The amount of uncertainty is equivalent to the risk, which is certainly relevant.Nathan Drake wrote: ↑Mon Apr 24, 2023 4:34 pmThe amount of uncertainty isn’t relevant. What is relevant is by virtue of discounting certain stocks, the market is pricing these stocks with a higher expected premiumrkhusky wrote: ↑Mon Apr 24, 2023 10:27 am At least with bonds you know the nominal return. With stocks you don’t know the nominal or real return. And a value for the expected return is suspect unless you can make a convincing argument for the future probability distribution.
The uncertainty in stocks is so much greater than for bonds that comparing the difference between two categories of bonds to the difference between two categories of stocks to the difference between stocks and bonds makes little sense. They are at least an order of magnitude apart.
Bond category differences are small with low uncertainty. Stock category differences are small with high uncertainty. Bond category vs stock category differences are large with high uncertainty.
And I note that in factor equations, the market return is compared to a risk free investment, typically a short term Treasury.
AVUV - difficult to hold
Re: AVUV - difficult to hold
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Re: AVUV - difficult to hold
Then you agree Value stocks have higher risk due to increased uncertainty over earnings and growth and therefore are priced for higher expected returnsrkhusky wrote: ↑Mon Apr 24, 2023 7:21 pmThe amount of uncertainty is equivalent to the risk, which is certainly relevant.Nathan Drake wrote: ↑Mon Apr 24, 2023 4:34 pmThe amount of uncertainty isn’t relevant. What is relevant is by virtue of discounting certain stocks, the market is pricing these stocks with a higher expected premiumrkhusky wrote: ↑Mon Apr 24, 2023 10:27 am At least with bonds you know the nominal return. With stocks you don’t know the nominal or real return. And a value for the expected return is suspect unless you can make a convincing argument for the future probability distribution.
The uncertainty in stocks is so much greater than for bonds that comparing the difference between two categories of bonds to the difference between two categories of stocks to the difference between stocks and bonds makes little sense. They are at least an order of magnitude apart.
Bond category differences are small with low uncertainty. Stock category differences are small with high uncertainty. Bond category vs stock category differences are large with high uncertainty.
And I note that in factor equations, the market return is compared to a risk free investment, typically a short term Treasury.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: AVUV - difficult to hold
VISVX has outperformed VTSMX over its lifetime.
DFSVX has outperformed VTSMX over its lifetime.
DISVX has outperformed VGTSX over its lifetime.
DFEVX has outperformed VEIEX over its lifetime.
I don't understand why MCW advocates point to past couple of years of outperformance, but completely disregard the longer term. At the very least, we should agree that past performance doesn't guarantee future results for any strategy, but we shouldn't point to past performance simply when it works in our favor.
Re: AVUV - difficult to hold
I think the uncertainty in future total return for value stocks is about the same as for growth stocks. The market has an expectation that the future total return of growth stocks will be higher than for value stocks, compared to current total return, hence their higher price. In that sense, average return expectations is the big driver for price for these market segments.Nathan Drake wrote: ↑Mon Apr 24, 2023 7:34 pmThen you agree Value stocks have higher risk due to increased uncertainty over earnings and growth and therefore are priced for higher expected returnsrkhusky wrote: ↑Mon Apr 24, 2023 7:21 pmThe amount of uncertainty is equivalent to the risk, which is certainly relevant.Nathan Drake wrote: ↑Mon Apr 24, 2023 4:34 pmThe amount of uncertainty isn’t relevant. What is relevant is by virtue of discounting certain stocks, the market is pricing these stocks with a higher expected premiumrkhusky wrote: ↑Mon Apr 24, 2023 10:27 am At least with bonds you know the nominal return. With stocks you don’t know the nominal or real return. And a value for the expected return is suspect unless you can make a convincing argument for the future probability distribution.
The uncertainty in stocks is so much greater than for bonds that comparing the difference between two categories of bonds to the difference between two categories of stocks to the difference between stocks and bonds makes little sense. They are at least an order of magnitude apart.
