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Old 10-23-2014, 07:05 PM   #41
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Re: Free Lunch

Also a value tilt approach, the best I've seen is the magic formula/little book thing. I think it stands a better chance than standard value tilt since you're not competing with fund managers (the market cap on the companies in the magic formula approach are too small for the fund managers to bother with).
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Old 10-23-2014, 07:21 PM   #42
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Also to tie NW-Bound value (fama-french) thread with Siegel's dividends, my understanding is that there is significant overlap between value stocks and dividend payers. I.e. dividend stocks will tend to load on value as per Fama-French's model.

This article compares various "value" metrics of which D/P is one:

Swedroe: Not All Value Metrics Are Equal | ETF.com

Sengsational -- do you have a link for the "magic formula"? I'm not familiar with that.
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Old 10-23-2014, 07:36 PM   #43
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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.
What you say may be true. I do not pay attention to the small cap ETFs that I have, because I own some stocks that have beta much higher than 2.

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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).
That's simply the revenge of the small caps after they trailed the S&P by 50% in 1999. Reversion to the mean, baby!

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I don't think it's a free lunch but I have a huge chunk of my AA devoted to it.
Well if one can ignore the higher daily fluctuations, it looks like a free lunch to me. And of course, one must also have the stomach to see it significantly underperforming the S&P some years. If one considers the price to pay to get 2X performance over a longer period, I do not think it is that dear.

And of course, how about owning both value and growth, watching them, then do some rebalancing?
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Old 10-23-2014, 11:32 PM   #44
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I just sold my last individual stocks, 70 shares of AAPL., yesterday I will not pay attention to the price of AAPL any more, nor their products. I do not to plan to own any individual stocks from now on.
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Old 10-24-2014, 12:10 AM   #45
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Originally Posted by photoguy View Post
Also to tie NW-Bound value (fama-french) thread with Siegel's dividends, my understanding is that there is significant overlap between value stocks and dividend payers. I.e. dividend stocks will tend to load on value as per Fama-French's model.

This article compares various "value" metrics of which D/P is one:

Swedroe: Not All Value Metrics Are Equal | ETF.com

Sengsational -- do you have a link for the "magic formula"? I'm not familiar with that.
Exactly. I consider myself a value investor, who mostly invests in dividend stocks. Although Berkshire is my largest investment for the obvious reason that Buffett, even with all the handicaps of size is a better value investor than I'll ever be.

I think dividend stocks are mostly value stocks, and most value stocks pay dividend. So they are mostly interchangable in my mind.

I think not only do value stocks offer modestly higher returns than growth stock they do so with moderately lower volatility. Which really is a free lunch. This value tilt persist for long periods not despite the lower volatility but because of it.

I have a one word explanation.

TESTOSTERONE

I and I believe many of the folks on the forum especially us more active investor could have ended up on Wall St. I don't know about the rest of you, but I was way more aggressive investor in my 20s than now days. Rather than write options, I bought them, rather than buying boring value stocks, I bought hot technology growth stocks. Bonds are you kidding . I had to buy mutual funds in my IRA/401K, and while I did own some S&P 500 index, I also owned plenty of Janus, and other small company growth funds.

Imagine a newly minted MBA from a top school, got a job on Wall St. He probably is familiar with Farma, and he know that he could outperform the index with a value tilt, and buy boring stocks but to what end. Great he beats the S&P 500 by 5% over 3 years with his value tilt, big deal. Do you think they give $5 million bonus on Wall Street for 5% beats, or give promotions for that?. Of course not. Who cares that 70% of money manager don't beat the index, I know I am one of the 30%, and that is how I get ahead. I have the balls to make big risky bets (especially with other people's money.).

As an older more patient investor, I am happy to exploit the young guns raging hormones. Now obviously you can do this with a value oriented index funds and such. I guess I have just enough testosterone left to do it with individual stocks.

So somewhat ironically, the folks that do the best on average, are those that don't follow Peter's advice and try and chart a completely new course.
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Old 10-24-2014, 05:04 AM   #46
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Just wanted to point out that if you buy the highest yielding dividend payers with a good track record you do the following:
  • Limit yourself to solid companies. You can only fake dividends for a few years.
  • Buy the cheapest ones in that list (with the highest yield)
So I would wager that it's not the dividend per se that gives you the outperformance, but that sustained dividend payment is still a very good sign of being a solid company. You'll probably (haven't tested) get similar results if you buy dividend aristrocrats with the lowest P/E ratio (with E average over 5 years or so). Dividend payers have a high payout ratio usually so there is a strong correlation between earnings and dividends.



As for why it works: by definition you buy the cheapest companies, so that gives you an advantage.


The other aspect is I believe psychology: solid stable companies give you a few % every year 'extra' over a period of 5 years or so. That's too long a time frame for a lot of investment managers and individuals, while in any given year the solid company may underperform.


