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Old 05-24-2007, 11:50 PM   #21
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We could go back and forth about this, I think, but nothing actionable will come of it. It is sorta like dogma, you either believe or you don't. In the end, your portfolio will tell the tale!

I'll leave this with two more paper from fama/french:

SSRN-The Value Premium and the CAPM by Eugene Fama, Kenneth French

Quote:
We examine (i) how value premiums vary with firm size, (ii) whether the CAPM explains value premiums, and (iii) whether in general average returns compensate beta in the way predicted by the CAPM. Loughran's (1997) evidence for a weak value premium among large firms is special to 1963-1995, U.S. stocks, and the book-to-market value-growth indicator. Ang and Chen's (2003) evidence that the CAPM can explain U.S. value premiums is special to 1926-1963. The CAPM's general problem is that variation in unrelated to size and value-growth goes unrewarded throughout 1926-2004. This produces rejections of the model for 1926-1963 and 1963-2004.
and:
SSRN-The Anatomy of Value and Growth Stock Returns by Eugene Fama, Kenneth French

Quote:
We break average returns on value and growth portfolios into dividends and three sources of capital gain, (i) reinvestment of earnings, (ii) convergence in price-to-book ratios (P/B) due to mean reversion in profitability and expected returns, and (iii) upward drift in P/B during 1926-2003. The capital gains of value stocks trace mostly to convergence: P/B rises as some value firms become more profitable and move to lower expected return groups. In contrast, reinvestment, which is trivial to negative for value portfolios, dominates the capital gains of growth stocks. For growth stocks, convergence is negative: P/B falls because growth stocks do not always remain highly profitable with low expected returns.
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Old 05-25-2007, 09:16 AM   #22
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There's good eveidence that, over time, small cap and value stocks have eturned more than other stocks on a risk-adjusted basis. Obviously, that doesn't mean that these stocks will outperform every year, or even every decade. My portfolio is tilted toward these equities (using low cost Vangaurd index funds, mostly). I also believe more strongly in the value premium than the small stock premium.

Value stocks/MFs have two traits I like:
-- When irrational exuberance takes off, it is growth stocks (not value stocks) that bubble and burst. If a value stock catches the eye of speculators, it will soon be bid up to the point that it isn't a value stock anymore, and my MF will sell it. That's good for me.
-- Their dividend returns are higher than growth stocks. Returns from dividends are more stable than growth in stock prices, so this helps reduce annual variation in my returns.

But, with a portfolio like this, some years I won't match the S&P 500 index. And I sure won't have great stories to pass along at parties about stocks that have gone through the roof.
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Old 05-25-2007, 09:21 AM   #23
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Growth does have its day, but there arent many of them. Many more years of value trumping growth than the other way around.

I guess one way to look at it is that being a top notch growth company is pretty tough to sustain. Being a semi bad company or company with endemic problems with a beaten down stock price and a nice dividend, on the other hand, seems to be something sustainable for decades.

Somewhat more risk/reward in small companies with these 'problems' vs large companies. The large companies can have strategy/product/management/distribution problems for a lot longer before they hit the ground.

And as pointed out, every once in a while one of those sad little companies figures it out and becomes a good big company.

At which point you should sell.

Bernstein may have said it most succinctly when he said that bad stocks are good to own and good stocks are bad to own.

Half my IRA is in small cap value index, other half is in a target retirement fund...all dividends/gains from both go into the small cap value fund.
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Old 05-25-2007, 09:25 AM   #24
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Originally Posted by samclem View Post
There's good eveidence that, over time, small cap and value stocks have eturned more than other stocks on a risk-adjusted basis. Obviously, that doesn't mean that these stocks will outperform every year, or even every decade. My portfolio is tilted toward these equities (using low cost Vangaurd index funds, mostly). I also believe more strongly in the value premium than the small stock premium.
That is my opinion as well. It's hard to be enthusiastic about my small cap funds, but I do have them. The small cap tilt in my portfolio is not very marked. The value tilt is substantial.

I am about as far from an investment guru as you could find, though, so it would probably be stupid to be influenced by what I do. Instead, I would suggest Bernstein, Swedloe, and an AA that you feel comfortable maintaining for a long time.
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Old 05-25-2007, 09:25 AM   #25
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Who Killed Value?

Nice little read, with PICTURES! for those of us who are word impaired.