Bond category differences are small with low uncertainty. Stock category differences are small with high uncertainty. Bond category vs stock category differences are large with high uncertainty.
And I note that in factor equations, the market return is compared to a risk free investment, typically a short term Treasury.
For individual stocks, uncertainty in total return is a bigger driver of prices. For two stocks with similar total return expectations, the one with lower uncertainty in total return will command a higher price. Similarly, if two stocks have similar uncertainty, the one with higher return expectations will fetch a higher price. If stock investors had control over return, the stocks with higher uncertainty would command a higher return.
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Re: AVUV - difficult to hold
If this is the case, then why do we have quantifiable measures of higher volatility in aggregate for Value stocks vs Growth stocks, as well as persistently higher value premiums as showcased in the chart I posted previously in this thread?rkhusky wrote: ↑Mon Apr 24, 2023 8:54 pmI think the uncertainty in future total return for value stocks is about the same as for growth stocks. The market has an expectation that the future total return of growth stocks will be higher than for value stocks, compared to current total return, hence their higher price. In that sense, average return expectations is the big driver for price for these market segments.Nathan Drake wrote: ↑Mon Apr 24, 2023 7:34 pmThen you agree Value stocks have higher risk due to increased uncertainty over earnings and growth and therefore are priced for higher expected returnsrkhusky wrote: ↑Mon Apr 24, 2023 7:21 pmThe amount of uncertainty is equivalent to the risk, which is certainly relevant.Nathan Drake wrote: ↑Mon Apr 24, 2023 4:34 pmThe amount of uncertainty isn’t relevant. What is relevant is by virtue of discounting certain stocks, the market is pricing these stocks with a higher expected premiumrkhusky wrote: ↑Mon Apr 24, 2023 10:27 am At least with bonds you know the nominal return. With stocks you don’t know the nominal or real return. And a value for the expected return is suspect unless you can make a convincing argument for the future probability distribution.
The uncertainty in stocks is so much greater than for bonds that comparing the difference between two categories of bonds to the difference between two categories of stocks to the difference between stocks and bonds makes little sense. They are at least an order of magnitude apart.
Bond category differences are small with low uncertainty. Stock category differences are small with high uncertainty. Bond category vs stock category differences are large with high uncertainty.
And I note that in factor equations, the market return is compared to a risk free investment, typically a short term Treasury.
For individual stocks, uncertainty in total return is a bigger driver of prices. For two stocks with similar total return expectations, the one with lower uncertainty in total return will command a higher price. Similarly, if two stocks have similar uncertainty, the one with higher return expectations will fetch a higher price. If stock investors had control over return, the stocks with higher uncertainty would command a higher return.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: AVUV - difficult to hold
Here are some of the issues:JSPECO9 wrote: ↑Mon Apr 24, 2023 8:04 pmVISVX has outperformed VTSMX over its lifetime.
DFSVX has outperformed VTSMX over its lifetime.
DISVX has outperformed VGTSX over its lifetime.
DFEVX has outperformed VEIEX over its lifetime.
I don't understand why MCW advocates point to past couple of years of outperformance, but completely disregard the longer term. At the very least, we should agree that past performance doesn't guarantee future results for any strategy, but we shouldn't point to past performance simply when it works in our favor.
1) total market has no beginning date and total market funds have far less survival bias
2) new factor funds are created every year and defined from their inception date
3) the factor funds that overperform tend to survive
4) many of these funds on your list would not exist today if they had underperformed --> factor money goes to the top performers
5) you ignore all the other factors that people could have invested in that resulted in negative value
Factor proponents only talk about the best performing factor funds. "AVUV knows how to do it". "Vanguard is doing it wrong with VIOV".
Picking an advantageous inception date and only focusing on the best performing factor funds produces an incorrect perception of factors. Ignoring the historical fees produces a bigger advantage than actually existed.
