The Money Mustache Community
Learning, Sharing, and Teaching => Investor Alley => Topic started by: Dodge on March 30, 2015, 02:03:54 PM
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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 (http://www.vanguard.com/bogle_site/sp20020626.html). 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 (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2394711) 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"
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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)
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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.
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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.
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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.
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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.
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By your tone, you clearly aren't interested in a reasoned discussion, so what exactly is the point of this post?
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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...
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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
(http://im.ft-static.com/content/images/d6d02358-aadf-4d56-bc27-3e62e5f5691c.img)
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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?
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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
(http://im.ft-static.com/content/images/d6d02358-aadf-4d56-bc27-3e62e5f5691c.img)
Neither of those quotes support your point.
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Just got a used copy of "Security Analysis". I guess there's no sense reading it.
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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.
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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.
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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:
(http://paulmerriman.com/wp-content/uploads/2015/03/Large-Table-Layout-2-page_Page_12-755x1024.jpg)
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.
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-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.”
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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.
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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.
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-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.
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-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.
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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.
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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
(http://im.ft-static.com/content/images/d6d02358-aadf-4d56-bc27-3e62e5f5691c.img)
Neither of those quotes support your point.
If you invest in Value, you would be ignoring the stated most famous names in Wall Street.
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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.
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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!!
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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
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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.
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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..
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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.
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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?
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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.
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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
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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.
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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.
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Agree.
Start a new thread.
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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.
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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.
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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.
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(http://www.reactiongifs.us/wp-content/uploads/2013/07/technically_correct_futurama.gif)
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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
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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.
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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.
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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.
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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
(http://im.ft-static.com/content/images/d6d02358-aadf-4d56-bc27-3e62e5f5691c.img)
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.
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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.
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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
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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.
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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.
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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
(http://im.ft-static.com/content/images/d6d02358-aadf-4d56-bc27-3e62e5f5691c.img)
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.
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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.
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.
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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.
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.
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Linking to the longest passive fund in each category and testing the maximum interval is as good a method as any.
If you want index data the results will be even more in the favor of value funds as there will be no expense ratio subtracted from their outperformance.
Besides, since when do you care at all about proof? This whole thread is a testament to your thoughtless and reflexive tendency to make claims completely divorced from reality.
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What are your answers to the following questions? (I should ask them one at a time, in Socratic fashion, but that would be tedious, so I'll list them all out at once. Hopefully the point is clear.)
Do you believe that all cars or houses for sale are exactly efficiently priced?
Do you think that all workers are paid exactly the highest salary they could get in the job market?
Do you think that all private businesses for sale in your local community are exactly efficiently priced?
Why wouldn't the same factors apply to businesses that are publicly listed, when the large majority of these publicly listed businesses have no analyst coverage and no institutions looking at them? Why are the prices of these publicly listed securities magically efficient, when so many things in the world aren't?
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What are your answers to the following questions? (I should ask them one at a time, in Socratic fashion, but that would be tedious, so I'll list them all out at once. Hopefully the point is clear.)
Do you believe that all cars or houses for sale are exactly efficiently priced?
Do you think that all workers are paid exactly the highest salary they could get in the job market?
Do you think that all private businesses for sale in your local community are exactly efficiently priced?
Why wouldn't the same factors apply to businesses that are publicly listed, when the large majority of these publicly listed businesses have no analyst coverage and no institutions looking at them? Why are the prices of these publicly listed securities magically efficient, when so many things in the world aren't?
I think these are all good points. Those who argue that the market is perfectly efficient seem delusional to me. There is no convincing argument for the momentum anomaly as a risk story for example.
But to me the most convincing argument for value effect is the empirical observation that no matter where you look, cheap stocks in aggregate outperform expensive stocks over long time horizons.
This may not be the way we wish for the market to work. But it is in fact the way the market works.
And I'm certainly not arguing that indexing is not one of the best strategies out there (if not the best.)
But indexing works precisely because it is cheap,and not because the market is perfectly efficient.
And I really have very little skin in this game personally as I am decidedly not a value investor, (though Admittedly I do favor a small value tilt for my buy and hold taxable accounts.)
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There are people who make a good living buying things like cars, pizza ovens, and anything else you can imagine at auctions, then reselling them.
It's easy to understand why they are able to make money. They are able to buy assets at less than they are worth.
I don't understand why it's so hard for some people to understand how you can do this with publicly trade securities as well. You are rewarded for your work done in identifying and buying securities that are currently priced at less than their worth.
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Because figuring out the value of a car is relatively easy, but the "worth" of a stock is based on unknown future profits, affected by unknown events and policies.
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Invert. If you cannot construct a diversified portfolio that will beat the 500 stocks chosen by Dow Jones and weighted by float, due to taxes and fees. Therefore, you cannot construct a diversified portfolio that will underperform either; taxes and fees being equal.
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Invert. You cannot construct a diversified portfolio that will beat the 500 stocks chosen by Dow Jones and weighted by float, due to taxes and fees. Therefore, you cannot construct a diversified portfolio that will underperform either; taxes and fees being equal.
