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Old 10-22-2014, 04:56 PM   #21
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Just as food for thought: If it were true that dividend payers consistently outperform the market without additional risk, wouldn't the market have priced it in long ago, leading to the effect vanishing?
I will let RM answer the other questions, but I cannot help answering the above question. It is a very common, oft-repeated, and well-worn argument of the Efficient Market Hypothesis proponents.

They base it on the principle that the players are all rational, hence the market is efficient. But I can apply that to question anything else. If the stock market is that good, why aren't all people successful investors and able to retire early? If exercise and staying slim gives health and longevity, why are there so many obese people?

If dividend stocks outperform - I take a neutral stance here - but yet not priced out, it could be because of many reasons. One of which is may be that these stocks are boring, and not sexy like Google, Apple, etc..., and get thrown in the bargain bins.

Of all the arguments used by EMH proponents, the above is what I find the weakest. It in effect says that the market is efficient because it simply cannot be inefficient. Instead of looking at the actual data, it will dismiss a premise because it is just impossible. Why impossible? Because it contradicts their theory!
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Old 10-22-2014, 04:59 PM   #22
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Attached is a one hour speech by Peter Thiel.
Actually watched the first 90 seconds and had to stop. This guy is a terrible speaker. I bet he could present his material in 20 minutes if he wouldn't repeat every other sentence and kept saying "Um...uh...kinda....".
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Old 10-22-2014, 05:06 PM   #23
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Speaking of something being impossible, even Burton Malkiel, the author of the "A Random Walk down Wall St", told of this joke.

Two economists were taking a walk down the street while discussing an interesting topic, when they spotted a $20 bill on the sidewalk. One bent down, ready to pick it up when his friend stopped him.

The friend said "Don't bother. It's a mirage. If that $20 bill were real, somebody else would have picked it up long ago".
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Old 10-22-2014, 05:31 PM   #24
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Slays me how important some people think they are. RM posted a video, we can watch it or not. If someone is too important with too many pressing demands on his time, he doesn't need to watch it. But for those of us who maintain open minds, members who post videos and other information are quite valuable and I and many others appreciate it. Peter Thiel has likely accomplished more in business and finance than all the members who have ever posted here, or who ever will in the future. I think I will find the time to listen.

Ha

+1

I appreciate the post. Funny that some find the time to add pointless comments. It seems like a better use of time would be to move on...

RM, please continue to post. Some, maybe even many, find it useful. Speaking for myself, this is one of the reasons I read this forum.
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Old 10-22-2014, 06:37 PM   #25
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It would have been hard to achieve anything else. Those were, overall, excellent years for stocks. The large drop in 2008 meant you were buying at a discount early on. Also, small sample size.


I doubt it, and so does science. It doesn't matter whether a company pays out its profits to shareholders, or invests them to grow the value of the business. Only the tax treatment might be different. This is all really well researched - you could look it up!

Not meaning to rain on your parade, though. Personally, I think investing in individual stocks rather then index funds is fine. That is, if you have a large enough portfolio to keep transaction costs small and do a good job to cover all segments of the market, domestic as well as international. Global exposure to all kinds of different businesses requires dozens of stocks, after all. And focusing too much on dividend payers will likely lead to a portfolio heavy with large value stocks.

Lastly, what many folks on this board correctly criticize is not so much holding individual stocks, but the believe that stock picking and market timing will result in outperformance. Going with low cost index funds is just much simpler, and just as likely to succeed. That being said, I, as many others, do buy the occasional stock in my "fun money account". It's simply much more interesting, and it makes me feel good if I'm right. But for serious investing, I trust Mr. Market more than my own investment skills.
I have been subscribe to the newsletter pretty much beginning. Since 2005, it has beaten the S&P by 30%, which sounds like a lot but is only 1.5% annual more than S&P500. My portfolio returns are almost exactly the same over the last 10 years. (I own roughly 80% of the stocks in his portfolio,and have hung on to a lot that he sold)

More importantly for me as a retiree is there is lower volatility with our portfolio (there is a variety of source documenting this) . This allows me to sleep well with higher concentration of stocks than most people have.