Because factor investors have very little standards on which to define factor performance they will always be choosing overperforming backtests as their representation of what happened. I have to laugh when people say all we had to do was choose international small cap value - as if we knew that in advance. Factor investors will always think they have a bigger advantage than they do - "because AVUV knows how to do it" "because all we had to do was choose international small cap value".
While there are individuals who can separate these things, much of of the factor crowd produces a very biased view of factors based on the above criteria. Remember the market is just one factor which studies show we can't actionably use valuations to move in and out of. Active stock funds can on average beat the market factor but not after fees. But suddenly factor spreads tell us how to move in and out of the value factor. Studies show how we choose stocks doesn't work but suddenly how we choose our factors matters. Factor investors equate all these things as factors and treat factors that are not the market much differently - it is like they haven't learned any of the lessons about the market factor. If you learned that you can't actionably time the stock market factor, then you can't do this for other factors.
If we are going to give other factors different properties than the market...
1) how we own them matters
2) we can actionably move in and out of them
3) we have to choose the right combination of them
I move we start calling them figments instead of factors. Use your imagination because with these definitions we will always be able to create figments that outperform the market average and we will never have to predict in advance what is actually going to work. With these definitions factors literally can't fail - even if they don't exist.
The factor community is a mess because of their lack of definitions and the resulting inability to form or test a hypothesis. People will just change definitions to make factors "true" because something will always have outperformed the average. You have to have testable definitions of factors for them to be fairly evaluated. Lacking this, we know what the investment community will do. If AVUV underperforms you will just have a new candidate that "knows how to do it better".
There is nothing wrong with factor theory but factor investors should demand far more:
- consistent, testable, and timeless definitions
- forward predictions that can eventually be proven true/false
- agreed upon standard of references for value performance, momentum performance, etc.
Without these you are just picking the overperformers after the fact and you don't know if you actually have anything actionable.
Re: AVUV - difficult to hold
Yet the past is just that -- the past. I could point to any various actively managed funds that have beat total market over the long term, and would you then have the confidence to invest in them based on past results? Doubtful. I am simply not convinced by "financial science" of these funds like Avantis. If those factors/sectors outperform, that's fantastic since they are already included in VTI. I see no need for myself, or any rational investor, to tilt a portfolio based on backtesting data and claiming that the right ratio of this or the right weighting of that will result in long term future outperformance.JSPECO9 wrote: ↑Mon Apr 24, 2023 8:04 pmVISVX has outperformed VTSMX over its lifetime.
DFSVX has outperformed VTSMX over its lifetime.
DISVX has outperformed VGTSX over its lifetime.
DFEVX has outperformed VEIEX over its lifetime.
I don't understand why MCW advocates point to past couple of years of outperformance, but completely disregard the longer term. At the very least, we should agree that past performance doesn't guarantee future results for any strategy, but we shouldn't point to past performance simply when it works in our favor.
And as another poster already pointed out, it's easy to look back now and decide which factor fund(s) you want to focus on, but at the time there were numerous factors to be selected from and outside of a handful of a very select few, so where did the rest end up? These factors will eventually fail and/or experience a long period of underperformance, and when that happens the factor crowd (those that has 5-15 tickers listed in their signature block) will simply say "well, it would have worked if only ____ held constant", switch to the newest, shiny factor fund based on the new, "improved" data, and claim that the future is bright. For those that like to tinker I imagine it's a fun little hobby for them, but for me it's a waste of time and antithetical to the reasons I was drawn to the Boglehead approach in the first place, which is not to be concerned by all of the noise and swayed by fancy financial products and slick marketing.
Last edited by beezlebub on Tue Apr 25, 2023 1:39 pm, edited 1 time in total.
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Re: AVUV - difficult to hold
Tune out the noise!
We have our Roth IRAs fully invested in SCV for the long run VBR & AVUV. One piece of the puzzle that we aren't budging on sounds like you need to figure out your long term investment policy.
We have our Roth IRAs fully invested in SCV for the long run VBR & AVUV. One piece of the puzzle that we aren't budging on sounds like you need to figure out your long term investment policy.