Not sure that this is quite true - if you deposited 250k into a brokerage account and got 500 free trades (lots of brokerages out there offer this), you have no fees, and if you don't sell, you have no taxes. This means you actually have a lower outflow than a mutual fund since you're not paying management expenses (Vanguard's annual 5 bps) - of course, you don't have the ability to rebalance, but you could use dividends (which are taxed regardless of whether you receive them from stocks or from a mutual fund) to rebalance (purchases here would cost fees on an annual basis)
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Because figuring out the value of a car is relatively easy, but the "worth" of a stock is based on unknown future profits, affected by unknown events and policies.
Two fallacies with that statement:
1) "value" of a car is the market price quoted to you by a buyer or KBB or whatever source you have, this is the same as open price on the stock market - you could say that a car has unknown future maintenance expenses, or in the event of a technological discovery, it becomes obsolete - same idea here, you can only work off of the knowledge that you have, and that goes for stocks as well. Equities at the end of the day are only supported by the earnings power of the underlying business, stocks are not just pieces of paper - you get returns from appreciation as well as dividends. Historically, the dividend portion of the return has driven total return (above inflation) for investors, as appreciation can fluctuate wildly - just look at our host's indexview (from 1971 - 2015, real return was 6% with dividends and 3% without, from 2000-2015, real return was 2% with dividends and 0% without)
2) When you take a view that the worth of a stock is based on unknown FUTURE events, then you have no basis for investing in stocks as opposed to holding bonds. The reason people think equities will drive better returns than bonds is because HISTORICALLY that has been true. If you are saying that investors cannot know future prospects for a company (the pillar of investing in individual stocks), then you should also say that investors cannot know future prospects for the market as a whole (the pillar of indexing) - the market isn't an entity, it's just a collection of a multitude of different businesses. Buying individual stock means you are buying a share of the business's sales and profits. Buying an index means you are buying a share of many different business's sales and profits - and you're letting float dictate how to weigh those businesses in your capital allocation
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Invert. You cannot construct a diversified portfolio that will beat the 500 stocks chosen by Dow Jones and weighted by float, due to taxes and fees. Therefore, you cannot construct a diversified portfolio that will underperform either; taxes and fees being equal.
Not sure that this is quite true - if you deposited 250k into a brokerage account and got 500 free trades (lots of brokerages out there offer this), you have no fees, and if you don't sell, you have no taxes. This means you actually have a lower outflow than a mutual fund since you're not paying management expenses (Vanguard's annual 5 bps) - of course, you don't have the ability to rebalance, but you could use dividends (which are taxed regardless of whether you receive them from stocks or from a mutual fund) to rebalance (purchases here would cost fees on an annual basis)
I too doubt that it (either) is true.
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I too doubt that it (either) is true.
I see the point you were trying to make now
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Because figuring out the value of a car is relatively easy, but the "worth" of a stock is based on unknown future profits, affected by unknown events and policies.
Two fallacies with that statement:
1) "value" of a car is the market price quoted to you by a buyer or KBB or whatever source you have, this is the same as open price on the stock market - you could say that a car has unknown future maintenance expenses, or in the event of a technological discovery, it becomes obsolete - same idea here, you can only work off of the knowledge that you have, and that goes for stocks as well. Equities at the end of the day are only supported by the earnings power of the underlying business, stocks are not just pieces of paper - you get returns from appreciation as well as dividends. Historically, the dividend portion of the return has driven total return (above inflation) for investors, as appreciation can fluctuate wildly - just look at our host's indexview (from 1971 - 2015, real return was 6% with dividends and 3% without, from 2000-2015, real return was 2% with dividends and 0% without)
2) When you take a view that the worth of a stock is based on unknown FUTURE events, then you have no basis for investing in stocks as opposed to holding bonds. The reason people think equities will drive better returns than bonds is because HISTORICALLY that has been true. If you are saying that investors cannot know future prospects for a company (the pillar of investing in individual stocks), then you should also say that investors cannot know future prospects for the market as a whole (the pillar of indexing) - the market isn't an entity, it's just a collection of a multitude of different businesses. Buying individual stock means you are buying a share of the business's sales and profits. Buying an index means you are buying a share of many different business's sales and profits - and you're letting float dictate how to weigh those businesses in your capital allocation
Sorry, I still don't think the analogy makes sense. A car has immediate utility. I can get in and use it to drive from A to B. The utility of a stock is the promise of future returns, which are unknown and can change. Therefore finding "undervalued" is not as reliable and mostly a crap shoot.
Your point #2 I don't really know what you're saying. It sounds like just an argument for diversification. As these unknown events will affect different companies differently. No we can't know the future, therefore we buy thousand of stocks, not try to guess which ones are "undervalued".
"then you should also say that investors cannot know future prospects for the market as a whole (the pillar of indexing) "
eh, no shit? No we can't. And how is this "the pillar of indexing"? Pillar of indexing is buying the average and diversify at low cost.
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Sorry, I still don't think the analogy makes sense. A car has immediate utility. I can get in and use it to drive from A to B. The utility of a stock is the promise of future returns, which are unknown and can change. Therefore finding "undervalued" is not as reliable and mostly a crap shoot.