I do think people have tendency to view index funds as a panacea. The average investor in an index fund underperformed the index by a considerable margin, 1.5% less/year for the Vanguard S&P 500 investor and 1.3% less for the Vanguard Total Bond investor over the last 10 years. People who own index funds are just as likely to buy high and sell low as others. Buying index fund is easy not selling them at the wrong time is harder.

I found Peter's talk interesting. I am definitely in the optimistic camp and more deterministic than indeterminstic. The world needs more people like Peter Thiel who believe you make you own luck. I also think it needs people who believe they can pick stocks. If every index fund disappeared tomorrow it really won't affect me. If every stock picker disappeared tomorrow all the index fund folks would be in world of trouble.

Unfortunately, Peter is much better thinker and entrepreneur than a speaker.
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Old 10-22-2014, 07:39 PM   #26
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The thing about dividend payers is they tend to be large, boring stocks without the opportunity at huge gains.
This is one of the reasons the entire market doesn't dive into them.

For me, I prefer individual stocks as I can control the capital gains and have control over which businesses I choose to invest in and which I don't.
Much lower volatility of my income stream and lower transaction fees also make individual dividend stocks appealing to me.

It isn't for everyone, but it certainly isn't like the day trading/gambling some people equate it to.
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Old 10-22-2014, 09:31 PM   #27
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I don't have any issues with owning individual stocks, even though I don't own any right now. If that's your interest and you have the time to spend researching companies, then I think you can do well. It'll always be debatable if you can do better than the market, because the reality is that sometimes you will and sometimes you won't.

The main reason I buy index funds is because it's easy. I don't have the time or primarily, the longer-term focus/persistence, to keep track of business's of individual stocks and their corresponding performance. For those that do, then they seem to do pretty well. Many of the members on the forum fit into this category, not to mention quite a few well known investors not on this forum.

The key piece, and what Clif points out above, is that just because you buy index funds doesn't mean that you are better off. I think regardless of how you invest, you need to be consistent. A person that speculates by buying individual stocks without due diligence is probably going to have the similar problems if he buys index funds.

I think most of the folks on the forum, regardless if they buy index funds or individual stocks, do well overall. This is because they have the right temperament for investing.

And as a side-note to another of Clif's comments, I track my yearly performance in my AA to the benchmark indexes. For the most part, they pretty much line up. It's not perfect, because I'm still buying/selling at various times in the year, but it's around .5% +/- of my benchmark allocation. I wouldn't be surprised if that's true for many other index-fund investors on the forum.
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Old 10-22-2014, 09:36 PM   #28
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Read the article. It leaves open a couple of questions about the methodology:
- Did Siegel adjust for survivorship bias?
- Are the 2.5% extra return related to higher risk?
- How did he pick the "highest paying 100 dividend stocks" - ex ante or ex post? If he selected them after the fact, that would be pointless.

Will follow up on this once I've had more time to read up on the topic. I find this quite interesting.

Just as food for thought: If it were true that dividend payers consistently outperform the market without additional risk, wouldn't the market have priced it in long ago, leading to the effect vanishing?
Siegel didn't need to adjust for survivor bias, he took the top 100 dividend yielding stocks at the start of each year, then readjusted at the end of the year. As to how you pick the 100 highest yield stocks, you take the annual dividend at January 1 divide by the pricce and get a yield percentage. You then take the 100 highest and hold for a year.

As to risk, I would assume but do not know that the dividend stocks actually had a lower beta and as such were probably less risky.

And yes Peter Thiel is a poor speaker, though I really enjoyed his thoughts.
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Old 10-22-2014, 09:52 PM   #29
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Good video, Running_Man, thanks for posting it. I'd read many references about Peter Thiel and appreciate an opportunity to hear him.

Having sat through more 1K presentations, his style wasn't that bad. He's clearly not a professional communicator, but I'll take his substance over more polish any day.