Re: AVUV - difficult to hold
You're absolutely correct. It's a bad idea to simply look at a backtest and create a portfolio out of it. I was responding to you pointing out that Nathan Drake's portfolio has underperformed US-TSM. It isn't relevant that his portfolio has underperformed (only the U.S. market, you shouldn't ignore ex-US), what matters is that he invest with conviction and sticks to his strategy, not a couple of years of underperformance.beezlebub wrote: ↑Tue Apr 25, 2023 7:22 am
Yet the past is just that -- the past. I could point to any various actively managed funds that have beat total market over the long term, and would you then have the confidence to invest in them based on past results? Doubtful. I am simply not convinced by pseudo the "financial science" of these funds like Avantis. If those factors/sectors outperform, that's fantastic since they are already included in VTI. I see no need for myself, or any rational investor, to tilt a portfolio based on backtesting data and claiming that the right ratio of this or the right weighting of that will result in long term future outperformance.
For OP, it doesn't look like he has the same conviction. He should stick to U.S.-TSM (likely wont be able to stick with the actual global haystack either, considering international stock market has also underperformed for so long).
Unfortunately, OP, like many other investors, fall pray to recency bias and performance chasing, and can only buy and hold U.S. TSM. I just hope that if we have a decade like 99-09, OP can continue to stick with his U.S. TSM approach only.
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Re: AVUV - difficult to hold
Explain which quantifiable measures show higher volatility for value stocks versus growth. If the stocks had completely known earnings (not constant exactly but known), they would still not have the same PE because some defer the earnings out (the growth stocks) while some have a lot of earnings up front (value stocks); in this case, those with the higher PE would in fact be riskier (at least by short-term metrics) due to effective duration.Nathan Drake wrote: ↑Mon Apr 24, 2023 9:11 pmIf this is the case, then why do we have quantifiable measures of higher volatility in aggregate for Value stocks vs Growth stocks, as well as persistently higher value premiums as showcased in the chart I posted previously in this thread?rkhusky wrote: ↑Mon Apr 24, 2023 8:54 pmI think the uncertainty in future total return for value stocks is about the same as for growth stocks. The market has an expectation that the future total return of growth stocks will be higher than for value stocks, compared to current total return, hence their higher price. In that sense, average return expectations is the big driver for price for these market segments.Nathan Drake wrote: ↑Mon Apr 24, 2023 7:34 pmThen you agree Value stocks have higher risk due to increased uncertainty over earnings and growth and therefore are priced for higher expected returnsrkhusky wrote: ↑Mon Apr 24, 2023 7:21 pmThe amount of uncertainty is equivalent to the risk, which is certainly relevant.Nathan Drake wrote: ↑Mon Apr 24, 2023 4:34 pm
The amount of uncertainty isn’t relevant. What is relevant is by virtue of discounting certain stocks, the market is pricing these stocks with a higher expected premium
For individual stocks, uncertainty in total return is a bigger driver of prices. For two stocks with similar total return expectations, the one with lower uncertainty in total return will command a higher price. Similarly, if two stocks have similar uncertainty, the one with higher return expectations will fetch a higher price. If stock investors had control over return, the stocks with higher uncertainty would command a higher return.