Your point #2 I don't really know what you're saying. It sounds like just an argument for diversification. As these unknown events will affect different companies differently. No we can't know the future, therefore we buy thousand of stocks, not try to guess which ones are "undervalued".
"then you should also say that investors cannot know future prospects for the market as a whole (the pillar of indexing) "
eh, no shit? No we can't. And how is this "the pillar of indexing"? Pillar of indexing is buying the average and diversify at low cost.
By your definition, the price then should be the only thing driving the value of a car, but if you pay $3000 for a 5 year old honda or for a 10 year old ford, they are different assets and you only know of their approximate reliability because of historical data. It's the same for evaluating businesses. Once you gain knowledge/understanding of businesses or do research into it, it's akin to doing research into car models and future reliability/maintenance costs - just because it's harder doesn't mean it's any less reliable than researching a car
Maybe this will clarify #2 - how do you know that buying "thousands of stocks" will result in more returns than a basket of bonds or a bucket of gold? Because it is based on historical research/statistics. The same is done to analyze stocks - we study history of businesses to know what constitutes as a comparative advantage. Just because there's more variables when you start to analyze businesses, doesn't mean that analysis is worth any less than academic studies done on stocks vs. bonds. In your position, you are positing that ONLY the academic studies of asset classes are useful, whereas others in this thread are positing that business analysis has just as much utility
Pillar of indexing is "buying thousands of stocks", hence, buying and betting on the future prospects of the market as a whole. Again, I refer you to my past post:
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
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Because it is based on historical research/statistics. The same is done to analyze stocks - we study history of businesses to know what constitutes as a comparative advantage. Just because there's more variables when you start to analyze businesses, doesn't mean that analysis is worth any less than academic studies done on stocks vs. bonds. In your position, you are positing that ONLY the academic studies of asset classes are useful, whereas others in this thread are positing that business analysis has just as much utility
ok, yes it can have utility and can (maybe, sometimes) be done. By people who do it as a full time, 60hrs/week job. But I'm going to guess that for 99% of the people here it does not. So don't see much point discussing it.
For the rest of us, i.e. pretty much everyone here, the historical return and academic studies is what matters and I feel safe that I'm not loosing anything by ignoring "intrinsic value".
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I agree with you there - for 99% of the people it's not worth the precious time that they have, and they'd be better off spending it on something they enjoy doing. You do perfectly fine investing in index funds, getting 6% REAL return and 10% overall return from 1971-2015 investing in the SP500, so you aren't losing anything, but arguing that it's utter crap for the people who enjoy doing it is why we have disagreements
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Because figuring out the value of a car is relatively easy, but the "worth" of a stock is based on unknown future profits, affected by unknown events and policies.
Do you think that all private businesses for sale in your local community are exactly efficiently priced? Aren't their prices also based on, as you say, "unknown future profits, affected by unknown events and policies"?
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Because figuring out the value of a car is relatively easy, but the "worth" of a stock is based on unknown future profits, affected by unknown events and policies.
Do you think that all private businesses for sale in your local community are exactly efficiently priced? Aren't their prices also based on, as you say, "unknown future profits, affected by unknown events and policies"?
Yes they are effected by unknown unknowns. So I don't buy local businesses. What's your point?
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Because figuring out the value of a car is relatively easy, but the "worth" of a stock is based on unknown future profits, affected by unknown events and policies.
Do you think that all private businesses for sale in your local community are exactly efficiently priced? Aren't their prices also based on, as you say, "unknown future profits, affected by unknown events and policies"?
Yes they are effected by unknown unknowns. So I don't buy local businesses. What's your point?
So you are denying that anyone makes good money as a local businessman or investor who routinely does this? Do you think all real estate is efficiently priced? Doesn't real estate depend also on many complex factors, many of which are completely unknowable, such as the direction of interest rates? Do you think arebelspy is just a lucky monkey throwing darts, or has he developed skill at real estate over many hundreds of hours of study and networking? What's so magical about businesses, that once they list, make them somehow completely un-evaluatable, unlike anything else in the world?
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My point, simply, is that you and others have a biased and inconsistent worldview that denies reality in thinking that no one can make money investing in stocks because they, magically, unlike anything else in the world, are efficiently priced simply because they are publicly listed.
Now, I'm not saying you aren't a good asset allocator, or that disciplined asset allocation won't get good results. It will, if you stick with it. I just don't understand the need to denigrate other ways of investing that do in fact work, saying that your way is the only way. I don't feel the need to say that things other than what I do can't work, or that my way is the only way. I don't see why that's necessary or helpful.
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Again, the analogy does not work. Real estate is based on knowledge of the local community, which require your you to at least visit it. (same with local business. But, no I don't think they make money. Thanks amazon.)
Info on listed stocks is available to anyone with a browser. The knowledge advantage is much less. Virtually zero. So maybe the share price isn't perfectly efficient all the time, but you can't know when, and guessing is such a crap shoot that it's pointless.
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I mean, what's your point? Are some stocks not efficient priced? Probably not always. So what? You still have no idea which are and which aren't. Just because you think found one doesn't mean it's right. It could just mean it's going down the tubes..
If you bought Google at the IPO you'd be rich. Ergo growth investing is awesome! ... Qed etc.