His message on technology has some common aspects with Marc Andreessen's views on innovation. Food for thought.
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Old 10-23-2014, 03:51 AM   #30
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As to how you pick the 100 highest yield stocks, you take the annual dividend at January 1 divide by the pricce and get a yield percentage. You then take the 100 highest and hold for a year.
But you do not know the dividend for any given year already on January 1. We would need to know whether Siegel just looked at the data for, say, 1957 and compiled a list of the 100 companies with the highest dividend relative to their January 1 stock price. That kind of ex-post exercise would be pointless IMO. What you need are expected dividends at the beginning of each year, and I can't imagine how to get that information for decades past. Alternatively, maybe Siegel simply used 1956's dividends to estimate 1957. I haven't made up my mind whether that would yield an acceptable result.

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Siegel didn't need to adjust for survivor bias, he took the top 100 dividend yielding stocks at the start of each year, then readjusted at the end of the year.
So you are saying his list for 2002 would have included WorldCom, despite the fact that they failed to pay any dividend and were bankrupt by the end of the year. Would be good to get our hands on his actual study and/or data to verify this.
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Old 10-23-2014, 04:10 AM   #31
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Speaking of something being impossible, even Burton Malkiel, the author of the "A Random Walk down Wall St", told of this joke.

Two economists were taking a walk down the street while discussing an interesting topic, when they spotted a $20 bill on the sidewalk. One bent down, ready to pick it up when his friend stopped him.

The friend said "Don't bother. It's a mirage. If that $20 bill were real, somebody else would have picked it up long ago".
That's a good one, I remember it from the book. I always took it as a comment on the long-term vs. short-term perspective of the EMH: If you notice that 20$ bill today for the first time, of course you'll try to pick it up. It was probably dropped just a minute ago. But, if it has been lying around for years on a busy street, and you see it everyday on your way to work, you can be reasonable sure it's fake, painted on the sidewalk, or tied to a string that some kid will pull as soon as you bend over.

In other words, I'm not a proponent of the EMH in it's strict form. It seems pretty clear that, in the short run, there are market inefficiencies that can be exploited. I remember buying a small amount of shares in Deutsche Bank in 2011, after it was brutally beaten down by worries about the financial sector as a whole. Well-run company overall, solid financials, but it was dirt-cheap. I made over 60%+ in a few months. Currently trying to repeat with Lufthansa.

But I digress. My point is, the idea that dividend payers outperform, while having similar or even below-average risk, has been around forever. You can argue that those stocks are not "sexy" for individual investors, but don't you think that hedge funds, pension funds etc. would gladly buy them? The big guys (I'm shying away from the term "smart money") would exploit this kind of long-term market inefficiency to the point that it would go away.
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Old 10-23-2014, 05:00 AM   #32
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But I digress. My point is, the idea that dividend payers outperform, while having similar or even below-average risk, has been around forever. You can argue that those stocks are not "sexy" for individual investors, but don't you think that hedge funds, pension funds etc. would gladly buy them? The big guys (I'm shying away from the term "smart money") would exploit this kind of long-term market inefficiency to the point that it would go away.
I think one of the advantages that individuals have over institutional money is we aren't required to avoid certain type of stocks.

For instance, I suspect the vast majority of the alpha I've made over the last decade has been due to Master Limited Partnership. Which have benefited both by declining interest rates, and the US energy boom. For tax reasons mutual funds can't own MLPs, and there is only one ETF with really high expenses and strange selections.

Likewise, the rise of social responsible investing has meant that a small amount of mutual funds and respectable amount of pension funds won't invest in tobacco, liquor, or gun companies and guess the latest trend
is greenhouse gas polluters. A lower demand for sin stocks means higher returns for the rest of us. for example tobacco stocks have had 21% CAGR over the last 15 years vs 4.6% for the S&P 500.

In the case of regular dividend stocks,while they are great for pension funds and the Wellesley of the world. There is a large class of money which won't go near them because they aren't sexy and aren't going to deliver home runs. If you are hedge and get to keep 20% of the profits above a threadhold, you aren't going to be sticking your money, in Coke, or P&G, or JNJ.
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Old 10-23-2014, 06:06 AM   #33
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A lower demand for sin stocks means higher returns for the rest of us. for example tobacco stocks have had 21% CAGR over the last 15 years vs 4.6% for the S&P 500.
Less demand results in higher prices? How would that work?

