I am kidding around a bit here. I have been a Value oriented investor for years but I have also had a taste for Aggressive Growth investments as well. I also have not sold my REIT investments.muffins14 wrote: ↑Sun Mar 26, 2023 9:58 pmHopefully not fallen apart.nedsaid wrote: ↑Sun Mar 26, 2023 9:43 pmThank you for this post. I remembered somewhere that there was debate in the academic community regarding whether or not the Value effect could be explained by other factors. Very similar to the debate over REITs, academics say that the behavior of REITs can be replicated by a combination of Small Value/High Yield Bonds or Small Value/Corporate Bonds. So the existence of the Value factor is debated and REITs are no longer a distinct asset class.nisiprius wrote: ↑Sat Jun 18, 2022 7:49 pmSo people come out with papers where there are 100 factors. Of course, when you put them together, you find out that there really aren't 100...But there's something very very odd about the "five"-factor model, because it too can be criticized on exactly the same grounds. It has an extra factor in there. A Five-Factor Asset Pricing Model itself says:There isn't any "five-factor model!" The paper is saying clearly that you should either be using the value factor or replacing it with the investment and profitability factors.VI. HML: A Redundant Factor
We note above that the five-factor model never improves the description of average returns from the four-factor model that drops HML. The explanation is interesting. The average HML return is captured by the exposures of HML to other factors. Thus, in the five-factor model, HML seems to be redundant for explaining average returns.
Yet when I use e.g. the PortfolioVisualizer factor regression tool and select "Fama-French Research Factor" it offers a "Five-factor" model and shows numbers for
Market (Rm-Rf)
Size (SMB)
Value (HML)
Profitability (RMW)
Investment (CMA)
"Value" shouldn't be included if "investment" and "profitability" are!That is a very strong statement. Why, then, isn't the paper title "A Four-Factor Asset Pricing Model?"We note above that the five-factor model never improves the description of average returns from the four-factor model that drops HML.
Is the value factor is being retained for no better reason than tradition and old times' sake?
My whole world has fallen apart. Two things that I believed in as an investor are very much in doubt.
You could view this like we used to think there were atoms, then later we learned atoms are electrons, neutrons, and protons.
Value aka HmL is still a useful thing to measure, but if you wanted to, you could measure the other two factors instead and explain HmL
I see Value mainly in two ways: cheap beats expensive and low expectations are easier to beat than high expectations. I define "cheap" in terms of Price/Earnings, Price/Cash Flow, Price Sales. Price/Book is less meaningful today than 40 years ago. I think of businesses as sets of cash flows much more than I think of them as a mix of assets and liabilities. In other words, I take an Income Statement approach more than a Balance Sheet approach. Cash flows are the primary way, in my view, to value a company; the Balance Sheet is a secondary, though important consideration.
With Value, you take less of a pricing/valuation/expectations risk but earnings of Value companies are more volatile and often Value companies have more leverage.