Interesting sidebar is noting the positive effect value stocks have during times of high inflation, reflecting back to our 'discussion' that wellesley (holding primarily value stocks in its equity portion) wasnt considered a decent inflation hedge.
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Old 05-25-2007, 11:32 AM   #26
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Quote:

This is my understanding:

- The EMH suggests that only way to obtain obtain greater return is to assume greater risk
- If that is the case then return should be a unique, montonically increasing function of beta (volatility) and beta should be the only statistically significant independent variable
- But the problem is that is not the case
- If you do the statistics it turns out both market cap and style are statistically significant and that greater returns are obtained for value (vs growth) and small cap (vs large cap)
- These returns are in excess of what one would expect from risk alone
- This is the justification for the so-called 3 Factor model that explains market return in term of risk, market cap and style
Does anyone still believe that beta is a good measurement of risk? It just blows me away that some think just because something is volatile then it is inherantly risky, because that's just not the case. For example, if you own the stock of a good, solid, profitable company that had been trading for $50 per share, and then the price immediatly went down to $25 per share, then beta would suggest that the price of $25 has more risk because of the big increase in volatility.

I really hate all the different asset "classes" that some focus on. To me there is only one logical "style" or "class" of investing, and that's value. I mean, when you make an investment you always need to make sure you get a good price, just like buying a house or a car. All those different asset classes were just devised by the financial community to help (trick) the general public feel good about their investments IMO, but they make little actual sense.
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Old 05-25-2007, 12:30 PM   #27
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Great article! Make sure you read to the caveat at the bottom:

Quote:
A warning: Fama and French’s HmL is a long-short portfolio and unattainable in actual practice. Even the hardcore upper-third DFA portfolios obtain a value loading of only about 0.65 or so, for a projected total excess return of about 2% per year, before expenses. The Vanguard value portfolios have slightly lower HmL ["high-minus-low" book value, in other words, the value-minus-growth return difference] loadings (in the .55 range) but with lower expenses. Happily, both organizations seem to manage negative transactional costs with surprising regularity.
Anyone know where to get these "value-load" numbers?
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Old 05-25-2007, 04:23 PM   #28
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Whether you can actually capitalize on the premium is another question, though.
Well if you ignore measurement and call it something else - a lefthanded vote is possible.

2006 I dumped my REIT Index and Sm Cap Value Index and rolled up into Target Retirement 2015 - in the name of my Chickenheartedness theory. REITs are well represented in sm cap.

Note that my 15% individual stocks - are probably over represented due to utilities and individual REITs - so by looking at div.'s - I'm indirectly chasing the sm. value premium or at least overweighting relative to market cap.

So I threw in the towel in 2006, but the Norwegian widow has changed the label on some of my small caps - and we're calling them something else.

heh heh heh - Clear as mud - right?
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Old 05-26-2007, 09:43 AM   #29
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Quote:
Originally Posted by cardude View Post

...I really hate all the different asset "classes" that some focus on. To me there is only one logical "style" or "class" of investing, and that's value. I mean, when you make an investment you always need to make sure you get a good price, just like buying a house or a car. All those different asset classes were just devised by the financial community to help (trick) the general public feel good about their investments IMO, but they make little actual sense.
There is a degree of truth in this for sure! The industry tries to make it more complex. This seems to be true in many industries in which the insiders develop ways of looking at the world that are probably totally irrelevant to the outsiders.

Yet when outsiders get enamored with these insider details, they sometimes forget the basics. Or worse, they just buy the story from the experts.

PS I think the word for this is
Quote:
Originally Posted by dictionary.com
obfuscate: to make obscure or unclear: to obfuscate a problem with extraneous information
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Old 05-26-2007, 10:03 AM   #30
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Or worse, people dig up formerly obscure asset classes that had interesting characteristics when they were obscure, then someone launches 47 ETF's that cater to every slant of that asset class.

Which then outperforms as everyone pours into it. Then it doesnt behave anything like it did when it was obscure.

An interesting phenomenon I think we're all about to become a lot more familiar with...
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Old 05-27-2007, 06:39 AM   #31
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every dog will have its day
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Old 05-27-2007, 12:43 PM   #32
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Originally Posted by cute fuzzy bunny View Post
Or worse, people dig up formerly obscure asset classes that had interesting characteristics when they were obscure, then someone launches 47 ETF's that cater to every slant of that asset class.

Which then outperforms as everyone pours into it. Then it doesnt behave anything like it did when it was obscure.

An interesting phenomenon I think we're all about to become a lot more familiar with...
And then there is this quote from The Oracle of Omaha:
http://www.jvbruni.com/Berkshire%202...ualmeeting.pdf
Quote:
If you are managing for long-term returns—20 years or more—
as a pension fund needs to do, it makes sense to invest wherever you
anticipate the highest returns. Buffett sees that in stocks. Today, however,
the popular—nearly ritualistic—approach is to buy A% large-cap growth
stocks, B% large-cap value stocks, C% mid-cap growth stocks, D% midcap
value, E% small-cap growth, F% small-cap value, G% “alternative”
investments, H% international stocks, I% long-term bonds, J%
intermediate-term bonds, K% short-term bonds, L% real estate, M%
precious metals and so on. Indeed, many of these categories are sometimes
further subdivided.