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My point, simply, is that you and others have a biased and inconsistent worldview that denies reality in thinking that no one can make money investing in stocks because they, magically, unlike anything else in the world, are efficiently priced simply because they are publicly listed.
Now, I'm not saying you aren't a good asset allocator, or that disciplined asset allocation won't get good results. It will, if you stick with it. I just don't understand the need to denigrate other ways of investing that do in fact work, saying that your way is the only way. I don't feel the need to say that things other than what I do can't work, or that my way is the only way. I don't see why that's necessary or helpful.
Oh! I'm so sorry Mr Buffett. I didn't mean to denigrate your prudent investment in junk food manufacturers. Good luck with that.
And I'm just the messenger. Blame lies with Bogle..
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Just because you do not know the details of the investing process does not mean there isn't a process. Annual reports and your internet browser are just the start of it. You mentioned visits and other local knowledge for real estate - that exists for stocks, too! Most companies have zero analyst coverage. There is no attention at all from institutions to them, because the companies are so small they are uninvestable. You often don't have to be the smartest player at the table - it's enough if you're at the table at all and have done the research. There are listed companies where they are delighted if you show up at the annual meeting and talk to the CFO, because no one does.
And even large-caps are frequently mispriced as well, but that's a story for another day.
Look, I definitely DO agree that buying mutual funds run by "value managers" and with "Value" in the name is not a wise thing to do. The fees are likely to eat away at the outperformance, and maybe more so. And I don't think a "value tilt" is likely to give great results going forward. Buying stocks that are cheap on simple ratios isn't good to work as well as it did in the 1950s, where it was not as easy to just get the data. With our world of cheap ETFs and tons of "smart beta," I think all that is going to be arbitraged away more or less.
But people are going to keep on finding ways to buy dollar bills for 50 cents (or 80 cents, depending on the level of valuation of the market). That's what value investing is, buying things for less than they are worth. And because the world changes, that approach will have to adapt and change as well.
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Just because you do not know the details of the investing process does not mean there isn't a process. Annual reports and your internet browser are just the start of it. You mentioned visits and other local knowledge for real estate - that exists for stocks, too! Most companies have zero analyst coverage. There is no attention at all from institutions to them, because the companies are so small they are uninvestable. You often don't have to be the smartest player at the table - it's enough if you're at the table at all and have done the research. There are listed companies where they are delighted if you show up at the annual meeting and talk to the CFO, because no one does.
And even large-caps are frequently mispriced as well, but that's a story for another day.
Look, I definitely DO agree that buying mutual funds run by "value managers" and with "Value" in the name is not a wise thing to do. The fees are likely to eat away at the outperformance, and maybe more so. And I don't think a "value tilt" is likely to give great results going forward. Buying stocks that are cheap on simple ratios isn't good to work as well as it did in the 1950s, where it was not as easy to just get the data. With our world of cheap ETFs and tons of "smart beta," I think all that is going to be arbitraged away more or less.
But people are going to keep on finding ways to buy dollar bills for 50 cents (or 80 cents, depending on the level of valuation of the market). That's what value investing is, buying things for less than they are worth. And because the world changes, that approach will have to adapt and change as well.
Re the bolded - Why do you think that low cost fund managers (such as Wellington, PRIMECAP, Mairs & Power, Dodge & Cox etc), cannot do this?
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They can, but with their size and other limitations, you might as well just do it yourself and save the fees.
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It's hilarious the level of arrogance of some on this board. They have the appearance of being so smart that they've figured out the best way of investing and everything else is inferior. I think it's just covering up a huge insecurity - that they themselves don't have the skills to outperform the market therefore it must be impossible. This was always Fama's issue as well.
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It's hilarious the level of arrogance of some on this board. They have the appearance of being so smart that they've figured out the best way of investing and everything else is inferior. I think it's just covering up a huge insecurity - that they themselves don't have the skills to outperform the market therefore it must be impossible. This was always Fama's issue as well.
I almost don't want to engage in these arguments, but I worry about the cocksureness of a lot of these prophets confusing people who are just starting out.
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The EMH is just a convenient tool for analysis, not really an attempt to describe real markets.
If you want to do any kind of analysis you have to make an assumption about how prices are set. Assuming they reflect availaible information is a reasonable choice. If everyone admitted "We have no clue what influences prices" then the whole field of finance is dead. Basic concepts such as alpha/beta, diversification, risk/reward and more all have their roots in EMH.
Note that anomalies like value or momentum investing can coexist with EMH, assuming that the additional return is offset by increased risk (ex: small-cap anomaly). Similar arguments can be made for momentum (skewed returns) and value (associated with distressed companies). Of course everything fell apart once the low-volatility anomaly was discovered, since there is no way to rationalize low risk companies as actually having more risk.
There are many reasons why publicly listed securities should be priced more efficiently than physical assets. They have low transaction costs, are perfectly fungible, free to transport, and all information is publically availaible. A comparison to real estate or employment isn't fair because of how sticky/illiquid those markets are, and because everyone has varying preferences.
