 11:01:22 AM »
It's hard to debate because there's no reliable way to compare. Low ratio stocks don't cut it these days because of accounting quirks(assets may not be as valuable as estimated, amortization may overestimate cost of capital, one-time items, etc). You can look at value firms vs an index, but a lot of firms don't have the same opportunities that small investors have. Most 'value analysis' out there is crap because the underlying business isn't truly 'quality'. MPET was argued to be a 'value' stock at $2/share, and people agreed! What could've gone wrong has gone wrong, and it is now below $0.30/share. I see why value investing works well- they tend to be unloved, misunderstood, or under the radar. The potential pool of capital is enormous vs. crowded stocks. Some are so unnoticed that people don't see insider trading (my suspicion, no one ever punished).

Part 2 of my rant: before going further, I'll clarify my interpretation of what value investing is. Nowadays, the term is thrown in a basket of 'low P/E, low P/B, 52-week lows', yada^3. Imo the most recognized indicator of value: is this business really good at making money? Now throw in additional criteria like a strong balance sheet, shareholder-friendly management, and high returns on capital, you may have a valuable stock (need more analysis, like- competition, can they weather out bad economy, is there customer concentration?). Now to the 'investing' part: how much am I paying for the business's earning power? Analysis is a lot of work and earning power is almost never obvious.

Part 3: tilt based on potential flow of capital: small businesses that are quality have a lot going for them. They may eventually attract institutions as they grow and get noticed, investors with deep pockets, and momentum traders. They can also be targets for strategic acquirers, PE firms, etc. With crowded stocks like Apple and Google, it's less likely you can tilt the odds in your favor- so much analyst coverage, many institutions already hold full positions, and everybody knows their name.

I can point you to many firms and individuals that have beaten the market in a 10yr+ period, but everyone's just going to say 'survivorship bias'! and 'luck!' There are some people who put a lot of their predictions and analysis out there with the same value perspective as I. One is Andreas (Andreas on seekingalpha and Andreas947 on valueinvestorsclub ).
« Last Edit: April 05, 2015, 11:07:56 AM by JoJoK »

DavidAnnArbor

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Re: Value investing/tilting with funds is utter crap
« Reply #140 on: April 05, 2015, 03:53:26 PM »
According the linked NY Times article, "most small-cap value funds underperformed the S.&P. SmallCap 600 Value Index."

http://www.nytimes.com/2015/04/05/your-money/measure-for-measure-index-funds-rule.html?src=me

milesdividendmd

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Re: Value investing/tilting with funds is utter crap
« Reply #141 on: April 05, 2015, 09:18:03 PM »

According the linked NY Times article, "most small-cap value funds underperformed the S.&P. SmallCap 600 Value Index."

http://www.nytimes.com/2015/04/05/your-money/measure-for-measure-index-funds-rule.html?src=me

The article compares actively managed small value funds to small value indices.

No one has argued here for investing in actively managed value funds.

In other words this study lumps in active management and the value approach in comparison to the pure passive value approach.

So it answers a completely different question to the topic at hand. Namely does active management work?

It does not. And In other news, gravity exists.