Compared to Buffett’s focus on wherever investment
returns seem most promising, the alphabet-soup approach will typically do
two things: (1) It will produce less short-term volatility, and (2) It will
produce lower long-term returns.
so as long as we retired folks have some runway, his advice might apply. And for the not yet ERed youngsters among us, it is even more relevant.
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Old 05-27-2007, 04:44 PM   #33
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I eat a lot of microwave popcorn(what ever brand is on sale) and check via guru focus and others what Warren is buying - don't often buy - but once every few years.

Over the last ten years - peak at stock holdings of Dodge and Cox, pssst Wellesley, Windsor, VG Health, Wellington also - once in a while.

heh heh heh - saves a lot of pain in the butt screening - weelllll some - also use Yahoo screener once in a while. Ya gotta watch out for that once in a while - pretty soon ya get hooked. Warren's picks are closest to my -drug- er stock picks.
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Old 05-28-2007, 02:25 AM   #34
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We divide stocks along a number of axes -- large-cap to small-cap, value vs. growth, US vs international, . . .

Not only are these axes not independent, many of them are not even well-defined. Value vs. growth?

You can quantify value vs. growth using PE. Think about that. Is stock performance in the future well defined based on stock price today? Is stock performance in the future well defined based on performance in the recent past? Clearly the answer to both questions is, "No". Yet through the magic of division, PE is going to tell us about the future.

PE is a good indicator of the future when earnings of the past are similar to earnings in the future. Similarly, value is a good indicator of future returns when performance of the recent past is similar to performance of the future. When the future is filled with dramatic changes, PE and value do not always pay off.

I'm not betting on value in the future. I'm not betting against value in the future. I'm hedging my bets by including value and growth.
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Old 06-15-2007, 07:28 PM   #35
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My logical reasoning would be that you are getting a larger payout (and higher volatility) due to a perceived and measurable (in aggregate) extra amount of risk you are taking. The often quoted 9-in-10 small businesses fail leads me to believe that you need to be paid extra for taking this risk of business failure. The 9-in-10 go to zero, but the ones that make it become winning lottery tickets as they graduate to mid-caps and then large-caps


Whether you can actually capitalize on the premium is another question, though.
Olav, small cap stocks are stocks with a market cap of 1 Billion or less.
Yahoo! Large-Cap and Small-Cap Funds Defined I would hardly consider a $900 million dollar company to be a "small business" subject to failing 9 out of 10 times.
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Old 06-16-2007, 11:38 AM   #36
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I would hardly consider a $900 million dollar company to be a "small business" subject to failing 9 out of 10 times.
True but there are companies with much much less and it is those that have the potential for a 10-bagger. Not as likely to get 10x from a $999 million company...
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Old 06-16-2007, 02:13 PM   #37
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I suspect small stocks out performance is reduced to near average when dollar weighting returns.

http://www.usc.edu/schools/business/...SA_IDICHEV.pdf
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Old 06-16-2007, 02:59 PM   #38
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True but there are companies with much much less and it is those that have the potential for a 10-bagger. Not as likely to get 10x from a $999 million company...
Companies with much less, less than $250 million, are excluded from small cap funds. They are considered micro-caps.
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Old 06-16-2007, 04:31 PM   #39
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I am not sure there is a generally accepted breakdown as far as market cap. They usually specify CSRP deciles, which can change in capitalization over time.

Microcap to one, can be small cap to others. We can say morningstar small cap, or fama-french small cap, or ....

And as you move up the deciles (to smaller companies), the return goes up.
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Old 06-16-2007, 05:14 PM   #40
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After browsing the posts on this topic I get the feeling that there is are some good comments here and a lot of mistaken ideas. Would suggest if an investor wants to get more facts that a good site is Vanguard Diehards on the Morningstar site or alternately the Bogleheads site.

BTW, recently Larry Swedroe observed this about the SV asset class:
"...most of the excess returns from small and value stocks comes NOT from the asset class as whole rising, but from a very small percentage of the stocks in the asset class MIGRATING from small to large and from value to growth. Thus the stocks remaing in the small and value asset classes are a DIFFERENT set of stocks than was the case previously". To see the entire post go to Diehards on 6/10/07 and check out Larry's reply #44.

Another comment, you may think you own small value but it may be difficult to get pure exposure to this asset class. For example, Vanguards VISVX only contains about 37% small value according to Morningstar. Apparently DFA offerings are purer but you need an advisor to get access to the funds.

Les
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