The interesting thing about EMH is that it seems reasonable at first, then you realize it can't possibly reflect reality, but the harder you look the more unavoidable it becomes. The fact that long-term outperformance is so hard to achieve (especially on a risk-adjusted basis) shows that markets must be pretty damn efficient. Note that EMH only says that prices must reflect availaible information, not that they represent the true value of an asset at all points in time.
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It's hilarious the level of arrogance of some on this board. They have the appearance of being so smart that they've figured out the best way of investing and everything else is inferior. I think it's just covering up a huge insecurity - that they themselves don't have the skills to outperform the market therefore it must be impossible. This was always Fama's issue as well.
I find it hilarious the arrogance of people who think they can outperform a billion dollar industry, and the best paid people in the world, with a few hours on their ipad in the evening. I'm also tired of engaging in these (pointless) arguments, and will try to avoid it. I do worry someone just starting out will think it's a good idea, but now I'm not sure I give a shit. If they want to loose money have at it.
I will pick up some extra cash by becoming an NFL quarterback on the side. Someone else did it so it must be possible..
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The EMH is just a convenient tool for analysis, not really an attempt to describe real markets.
If you want to do any kind of analysis you have to make an assumption about how prices are set. Assuming they reflect availaible information is a reasonable choice. If everyone admitted "We have no clue what influences prices" then the whole field of finance is dead. Basic concepts such as alpha/beta, diversification, risk/reward and more all have their roots in EMH.
Note that anomalies like value or momentum investing can coexist with EMH, assuming that the additional return is offset by increased risk (ex: small-cap anomaly). Similar arguments can be made for momentum (skewed returns) and value (associated with distressed companies). Of course everything fell apart once the low-volatility anomaly was discovered, since there is no way to rationalize low risk companies as actually having more risk.
There are many reasons why publicly listed securities should be priced more efficiently than physical assets. They have low transaction costs, are perfectly fungible, free to transport, and all information is publically availaible. A comparison to real estate or employment isn't fair because of how sticky/illiquid those markets are, and because everyone has varying preferences.
The interesting thing about EMH is that it seems reasonable at first, then you realize it can't possibly reflect reality, but the harder you look the more unavoidable it becomes. The fact that long-term outperformance is so hard to achieve (especially on a risk-adjusted basis) shows that markets must be pretty damn efficient. Note that EMH only says that prices must reflect availaible information, not that they represent the true value of an asset at all points in time.
The EMH is absolutely my starting point in analysis. I need to have an "inefficient rationale" for why the current consensus is wrong and why my variant perception is instead correct. But it's foolish to state that because everything is perfectly efficient, value investing is nonsense.
Especially for small investors. It's true that once you get to certain size, it's really hard to outperform. I doubt I'll ever have this problem. It's not like I have $10 billion right now. I'm not only hunting for the elephants everyone is looking for. I'm also looking at minnows that no institutions are looking at, because the securities don't have the carrying capacity for them.
And the kicker is that the elephants are often inefficiently priced, too, if you just look at how wildly the market prices fluctuate, compared to the much lesser fluctuations of the underlying fundamentals.
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Look. It is possible to beat the market picking stocks.
It's just improbable. That's all.
Anyone with a rudimentary knowledge of investing knows this to be the case.
The market is not perfectly efficient, but it's damned hard to beat market returns.
I have no interest in individual stock selection for the most part, and am under no illusion that I have a special insight when it comes to stock selection. But to dismiss the possibility of outperformance as out of hand is to ignore those who have shown the talent to beat the market over long time periods in a statistically significant manner.
And none of this has anything to do with the obvious fallacy that was the original argument that value investing is utter crap!
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Well stated, Miles.
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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.
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.
It doesn't seem like anyone is advocating in favor of value funds outperforming, but I'll ask anyway. I understand the theories, I'm looking for evidence. Does anyone have evidence which contradicts the evidence/studies in the original post, which show that value funds don't outperform?
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I think that for the record, it should be stated that the original title of this post was "value investing is crap." This is important, because anyone reading this thread in retrospect with the changed title will think that anyone arguing that individuals can successfully pick undervalued stocks is arguing a straw man, where in fact it is the very opposite.
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According to the 20%/80% rule, which I follow religiously, value investing is utter crap.
Simple total market indexing results in higher net returns than more than 80% of actively invested $$ return after fees.
In most areas, rewards beyond 80% of the theoretically achievable require disproportionate effort and increasing risk of failure.
It often pays handsomely to just leave a good thing alone, particularly in a field where avoiding wrong calls is the main problem.
In other words: Optimal returns are not necessarily the highest returns.
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I think that for the record, it should be stated that the original title of this post was "value investing is crap." This is important, because anyone reading this thread in retrospect with the changed title will think that anyone arguing that individuals can successfully pick undervalued stocks is arguing a straw man, where in fact it is the very opposite.
Updated the original post to reflect this. I think it worked out well, the original title prompted many people who otherwise wouldn't have come into the thread, to share their opinion on value funds.
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I don't care about value funds.
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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.
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.
It doesn't seem like anyone is advocating in favor of value funds outperforming, but I'll ask anyway. I understand the theories, I'm looking for evidence. Does anyone have evidence which contradicts the evidence/studies in the original post, which show that value funds don't outperform?