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In the case of regular dividend stocks,while they are great for pension funds and the Wellesley of the world. There is a large class of money which won't go near them because they aren't sexy and aren't going to deliver home runs. If you are hedge and get to keep 20% of the profits above a threadhold, you aren't going to be sticking your money, in Coke, or P&G, or JNJ.
You are addressing the issue that fund managers are incentivized to take higher risks. I'm not sure whether hedge funds' incentive schemes are as simple as you described, but it's certainly possible.

Still, I'm not buying the notion that there is a subset of stocks that consistently beats the market, while showing lower volatility. If that were true, hedge funds would have picked up on it. They would go long dividend stocks, short the rest of the market, and have a free lunch. I'm not going to convince any of you, and you are of course free to believe whatever you want. But I think you are wrong.
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Old 10-23-2014, 07:12 AM   #34
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Less demand results in higher prices? How would that work?
Megan McArdle addresses this in one her columns. I'll reproduced the relevant portion here.
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Letís work it through with a little example. Letís say thereís a stock market with $1 million invested in it by 100 investors, each of them with $10,000 in the market. In that market, there are 10 stocks, each of which has a market capitalization of $100,000. All the stocks are priced to yield a risk-adjusted 5 percent a year in some combination of dividends and capital appreciation, which means that everyoneís $10,000 portfolio earns $500 per annum, because they are good students of economics and they buy index funds rather than trying to beat the market.
Yes, this is a gross oversimplification, but itís enough to illustrate our point.
Now imagine that one of our 10 stocks makes a controversial product -- call it Evil Sludge. Twenty of our investors -- call them the Moral Minority -- decide that they do not want to be involved in the production of Evil Sludge. Each of them has 10 shares of Big Evil Inc., which they sell, and they use the money to purchase an equally weighted portfolio of all the other shares.
The immediate effect is that the price of Big Evil falls, while the price of all the other shares rise. Thatís the first-order effect. That seems to be where a lot of people are stopping in their mental model of divestment.
But letís think about the second-order effect. The price of the other nine companies has now risen, so a $1,000 investment buys you fewer shares. What does that mean?
It means that the potential return has fallen. A $1,000 investment in a nonsludge stock used to earn you $50 a year. But now you arenít getting as many shares for your $1,000. So maybe it earns you $45 a year. In financial jargon, the returns are inversely related to the price: All else being equal, the higher the price you pay, the lower the return; the lower the price, the higher the return.
But hey, Evil Sludge is evil, and the Moral Minority is willing to take a little financial hit in order to send a message to Big Evil.
OK, but what about the other investors? They donít care about Big Evil; they care about returns. And just as the returns on other stocks fell when the Moral Minority decided to shift their portfolios, the potential returns on Big Evil Inc. have now risen; a $1,000 investment may now net you $55 or $60 a year. The rest of the investors can make free money by selling some of their other stocks to the Moral Minority and buying up Big Evil. Where does this process stop? When the returns on Big Evil fall to the same level as the returns on all the other stocks.
Now this adjustment very well may have taken place in the case of tobacco, both MO and PM are expensive IMO. But it is been profitable to invest in sin. I am looking forward to making money on the polluters as more institutional money sells them.

Quote:
You are addressing the issue that fund managers are incentivized to take higher risks. I'm not sure whether hedge funds' incentive schemes are as simple as you described, but it's certainly possible.

Still, I'm not buying the notion that there is a subset of stocks that consistently beats the market, while showing lower volatility. If that were true, hedge funds would have picked up on it. They would go long dividend stocks, short the rest of the market, and have a free lunch. I'm not going to convince any of you, and you are of course free to believe whatever you want. But I think you are wrong.
In addition the Siegel study which is worth reading. Josh Peter in his Dividend book points out 3 different studies from the early 2000s showing an out performance of dividend stocks.

More recently there are fair number of recent studies from place like Standards & Poor. This Seeking Alpha article discuss them.