2% outperformance in the long run however adds up when indexing gives you 4%. It basically increases your results by 50%
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Old 10-24-2014, 01:42 PM   #47
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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.
Of course I'm not kidding. Did you even read my post? There are two possible issues with that: (a) Is this a good estimate? Dividends can be reduced or cancelled. (b) Assuming we want to use those estimates, what do we take for past years? I don't think Morningstar will tell you the expected dividend yield for any past years, much less for 1957. Can you find this information in old copies of the WSJ? I honestly don't know - do you?
Your suggestion to contact Mr. Siegel about his methedology is a very good idea.
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Old 10-24-2014, 01:58 PM   #48
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Imagine a newly minted MBA from a top school, got a job on Wall St. He probably is familiar with Farma, and he know that he could outperform the index with a value tilt, and buy boring stocks but to what end. Great he beats the S&P 500 by 5% over 3 years with his value tilt, big deal. Do you think they give $5 million bonus on Wall Street for 5% beats, or give promotions for that?. Of course not.
Why limit yourself to 5% (or 2%, or whatever)? If you truly belief that such a "free lunch" exists, this generates an exploitable arbitration possibility. By buying dividend payers and shorting non-dividend payers at the same time, you could generate risk free excess returns. And you could even leverage this strategy through the use of derivatives to generate as much money as you want.

I challenge all of you who really believe in such a glaring instance of mis-pricing to give it a shot. Please post your results, and good luck. I think you'll need it. But if it works, please remember who told you about that idea.
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Old 10-24-2014, 02:01 PM   #49
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2% outperformance in the long run however adds up when indexing gives you 4%. It basically increases your results by 50%
You seem to be mixing up the 4% that is often considered a safe WR with the average stock return, which is generally believed to be closer to 10%. So even the proponents of this dividend approach claim that it pushes returns from about 10% to about 12%. Still huge, yes, but nowhere near a 50% increase.
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Old 10-24-2014, 02:05 PM   #50
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Originally Posted by photoguy View Post
Also to tie NW-Bound value (fama-french) thread with Siegel's dividends, my understanding is that there is significant overlap between value stocks and dividend payers. I.e. dividend stocks will tend to load on value as per Fama-French's model.

This article compares various "value" metrics of which D/P is one:

Swedroe: Not All Value Metrics Are Equal | ETF.com

Sengsational -- do you have a link for the "magic formula"? I'm not familiar with that.
Magic Formula Investing

After reading the book and seeing people use it in internet investment simulations, I think it could still work in the future because the big players can't be bothered with these little companies that, if the big boys bought, would move the price so much.
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Old 10-24-2014, 02:45 PM   #51
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I think it could still work in the future because the big players can't be bothered with these little companies that, if the big boys bought, would move the price so much.
Thanks for the info on magic formula.

I know one big criticism of small value funds (e.g. vanguard's) is that they are not particularly small (nor valuey). I do have some other funds like bridgeway's BRSIX (avg market cap 228M) but the expense ratio is killer (0.75) so I'm not sure if it's worth it.
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Old 10-24-2014, 05:07 PM   #52
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Why limit yourself to 5% (or 2%, or whatever)? If you truly belief that such a "free lunch" exists, this generates an exploitable arbitration possibility. By buying dividend payers and shorting non-dividend payers at the same time, you could generate risk free excess returns. And you could even leverage this strategy through the use of derivatives to generate as much money as you want.

I challenge all of you who really believe in such a glaring instance of mis-pricing to give it a shot. Please post your results, and good luck. I think you'll need it. But if it works, please remember who told you about that idea.

Now you are just being silly. As NW pointed when value stocks lag they do so by a lot. If you had bought value and shorted growth in 1999 you would have been broke, even Buffett who started talking about the internet bubble in 98, and gave a famous speech in summer of 99, would have been hurting following such a strategy. I did short AOL, Amazon and some other internet company back then, but fortunately had lots of tech stock long. In early 2000 when sold all my tech stocks, I very reluctantly reversed my shorts. Being retire it is very rare I short stock now days, I just don't need the added risk.

This ETF CHEP does exactly what you propose it shorts growth stocks and goes long on value stocks. It has 4 star M* star rating and 3 year return of 3.81% (it has high expenses but pretty close to my 5% number) despite being market neutral 200 long value 200 short growth stocks.

Since you are positive this strategy won't work, I suggest you short this ETF and take the free money.
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Old 10-24-2014, 05:12 PM   #53
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It is not impossible to get ahead buying individual stocks but it is improbable.

That being said, boy do I wish I had bought more Gilead earlier this year (or about a decade ago before it had gained 40,000%)
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Old 10-24-2014, 05:33 PM   #54
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A correction I need to make about volatility: I was talking about small value stocks being more volatile than the S&P. I have a MF that is 100% large value, and the thing does not budge much. One can also look at an MF like Wellington and see that it has lower volatility than its 60%-equity AA would suggest.

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... If you had bought value and shorted growth in 1999 you would have been broke, even Buffett who started talking about the internet bubble in 98, and gave a famous speech in summer of 99, would have been hurting following such a strategy....
"The market can stay irrational longer than you can stay solvent" - John Maynard Keynes

If you survived through the tech stock bubble of 1999, the arbitrage would indeed work out as shown by the data on the Fidelity Web page whose link I provided earlier. But in the dot-com bubble, you would have been wiped out in early 2000.