Wrong again.
I advocated value funds outperforming in the past, and believe the trend will continue in the future. See post 50.
There is ample evidence of Value beating blend over long time horizons. See post 15.
The better question is why you believe the converse when you provide zero evidence of your hypothesis that value funds do not outperform.
And although I am a huge fan bogle, Bogle quotes do not count as evidence.
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There is ample evidence of Value beating blend over long time horizons. See post 15.
The better question is why you believe the converse when you provide zero evidence of your hypothesis that value funds do not outperform.
And although I am a huge fan bogle, Bogle quotes do not count as evidence.
To be fair, currently, Vanguard value etf (VTV) is lagging VTI - 7.29% in 10 years and 13.47% in 5 years vs 8.57% and 14.76% - respectively (same trends for midcap and small cap). Can't remember if that's total return or just appreciation tho - if dividends were not included, reinvestment (yield is 2.47% vs 1.84%) could possibly make value funds better
https://personal.vanguard.com/us/funds/etf/all?sortorder=asc&sortorder=asc&sort=name&sort=name&WT.srch=1#upperTB=perfTBI&lowerTB=avgAnnTBI
Also, the chart you posted seem to indicate that everytime there's a crash, the two funds converge in total price - enthusiasm for growth prior to 2000 led to temporary overperformance until the 2001 crash, and enthusiasm for value prior to 2008 led to temporary overperformance until the 09 crash. Perhaps the next crash will see value meet with total market yet again?
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Wrong again.
I advocated value funds outperforming in the past, and believe the trend will continue in the future. See post 50.
There is ample evidence of Value beating blend over long time horizons. See post 15.
The better question is why you believe the converse when you provide zero evidence of your hypothesis that value funds do not outperform.
And although I am a huge fan bogle, Bogle quotes do not count as evidence.
None of the posts mentioned contain an analysis of actual funds over time. The only sources I see here that do, are in the original post. John Bogle's word is not the source, the underlying data is.
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See post 50 again.
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There is ample evidence of Value beating blend over long time horizons. See post 15.
The better question is why you believe the converse when you provide zero evidence of your hypothesis that value funds do not outperform.
And although I am a huge fan bogle, Bogle quotes do not count as evidence.
To be fair, currently, Vanguard value etf (VTV) is lagging VTI - 7.29% in 10 years and 13.47% in 5 years vs 8.57% and 14.76% - respectively (same trends for midcap and small cap). Can't remember if that's total return or just appreciation tho - if dividends were not included, reinvestment (yield is 2.47% vs 1.84%) could possibly make value funds better
https://personal.vanguard.com/us/funds/etf/all?sortorder=asc&sortorder=asc&sort=name&sort=name&WT.srch=1#upperTB=perfTBI&lowerTB=avgAnnTBI
Also, the chart you posted seem to indicate that everytime there's a crash, the two funds converge in total price - enthusiasm for growth prior to 2000 led to temporary overperformance until the 2001 crash, and enthusiasm for value prior to 2008 led to temporary overperformance until the 09 crash. Perhaps the next crash will see value meet with total market yet again?
VTI has only existed since 2005. I'll give you credit for supplying data, unlike others, but I think that all would agree that nine years is not enough time to come to a meaningful conclusion about the relative performance of any two asset classes.
The other point I would make is that Vanguard style funds are very weak sauce. In other words their value funds are not very value-ey. But even so I suspect that if they were back tested back to the 70s or earlier, VTV would beat VTI.
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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.
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I'm tired of some of this nonsense. Here is some data going back to the 20's.
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There is ample evidence of Value beating blend over long time horizons. See post 15.
The better question is why you believe the converse when you provide zero evidence of your hypothesis that value funds do not outperform.
And although I am a huge fan bogle, Bogle quotes do not count as evidence.
To be fair, currently, Vanguard value etf (VTV) is lagging VTI - 7.29% in 10 years and 13.47% in 5 years vs 8.57% and 14.76% - respectively (same trends for midcap and small cap). Can't remember if that's total return or just appreciation tho - if dividends were not included, reinvestment (yield is 2.47% vs 1.84%) could possibly make value funds better
https://personal.vanguard.com/us/funds/etf/all?sortorder=asc&sortorder=asc&sort=name&sort=name&WT.srch=1#upperTB=perfTBI&lowerTB=avgAnnTBI
Also, the chart you posted seem to indicate that everytime there's a crash, the two funds converge in total price - enthusiasm for growth prior to 2000 led to temporary overperformance until the 2001 crash, and enthusiasm for value prior to 2008 led to temporary overperformance until the 09 crash. Perhaps the next crash will see value meet with total market yet again?
VTI has only existed since 2005. I'll give you credit for supplying data, unlike others, but I think that all would agree that nine years is not enough time to come to a meaningful conclusion about the relative performance of any two asset classes.
The other point I would make is that Vanguard style funds are very weak sauce. In other words their value funds are not very value-ey. But even so I suspect that if they were back tested back to the 70s or earlier, VTV would beat VTI.
Why are you so pro-Betterment if you do not like the Vanguard Value funds?
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I'm tired of some of this nonsense. Here is some data going back to the 20's.
