Excellent Prof. Robert Novy-Marx Podcast

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matjen
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Excellent Prof. Robert Novy-Marx Podcast

Post by matjen »

I thought this was very informative on a range of topics. Especially for factor types. He does not speak marketing. I excerpted one part for those who may continue to worry about the value premium. I'm guessing there is a bit less of that recently.


https://www.youtube.com/watch?v=YsWgWrpzdAM
https://rationalreminder.ca/podcast/149

Today’s guest is Professor Robert Novy-Marx, the Lori and Alan Zekelman Distinguished Professor of Business Administration at Simon Business School of the University of Rochester. Professor Novy-Marx is best known for his articulation of the profitability factor and has also done a ton of great work on momentum and low volatility.

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So, here's a question I know many listeners are asking in their mind right now about the value factor. So does the recent decade, plus or minus, run of underperformance impact your view of the value premium?

For me, not really very much. At my heart, I'm a profitability guy. It's kind of my baby, but if you were to press me on which long-term premia, I believe most strongly in, other than the equity premium, it's the value premium. It's really just because prices are directly observable and the fact that low prices are signals of high discount rates, it's an accounting identity. It's very hard to come up with a world where low prices aren't at least somewhat associated with higher expected rates of return. So as soon as I'm in a world where I kind of admit, and I do strongly believe that there's differences in expected rates of return across stocks, there are kind of a value premium comes about.
Now, I've already said I don't think these premia can be too large. It's just there's what they call good deal bounds in academic finance. There's just, I don't believe in these super high sharp ratios that some people claim, and it's just the nature of arbitrage. I'm willing to believe there are lots of nickels lying around and if you are efficient at picking up the nickels, it can be worth looking for them. But I don't think there are a lot of hundred dollars bills lying around waiting to get picked up.

What does that mean? Well, it means that if the sharp ratios aren't that big, it means there have to be long run periods of underperformance. If not, if there were no long-run periods of under-performance of any of these risk factors, they're not risky, then they'd be obviously good deals.
It's the same thing with the market. We saw the whole 2000s were a lost decade for equity investors, but at the end of that run where the market was down over a 10-year period, no one was saying, "Well, the equity premium, is it gone?" I mean, we thought it was coming back. We just had a decade of under-performance and it's the kind of thing you expect.
I always expected to live through some decade where value had a negative premium, realize the negative premium, but that doesn't mean that I think the expected premium is gone. I wake up every morning expecting value stocks to outperform growth stocks by a couple of basis points. I expect to be right 50.5% of the time over my lifetime, but that means there are long periods where it's not true.
Really just for economic reasons, I kind of think there has to be an expected value premium, but again, I'm not surprised that there was a long period of under-performance. It's unfortunate, since I believe in value and invest in it, but it doesn't make me think value has gone away.
A man is rich in proportion to the number of things he can afford to let alone.
YRT70
Posts: 1289
Joined: Sat Apr 27, 2019 8:51 am

Re: Excellent Prof. Robert Novy-Marx Podcast

Post by YRT70 »

Great podcast. There's a good discussion about it on the Rational Reminder forum.
David Althaus
Posts: 418
Joined: Wed Feb 14, 2018 7:05 pm

Re: Excellent Prof. Robert Novy-Marx Podcast

Post by David Althaus »

Found it extremely informative. It may well be confirmation bias but I found the entire discussion an elegant unstated argument for the three fund portfolio. His findings pretty much show you will have to endure tracking error to meaningfully participate in factors.
1. 3 Fund essentially eliminates tracking error and provides for more confident (not perfect) planning. As I grow older market risk is plenty of risk,
2. As you eliminate tracking error you need not assume how you will handle decades or so of underperformance. This usually manifests by doing exactly the wrong thing at exactly the wrong time. Who of us can legitimately assert we are immune to this behavior trait? One need only look at threads here in spring 2020 about selling REITS to buy gold.
3. Eliminating tracking error probably also means you are more likely to stay the course at your IPS asset allocation. Good enough.

All the best
YRT70
Posts: 1289
Joined: Sat Apr 27, 2019 8:51 am

Re: Excellent Prof. Robert Novy-Marx Podcast

Post by YRT70 »

David Althaus wrote: Sat May 15, 2021 8:55 am Found it extremely informative. It may well be confirmation bias but I found the entire discussion an elegant unstated argument for the three fund portfolio. His findings pretty much show you will have to endure tracking error to meaningfully participate in factors.
1. 3 Fund essentially eliminates tracking error and provides for more confident (not perfect) planning. As I grow older market risk is plenty of risk,
2. As you eliminate tracking error you need not assume how you will handle decades or so of underperformance. This usually manifests by doing exactly the wrong thing at exactly the wrong time. Who of us can legitimately assert we are immune to this behavior trait? One need only look at threads here in spring 2020 about selling REITS to buy gold.
3. Eliminating tracking error probably also means you are more likely to stay the course at your IPS asset allocation. Good enough.

All the best
Nothing wrong with the market portfolio of course but even that can underperform riskless T bills for long periods, and has done so many times. During many of those periods a tilt to small value would have helped. For example: 2000-2009 TSM returned -0.3%, SCV returned 9.1% annually.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
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