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This ETF CHEP does exactly what you propose it shorts growth stocks and goes long on value stocks. It has 4 star M* star rating and 3 year return of 3.81% (it has high expenses but pretty close to my 5% number) despite being market neutral 200 long value 200 short growth stocks...
Interesting. I never heard of this ETF. There's an ETF now for everything one can dream of. Out with MF. In with ETF.

In the heyday of 1999, there were more MFs than traded stocks! Just like there are more recipes than food ingredients. The ETFs added another dimension with leveraging and shorting. Whoo Hoo!
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Old 10-24-2014, 05:37 PM   #55
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I have created a basket in my Roth of about 30 dividend stocks that are steady Eddies.

Anybody on here have any buy suggestions? I own companies like KO,UPS,LMT,GE,T,MCD,CVX,JNJ,NYCCB,etc.

I own ETFs and index funds mostly but it has been enjoyable to learn about individual companies as you buy them and add to positions.

Its amazing how the dividends add up throughout the year.

I sure wish the IRS would raise the IRA contribution limits.
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Old 10-25-2014, 03:24 PM   #56
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This ETF CHEP does exactly what you propose it shorts growth stocks and goes long on value stocks. It has 4 star M* star rating and 3 year return of 3.81% (it has high expenses but pretty close to my 5% number) despite being market neutral 200 long value 200 short growth stocks.
We were discussing the merits of dividend payers vs. non-dividend payers. "The index rebalances monthly by identifying the most undervalued stocks as long positions and the most overvalued stocks as short positions" - no mention of dividends.

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Since you are positive this strategy won't work, I suggest you short this ETF and take the free money.
Hm. That won't work, will it? If I'm right, and there is no systematic mis-pricing in the market, CHEP should break even. After all, I'm not saying that dividend payers perform worse.
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Old 10-25-2014, 03:43 PM   #57
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We were discussing the merits of dividend payers vs. non-dividend payers. "The index rebalances monthly by identifying the most undervalued stocks as long positions and the most overvalued stocks as short positions" - no mention of dividends.



Hm. That won't work, will it? If I'm right, and there is no systematic mis-pricing in the market, CHEP should break even. After all, I'm not saying that dividend payers perform worse.
As has been pointed out dividend stocks and value stocks are essentially synonymous.

Well shouldn't they perform worse, in an efficient market they are less volatile, but yes I do agree it isn't a full proof way of making money.

As aside with all of these ETF out there pursuing different strategies, I wonder if you shorted them all wouldn't you come out ahead because they have pretty high expenses 1-2%... Admittedly most are hard to short.
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Old 10-25-2014, 03:48 PM   #58
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As aside with all of these ETF out there pursuing different strategies, I wonder if you shorted them all wouldn't you come out ahead because they have pretty high expenses 1-2%... Admittedly most are hard to short.
I recently saw an article arguing that it should be easy to beat the market. How?

The author pointed out that since most investors trailed the index, one should just do the reverse of the crowd.
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Old 10-25-2014, 04:34 PM   #59
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You seem to be mixing up the 4% that is often considered a safe WR with the average stock return, which is generally believed to be closer to 10%. So even the proponents of this dividend approach claim that it pushes returns from about 10% to about 12%. Still huge, yes, but nowhere near a 50% increase.
Not really mixing it up.

Should have explained myself better: the 4% I refer to is a (conservative?) estimate of the real return in the long run, after inflation. Which indeed equates to the safe withdrawal rate, almost by definition.

So what 2% does is increase the safe withdrawal rate from 4% to 6%, which is a huge pay hike.

The 10% you refer to includes inflation, which isn't available to spend unless you have a short time horizon (less than 15 years or so). So it's not correct to calculate the impact of a higher result on your retirement funds that way.

Even if you take 5.5% as probable real return, 2% is still a 36% increase.

A 36%-50% increase in my budget is a big deal for me.
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Old 10-26-2014, 02:23 AM   #60
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Not really mixing it up.

Should have explained myself better: the 4% I refer to is a (conservative?) estimate of the real return in the long run, after inflation. Which indeed equates to the safe withdrawal rate, almost by definition.

The 10% you refer to includes inflation, which isn't available to spend unless you have a short time horizon (less than 15 years or so). So it's not correct to calculate the impact of a higher result on your retirement funds that way.
The oft-cited 4% SWR is meant for a portfolio of 60% stocks and 40% bonds, IIRC. Stocks are riskier than bonds, and consequently have higher returns. That's called the equity risk premium.

I have never seen an estimate as low as 4% for real stock returns. Seems you are overly pessimistic. This calculator (CAGR of the Stock Market: Annualized Returns of the S&P 500) claims to use Robert Schiller's market data. It returns a real CAGR for the S&P 500 of 6.86% for the period 1871-2013.
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