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Re: AVUV - difficult to hold
Today is a tough day to be a SCV holder. So RIP to the AVUV holding of anyone with SCV doubts before today
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Re: AVUV - difficult to hold
Higher volatility and max drawdownssecondopinion wrote: ↑Tue Apr 25, 2023 12:38 pmExplain which quantifiable measures show higher volatility for value stocks versus growth. If the stocks had completely known earnings (not constant exactly but known), they would still not have the same PE because some defer the earnings out (the growth stocks) while some have a lot of earnings up front (value stocks); in this case, those with the higher PE would in fact be riskier (at least by short-term metrics) due to effective duration.Nathan Drake wrote: ↑Mon Apr 24, 2023 9:11 pmIf this is the case, then why do we have quantifiable measures of higher volatility in aggregate for Value stocks vs Growth stocks, as well as persistently higher value premiums as showcased in the chart I posted previously in this thread?rkhusky wrote: ↑Mon Apr 24, 2023 8:54 pmI think the uncertainty in future total return for value stocks is about the same as for growth stocks. The market has an expectation that the future total return of growth stocks will be higher than for value stocks, compared to current total return, hence their higher price. In that sense, average return expectations is the big driver for price for these market segments.Nathan Drake wrote: ↑Mon Apr 24, 2023 7:34 pmThen you agree Value stocks have higher risk due to increased uncertainty over earnings and growth and therefore are priced for higher expected returns
For individual stocks, uncertainty in total return is a bigger driver of prices. For two stocks with similar total return expectations, the one with lower uncertainty in total return will command a higher price. Similarly, if two stocks have similar uncertainty, the one with higher return expectations will fetch a higher price. If stock investors had control over return, the stocks with higher uncertainty would command a higher return.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: AVUV - difficult to hold
Could you share the source of information where this is observed?Nathan Drake wrote: ↑Tue Apr 25, 2023 1:29 pmHigher volatility and max drawdownssecondopinion wrote: ↑Tue Apr 25, 2023 12:38 pmExplain which quantifiable measures show higher volatility for value stocks versus growth. If the stocks had completely known earnings (not constant exactly but known), they would still not have the same PE because some defer the earnings out (the growth stocks) while some have a lot of earnings up front (value stocks); in this case, those with the higher PE would in fact be riskier (at least by short-term metrics) due to effective duration.Nathan Drake wrote: ↑Mon Apr 24, 2023 9:11 pmIf this is the case, then why do we have quantifiable measures of higher volatility in aggregate for Value stocks vs Growth stocks, as well as persistently higher value premiums as showcased in the chart I posted previously in this thread?rkhusky wrote: ↑Mon Apr 24, 2023 8:54 pmI think the uncertainty in future total return for value stocks is about the same as for growth stocks. The market has an expectation that the future total return of growth stocks will be higher than for value stocks, compared to current total return, hence their higher price. In that sense, average return expectations is the big driver for price for these market segments.Nathan Drake wrote: ↑Mon Apr 24, 2023 7:34 pm
Then you agree Value stocks have higher risk due to increased uncertainty over earnings and growth and therefore are priced for higher expected returns
For individual stocks, uncertainty in total return is a bigger driver of prices. For two stocks with similar total return expectations, the one with lower uncertainty in total return will command a higher price. Similarly, if two stocks have similar uncertainty, the one with higher return expectations will fetch a higher price. If stock investors had control over return, the stocks with higher uncertainty would command a higher return.
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Re: AVUV - difficult to hold
Portfolio Visualizersecondopinion wrote: ↑Tue Apr 25, 2023 1:36 pmCould you share the source of information where this is observed?Nathan Drake wrote: ↑Tue Apr 25, 2023 1:29 pmHigher volatility and max drawdownssecondopinion wrote: ↑Tue Apr 25, 2023 12:38 pmExplain which quantifiable measures show higher volatility for value stocks versus growth. If the stocks had completely known earnings (not constant exactly but known), they would still not have the same PE because some defer the earnings out (the growth stocks) while some have a lot of earnings up front (value stocks); in this case, those with the higher PE would in fact be riskier (at least by short-term metrics) due to effective duration.Nathan Drake wrote: ↑Mon Apr 24, 2023 9:11 pmIf this is the case, then why do we have quantifiable measures of higher volatility in aggregate for Value stocks vs Growth stocks, as well as persistently higher value premiums as showcased in the chart I posted previously in this thread?rkhusky wrote: ↑Mon Apr 24, 2023 8:54 pm
I think the uncertainty in future total return for value stocks is about the same as for growth stocks. The market has an expectation that the future total return of growth stocks will be higher than for value stocks, compared to current total return, hence their higher price. In that sense, average return expectations is the big driver for price for these market segments.