Quote:
  1. From 1980 to 2005, S&P 500 dividend payers outperformed non-payers by more than 2.6 percentage points per year.
  2. S&P 500 Dividend Aristocrats beat the S&P 500 Index over the last 1, 3, 5, 10, 15, and 20-year periods as of March 31, 2012, with lower volatility as measured by standard deviation.
  3. Dividend payers have been shown to outperform non-payers in a range of different interest rate environments. I found this item reassuring, as we are in a historically low-rate environment now, and eventually rates will tick upward.
There very well be hedge funds doing just what you suggest, it is hard to know. I will point out to the 85 year performance of Wellington as example of investment strategy that focus on almost exclusively on dividend stocks (for the 60% equity portion). Anyway I'm always suspicious this out performance can continue indefinitely, so I'd happy to read research point out that I am wrong, cause dividend stocks aren't cheap now days.
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Old 10-23-2014, 08:51 AM   #35
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In addition to Clifp's points above I think of it like this using an example of a long term holding of mine Altria (MO)

A stock like Altria growing dividend at 8% per year should probably be priced to have the market dividend yield of about 2% not 4.42 % and as high as 5.5% in recent years. The market is/was pricing the stock for only an inflation adjusted return as punishment for being in the tobacco industry. When the Altria earns 8% additional income and raises the dividend 8% the next year the price rises 8%, you earn the 5% dividend and the 8% price increase for a 13 % gain and the market still does not realize the true value of the stock because of it's association with tobacco.

Now there are years like this current year when the market say, wait a minute this Altria really can earn money and raises the stock price and MO is up 24% YTD in a flattish to slightly up market, for a 29% total return and still the stock has not reached what the true value should be. But if you compare this stock and expect 8% growth and 4.4% dividend you can reasonably expect a 12.4% annual return vs the 8% growth and 2% return or 10% of the comparable market stocks. The MO investor's job is to determine if there is a reason for this pattern to change in the intermediate term or not and then hold through the negative press the stock will garner that makes the return possible to obtain.

Using this as an example of what is discussed in the video, this is a optimistic deterministic approach to stock investing. And by looking for these types of stocks and working to see that the assumptions are correct often I wonder why this is not so obvious to everyone, but I realize many are in the world that returns must be indeterminate and therefore only the portfolio approach can work, and since in total the market average is what is earned by the market, my excess returns cannot be possible or else must be a result of taking abnormal risks. But I think there are a large number of investors who think dividends are bad for either tax or not properly allocating capital or else as Clifp says do not provide enough upside to be worth the investment and avoid the stocks and leads to these continual outsized gains.
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Old 10-23-2014, 10:25 AM   #36
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The market is/was pricing the stock for only an inflation adjusted return as punishment for being in the tobacco industry.
(emphasis mine)

Hm. How do you know investors are not wary to buy it for other reasons, like a fear of law suits, higher taxes on their products, more regulation of tobacco sales, and so on?
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Old 10-23-2014, 10:40 AM   #37
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Megan McArdle addresses this in one her columns. I'll reproduced the relevant portion here.
[...]
This Seeking Alpha article discuss them.
Thanks for the material. The example is interesting - I need to think about that a bit more before commenting. Will also read the Seeking Alpha article, but it might take me a few days.

What you, clifp, and Running_Man described in your latest posts is the phenomenon that stocks can be undervalued for a while. I agree that this happens and can be exploited (see my earlier posts), which means the EMH in its strict form does not hold true. But this has nothing to do with dividends.

I need to do more research on the topic. Hopefully I can get my hands on one or two of the studies clifp quoted. It's always tough to argue about research without being able to review the data and methodology.

One quick comment on this: "dividend payers outperformed non-payers".
Apart from my still open question whether dividend stocks were selected ex ante or ex post, could this result from a bias in sampling? If you compare against non-dividend payers, you will include some companies which are in financial distress and currently unable to pay out a dividend. Maybe the question is more, which companies are solid and which are in danger of going under? In this case, dividends might indeed be a signal towards investors. OTOH, WorldCom paid a dividend, and Berkshire Hathaway doesn't..
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Old 10-23-2014, 01:17 PM   #38
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Is there a free lunch?

Yes, Virginia, but there is a caveat.

Many people here already know what I am about to say, but please indulge me if you find this boring.