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?
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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.
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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.
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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.
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There is ample evidence of Value beating blend over long time horizons. See post 15.
The better question is why you believe the converse when you provide zero evidence of your hypothesis that value funds do not outperform.
And although I am a huge fan bogle, Bogle quotes do not count as evidence.
To be fair, currently, Vanguard value etf (VTV) is lagging VTI - 7.29% in 10 years and 13.47% in 5 years vs 8.57% and 14.76% - respectively (same trends for midcap and small cap). Can't remember if that's total return or just appreciation tho - if dividends were not included, reinvestment (yield is 2.47% vs 1.84%) could possibly make value funds better
https://personal.vanguard.com/us/funds/etf/all?sortorder=asc&sortorder=asc&sort=name&sort=name&WT.srch=1#upperTB=perfTBI&lowerTB=avgAnnTBI
Also, the chart you posted seem to indicate that everytime there's a crash, the two funds converge in total price - enthusiasm for growth prior to 2000 led to temporary overperformance until the 2001 crash, and enthusiasm for value prior to 2008 led to temporary overperformance until the 09 crash. Perhaps the next crash will see value meet with total market yet again?
VTI has only existed since 2005. I'll give you credit for supplying data, unlike others, but I think that all would agree that nine years is not enough time to come to a meaningful conclusion about the relative performance of any two asset classes.
The other point I would make is that Vanguard style funds are very weak sauce. In other words their value funds are not very value-ey. But even so I suspect that if they were back tested back to the 70s or earlier, VTV would beat VTI.
Why are you so pro-Betterment if you do not like the Vanguard Value funds?
1. Irrelevant question to topic at hand.
2. I like betterment for their ease of use, maintenance free slice and dice portfolio with effortless tax loss harvesting and rebalancing.
3. I would choose different value ETFs if I were in charge of their security selection.
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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?
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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. (http://quotes.morningstar.com/chart/fund/chart.action?t=VIVAX®ion=usa&culture=en-US&dataParams=%7B%22zoomKey%22%3A10%2C%22version%22%3A%22US%22%2C%22showNav%22%3Atrue%2C%22defaultShowName%22%3A%22name%22%2C%22mainSettingId%22%3A%22main%22%2C%22navSettingId%22%3A%22nav%22%2C%22benchmarkSettingId%22%3A%22benchmark%22%2C%22sliderBgSettingId%22%3A%22sliderBg%22%2C%22volumeSettingId%22%3A%22volume%22%2C%22defaultBenchmark%22%3Afalse%2C%22id%22%3A%22FOUSA00FQW%7CFEUSA0002P%7CFOUSA00FQU%7CFOUSA00L8W%22%2C%22type%22%3A%22FO%7CFE%7CFO%7CFO%22%2C%22name%22%3A%22XNAS%3AVIVAX%7CARCX%3AVTI%7CXNAS%3AVTSMX%7CXNAS%3AVFIAX%22%2C%22baseCurrency%22%3A%22USD%22%2C%22defaultBenchmarks%22%3A%5B%22%22%2C%22%22%5D%2C%22chartType%22%3A%22growth%22%2C%22startDay%22%3A%2211%2F02%2F1992%22%2C%22endDay%22%3A%2204%2F03%2F2015%22%2C%22chartWidth%22%3A955%2C%22SMA%22%3A%5B%5D%7D)
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.
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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.
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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.
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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."
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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."
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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.
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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.
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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.
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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. (http://quotes.morningstar.com/chart/fund/chart.action?t=VIVAX®ion=usa&culture=en-US&dataParams=%7B%22zoomKey%22%3A10%2C%22version%22%3A%22US%22%2C%22showNav%22%3Atrue%2C%22defaultShowName%22%3A%22name%22%2C%22mainSettingId%22%3A%22main%22%2C%22navSettingId%22%3A%22nav%22%2C%22benchmarkSettingId%22%3A%22benchmark%22%2C%22sliderBgSettingId%22%3A%22sliderBg%22%2C%22volumeSettingId%22%3A%22volume%22%2C%22defaultBenchmark%22%3Afalse%2C%22id%22%3A%22FOUSA00FQW%7CFEUSA0002P%7CFOUSA00FQU%7CFOUSA00L8W%22%2C%22type%22%3A%22FO%7CFE%7CFO%7CFO%22%2C%22name%22%3A%22XNAS%3AVIVAX%7CARCX%3AVTI%7CXNAS%3AVTSMX%7CXNAS%3AVFIAX%22%2C%22baseCurrency%22%3A%22USD%22%2C%22defaultBenchmarks%22%3A%5B%22%22%2C%22%22%5D%2C%22chartType%22%3A%22growth%22%2C%22startDay%22%3A%2211%2F02%2F1992%22%2C%22endDay%22%3A%2204%2F03%2F2015%22%2C%22chartWidth%22%3A955%2C%22SMA%22%3A%5B%5D%7D)
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?
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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.
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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.
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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.
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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.
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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.
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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.)
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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.
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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.
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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.
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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?