For individual stocks, uncertainty in total return is a bigger driver of prices. For two stocks with similar total return expectations, the one with lower uncertainty in total return will command a higher price. Similarly, if two stocks have similar uncertainty, the one with higher return expectations will fetch a higher price. If stock investors had control over return, the stocks with higher uncertainty would command a higher return.
Compare VUG to DFSVX
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: AVUV - difficult to hold
But that is comparing small-cap against large-cap essentially. Most of the volatility could be explained from that alone.Nathan Drake wrote: ↑Tue Apr 25, 2023 1:38 pmPortfolio Visualizersecondopinion wrote: ↑Tue Apr 25, 2023 1:36 pmCould you share the source of information where this is observed?Nathan Drake wrote: ↑Tue Apr 25, 2023 1:29 pmHigher volatility and max drawdownssecondopinion wrote: ↑Tue Apr 25, 2023 12:38 pmExplain which quantifiable measures show higher volatility for value stocks versus growth. If the stocks had completely known earnings (not constant exactly but known), they would still not have the same PE because some defer the earnings out (the growth stocks) while some have a lot of earnings up front (value stocks); in this case, those with the higher PE would in fact be riskier (at least by short-term metrics) due to effective duration.Nathan Drake wrote: ↑Mon Apr 24, 2023 9:11 pm
If this is the case, then why do we have quantifiable measures of higher volatility in aggregate for Value stocks vs Growth stocks, as well as persistently higher value premiums as showcased in the chart I posted previously in this thread?
Compare VUG to DFSVX
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Re: AVUV - difficult to hold
You can compare small cap growth to small cap value and get the same resultsecondopinion wrote: ↑Tue Apr 25, 2023 1:59 pmBut that is comparing small-cap against large-cap essentially. Most of the volatility could be explained from that alone.Nathan Drake wrote: ↑Tue Apr 25, 2023 1:38 pmPortfolio Visualizersecondopinion wrote: ↑Tue Apr 25, 2023 1:36 pmCould you share the source of information where this is observed?Nathan Drake wrote: ↑Tue Apr 25, 2023 1:29 pmHigher volatility and max drawdownssecondopinion wrote: ↑Tue Apr 25, 2023 12:38 pm
Explain which quantifiable measures show higher volatility for value stocks versus growth. If the stocks had completely known earnings (not constant exactly but known), they would still not have the same PE because some defer the earnings out (the growth stocks) while some have a lot of earnings up front (value stocks); in this case, those with the higher PE would in fact be riskier (at least by short-term metrics) due to effective duration.
Compare VUG to DFSVX
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Re: AVUV - difficult to hold
What conclusions are you drawing if volatility & max drawdowns are bigger?Nathan Drake wrote: ↑Tue Apr 25, 2023 2:10 pm You can compare small cap growth to small cap value and get the same result
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Re: AVUV - difficult to hold
But here is the question; is it value minus quality versus growth + quality (and still have some size effect)? Technically speaking, if the earnings are expected to be similar but the risk is higher in stock A than B, it usually stands to reason that stock A will have a lower PE. But that is not "value" (value meaning the timeline of expected earnings is rather front heavy), that is minus quality (quality meaning surety of earnings). If requiring profitability is part of the selection, then you have already thrown out the riskiest growth stocks (since any earnings are certainly in the future rather than the present). Value stocks have to, by definition of front heavy earnings, already be profitable.Nathan Drake wrote: ↑Tue Apr 25, 2023 2:10 pmYou can compare small cap growth to small cap value and get the same resultsecondopinion wrote: ↑Tue Apr 25, 2023 1:59 pmBut that is comparing small-cap against large-cap essentially. Most of the volatility could be explained from that alone.Nathan Drake wrote: ↑Tue Apr 25, 2023 1:38 pmPortfolio Visualizersecondopinion wrote: ↑Tue Apr 25, 2023 1:36 pmCould you share the source of information where this is observed?
Compare VUG to DFSVX
In general, I would think that the PE would drift towards the average if the expected outcome realizes (low PE -> higher PE due to earnings drop, high PE -> lower PE due to earnings increase).