I am not familiar with dividend stock strategy by Siegel, nor follow "sin" stocks. But I know about the Farma-French study that shows that value stocks outperform growth stocks. Does that come with an increase in volatility? I am not sure, but will get back to this later.

The effect is called "value tilt". How large is this effect? Over a long period, it's HUGE. Historical data shows that from Jan 1980 to Dec 2010, a period of 31 years, $10K invested in large cap growth stocks became $187K, but in small cap values, it became $602K. In the same period, investing in S&P 500 yielded $281K.

Note that the above are ideal values. One has to buy stocks in an MF or ETF and that incurs some costs. So, using Vanguard flagship VFINX, you would get $263K instead of $281K.

The data above is from a Web page by Fidelity (see below). The page by Fidelity shows all 6 categories: large-cap value/growth, mid-cap value/growth, small-cap value/growth, but not for S&P. So, I took the S&P and VFINX numbers from Morningstar. The data shows that value soundly beats growth in all 3 market cap categories after 31 years.

So, if value stocks are that great, what's the gotcha? Are they more volatile? If so, then that is the cost of the lunch, some say.

Looking at the data, I don't think that's the case. Instead, I believe what happens is that when value beats growth, it is only by a small amount. But when value trails growth, it is by a huge amount. In 1999, growth stocks jumped 50%, while value stocks were flat.

Yet, in the long run, value beats growth so soundly. The hare and the tortoise again. Nothing can beat the index every single year, because investors will flock to the winners and drive them into bubble territory and they crash hard subsequently. By the same token, individuals bailed out of value stocks during go-go years, and piled on to growth stocks which crashed hard when the bubble burst. Money managers did not do that well either, because they were pressured by their constituents to keep up with the index. In a year like 1999, if you were flat while the S&P was bid up 50%, you would be called stupid and lost your job. And so, you were not able to keep your career, so that later you could say that you beat the index and proved the "coin tossing monkey" argument wrong.

So, there is a "free lunch", but you have to be willing to wait for it, and investors are simply too impatient.

For more, see: https://www.fidelity.com/learning-ce...owth-investing.
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Old 10-23-2014, 03:09 PM   #39
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Originally Posted by RISP View Post
But you do not know the dividend for any given year already on January 1. We would need to know whether Siegel just looked at the data for, say, 1957 and compiled a list of the 100 companies with the highest dividend relative to their January 1 stock price. That kind of ex-post exercise would be pointless IMO. What you need are expected dividends at the beginning of each year, and I can't imagine how to get that information for decades past. Alternatively, maybe Siegel simply used 1956's dividends to estimate 1957. I haven't made up my mind whether that would yield an acceptable result.


So you are saying his list for 2002 would have included WorldCom, despite the fact that they failed to pay any dividend and were bankrupt by the end of the year. Would be good to get our hands on his actual study and/or data to verify this.
You are kidding right? Almost every single stock quote site shows the current dividend yield which would be based on the most recent dividend approved by the board of directors. If World Com was in the S&P 500 at the start of 2002 of course they would be included. Feel free to email Jeremy Siegel for the actual data, maybe he has it available.
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Old 10-23-2014, 06:57 PM   #40
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Originally Posted by NW-Bound View Post
Is there a free lunch?
So, if value stocks are that great, what's the gotcha? Are they more volatile? If so, then that is the cost of the lunch, some say.
I haven't looked at the long term stats but on daily basis it seems like the change is x2 for my value funds vs S&P 500. I.e. if S&P 500 goes up 1% the value indexes go up 2% and vice versa.

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Looking at the data, I don't think that's the case. Instead, I believe what happens is that when value beats growth, it is only by a small amount. But when value trails growth, it is by a huge amount. In 1999, growth stocks jumped 50%, while value stocks were flat.
Well there are those years in 2000 and 2001 when small value trounced s&p 500. I think vanguards version of the funds were up +30.9% and +25.7% (on arithmetic difference).

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So, there is a "free lunch", but you have to be willing to wait for it, and investors are simply too impatient.
I don't think it's a free lunch but I have a huge chunk of my AA devoted to it.
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