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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. (http://quotes.morningstar.com/chart/fund/chart.action?t=VIVAX®ion=usa&culture=en-US&dataParams=%7B%22zoomKey%22%3A10%2C%22version%22%3A%22US%22%2C%22showNav%22%3Atrue%2C%22defaultShowName%22%3A%22name%22%2C%22mainSettingId%22%3A%22main%22%2C%22navSettingId%22%3A%22nav%22%2C%22benchmarkSettingId%22%3A%22benchmark%22%2C%22sliderBgSettingId%22%3A%22sliderBg%22%2C%22volumeSettingId%22%3A%22volume%22%2C%22defaultBenchmark%22%3Afalse%2C%22id%22%3A%22FOUSA00FQW%7CFEUSA0002P%7CFOUSA00FQU%7CFOUSA00L8W%22%2C%22type%22%3A%22FO%7CFE%7CFO%7CFO%22%2C%22name%22%3A%22XNAS%3AVIVAX%7CARCX%3AVTI%7CXNAS%3AVTSMX%7CXNAS%3AVFIAX%22%2C%22baseCurrency%22%3A%22USD%22%2C%22defaultBenchmarks%22%3A%5B%22%22%2C%22%22%5D%2C%22chartType%22%3A%22growth%22%2C%22startDay%22%3A%2211%2F02%2F1992%22%2C%22endDay%22%3A%2204%2F03%2F2015%22%2C%22chartWidth%22%3A955%2C%22SMA%22%3A%5B%5D%7D)
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.
(http://)
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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 (http://youarenotsosmart.com/2013/05/23/survivorship-bias/) 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. ”The only way you can spot it is to always ask: what am I missing? Is what I’m 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?
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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. (http://quotes.morningstar.com/chart/fund/chart.action?t=VIVAX®ion=usa&culture=en-US&dataParams=%7B%22zoomKey%22%3A10%2C%22version%22%3A%22US%22%2C%22showNav%22%3Atrue%2C%22defaultShowName%22%3A%22name%22%2C%22mainSettingId%22%3A%22main%22%2C%22navSettingId%22%3A%22nav%22%2C%22benchmarkSettingId%22%3A%22benchmark%22%2C%22sliderBgSettingId%22%3A%22sliderBg%22%2C%22volumeSettingId%22%3A%22volume%22%2C%22defaultBenchmark%22%3Afalse%2C%22id%22%3A%22FOUSA00FQW%7CFEUSA0002P%7CFOUSA00FQU%7CFOUSA00L8W%22%2C%22type%22%3A%22FO%7CFE%7CFO%7CFO%22%2C%22name%22%3A%22XNAS%3AVIVAX%7CARCX%3AVTI%7CXNAS%3AVTSMX%7CXNAS%3AVFIAX%22%2C%22baseCurrency%22%3A%22USD%22%2C%22defaultBenchmarks%22%3A%5B%22%22%2C%22%22%5D%2C%22chartType%22%3A%22growth%22%2C%22startDay%22%3A%2211%2F02%2F1992%22%2C%22endDay%22%3A%2204%2F03%2F2015%22%2C%22chartWidth%22%3A955%2C%22SMA%22%3A%5B%5D%7D)
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.
(http://)
You're welcome to make investing decisions based on 15 years data. I think that's ridiculous.
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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?
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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.
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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. (http://quotes.morningstar.com/chart/fund/chart.action?t=VIVAX®ion=usa&culture=en-US&dataParams=%7B%22zoomKey%22%3A10%2C%22version%22%3A%22US%22%2C%22showNav%22%3Atrue%2C%22defaultShowName%22%3A%22name%22%2C%22mainSettingId%22%3A%22main%22%2C%22navSettingId%22%3A%22nav%22%2C%22benchmarkSettingId%22%3A%22benchmark%22%2C%22sliderBgSettingId%22%3A%22sliderBg%22%2C%22volumeSettingId%22%3A%22volume%22%2C%22defaultBenchmark%22%3Afalse%2C%22id%22%3A%22FOUSA00FQW%7CFEUSA0002P%7CFOUSA00FQU%7CFOUSA00L8W%22%2C%22type%22%3A%22FO%7CFE%7CFO%7CFO%22%2C%22name%22%3A%22XNAS%3AVIVAX%7CARCX%3AVTI%7CXNAS%3AVTSMX%7CXNAS%3AVFIAX%22%2C%22baseCurrency%22%3A%22USD%22%2C%22defaultBenchmarks%22%3A%5B%22%22%2C%22%22%5D%2C%22chartType%22%3A%22growth%22%2C%22startDay%22%3A%2211%2F02%2F1992%22%2C%22endDay%22%3A%2204%2F03%2F2015%22%2C%22chartWidth%22%3A955%2C%22SMA%22%3A%5B%5D%7D)
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.
(http://)
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.
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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 (http://youarenotsosmart.com/2013/05/23/survivorship-bias/) again. It says:
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"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. ”The only way you can spot it is to always ask: what am I missing? Is what I’m seeing all there is? What am I not seeing?"
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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.
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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 (http://youarenotsosmart.com/2013/05/23/survivorship-bias/) 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. ”The only way you can spot it is to always ask: what am I missing? Is what I’m 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.
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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.
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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).
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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.
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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."
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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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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 ).
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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
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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.