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Re: AVUV - difficult to hold
Value is traditionally defined as low P/B, though other metrics can be used such as P/S, P/CF, etc.secondopinion wrote: ↑Tue Apr 25, 2023 2:43 pmBut here is the question; is it value minus quality versus growth + quality (and still have some size effect)? Technically speaking, if the earnings are expected to be similar but the risk is higher in stock A than B, it usually stands to reason that stock A will have a lower PE. But that is not "value" (value meaning the timeline of expected earnings is rather front heavy), that is minus quality (quality meaning surety of earnings). If requiring profitability is part of the selection, then you have already thrown out the riskiest growth stocks (since any earnings are certainly in the future rather than the present). Value stocks have to, by definition of front heavy earnings, already be profitable.Nathan Drake wrote: ↑Tue Apr 25, 2023 2:10 pmYou can compare small cap growth to small cap value and get the same resultsecondopinion wrote: ↑Tue Apr 25, 2023 1:59 pmBut that is comparing small-cap against large-cap essentially. Most of the volatility could be explained from that alone.Nathan Drake wrote: ↑Tue Apr 25, 2023 1:38 pmPortfolio Visualizersecondopinion wrote: ↑Tue Apr 25, 2023 1:36 pm
Could you share the source of information where this is observed?
Compare VUG to DFSVX
In general, I would think that the PE would drift towards the average if the expected outcome realizes (low PE -> higher PE due to earnings drop, high PE -> lower PE due to earnings increase).
Funds like Avantis also implement quality measures like profitability, but it is not seeking the absolute highest profitability sorts as those are expensively priced.
The point is, in aggregate Value stocks have higher risk measures compared to Growth, which accounts for some of the premium. The other side of the premium may be behavioral but unlikely to be arbitraged away
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Re: AVUV - difficult to hold
I look at the timeline of expected earnings as the main determination of value versus growth because it is the only means for a "risk-free" version of a stock to differ (in this hypothetical, cap does not matter, profitability is assumed, and many factors disappear; only a known stream of earnings exist).Nathan Drake wrote: ↑Tue Apr 25, 2023 3:15 pmValue is traditionally defined as low P/B, though other metrics can be used such as P/S, P/CF, etc.secondopinion wrote: ↑Tue Apr 25, 2023 2:43 pmBut here is the question; is it value minus quality versus growth + quality (and still have some size effect)? Technically speaking, if the earnings are expected to be similar but the risk is higher in stock A than B, it usually stands to reason that stock A will have a lower PE. But that is not "value" (value meaning the timeline of expected earnings is rather front heavy), that is minus quality (quality meaning surety of earnings). If requiring profitability is part of the selection, then you have already thrown out the riskiest growth stocks (since any earnings are certainly in the future rather than the present). Value stocks have to, by definition of front heavy earnings, already be profitable.Nathan Drake wrote: ↑Tue Apr 25, 2023 2:10 pmYou can compare small cap growth to small cap value and get the same resultsecondopinion wrote: ↑Tue Apr 25, 2023 1:59 pmBut that is comparing small-cap against large-cap essentially. Most of the volatility could be explained from that alone.
In general, I would think that the PE would drift towards the average if the expected outcome realizes (low PE -> higher PE due to earnings drop, high PE -> lower PE due to earnings increase).
Funds like Avantis also implement quality measures like profitability, but it is not seeking the absolute highest profitability sorts as those are expensively priced.
The point is, in aggregate Value stocks have higher risk measures compared to Growth, which accounts for some of the premium. The other side of the premium may be behavioral but unlikely to be arbitraged away
If one can argue that value is riskier due to the discount given to riskier stocks and they are more likely to show up in the portfolio, that makes sense. Beyond this, I really cannot say that value is riskier by itself merely on when earnings are expected.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: AVUV - difficult to hold
Where I sometimes get confused is in the definition of “low”. Financial pundits sometimes say value has a low PE relative to growth. Even if this is true, it still might be possible that value and growth are both overvalued.Nathan Drake wrote: ↑Tue Apr 25, 2023 3:15 pm Value is traditionally defined as low P/B, though other metrics can be used such as P/S, P/CF, etc.
It seems more important to look at value not relative to growth, but to value’s own historical trend.
Am I thinking about this correctly?
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Re: AVUV - difficult to hold
Sadly, the market real yields do differ over time. Therefore, it can be "overvalued" in that sense. However, one has to adjust for this to determine if a stock is really a value stock.Gaston wrote: ↑Tue Apr 25, 2023 4:56 pmWhere I sometimes get confused is in the definition of “low”. Financial pundits sometimes say value has a low PE relative to growth. Even if this is true, it still might be possible that value and growth are both overvalued.Nathan Drake wrote: ↑Tue Apr 25, 2023 3:15 pm Value is traditionally defined as low P/B, though other metrics can be used such as P/S, P/CF, etc.
It seems more important to look at value not relative to growth, but to value’s own historical trend.
Am I thinking about this correctly?
That is, if real yields were really high, everything would look like a value stock otherwise.
Passive investing: not about making big bucks but making profits. Active investing: not about beating the market but meeting goals. Speculation: not about timing the market but taking profitable risks.
Re: AVUV - difficult to hold
A lot of the value outperformance was from past eras where markets were less efficient. Since the WWW was just starting in the early 90’s, about the same time as the FF model was published, the modern era of investing could be said to have started in the early 2000’s, which was still a good time for Value. Since then, there is no clear consensus for a positive value premium.Nathan Drake wrote: ↑Mon Apr 24, 2023 9:11 pmIf this is the case, then why do we have quantifiable measures of higher volatility in aggregate for Value stocks vs Growth stocks, as well as persistently higher value premiums as showcased in the chart I posted previously in this thread?rkhusky wrote: ↑Mon Apr 24, 2023 8:54 pm I think the uncertainty in future total return for value stocks is about the same as for growth stocks. The market has an expectation that the future total return of growth stocks will be higher than for value stocks, compared to current total return, hence their higher price. In that sense, average return expectations is the big driver for price for these market segments.
For individual stocks, uncertainty in total return is a bigger driver of prices. For two stocks with similar total return expectations, the one with lower uncertainty in total return will command a higher price. Similarly, if two stocks have similar uncertainty, the one with higher return expectations will fetch a higher price. If stock investors had control over return, the stocks with higher uncertainty would command a higher return.
If I look at the future instead of the past, the uncertainty of total return for value stocks is about the same as for growth stocks. Can all the growth stocks that have had little to no profit actually make money? Or can the growth stocks that are making money expand and make even more money? Can the value stocks that seem to be on the path to bankruptcy turn things around?
Will the value companies that consistently make money but haven’t been able to expand or find new markets do so? The future remains hazy.
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Re: AVUV - difficult to hold
Yes, you are thinking correctly. There's quite a bit more to investing than just buying "low PE" stocks - they might stay low for various reasons.Gaston wrote: ↑Tue Apr 25, 2023 4:56 pm Where I sometimes get confused is in the definition of “low”. Financial pundits sometimes say value has a low PE relative to growth. Even if this is true, it still might be possible that value and growth are both overvalued.
It seems more important to look at value not relative to growth, but to value’s own historical trend.
Am I thinking about this correctly?
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Re: AVUV - difficult to hold
It is possible that both Value and Growth are overvalued. You would need a scenario whereby both the spread between Value and Growth narrows, and where the valuation of Growth is high.Gaston wrote: ↑Tue Apr 25, 2023 4:56 pmWhere I sometimes get confused is in the definition of “low”. Financial pundits sometimes say value has a low PE relative to growth. Even if this is true, it still might be possible that value and growth are both overvalued.Nathan Drake wrote: ↑Tue Apr 25, 2023 3:15 pm Value is traditionally defined as low P/B, though other metrics can be used such as P/S, P/CF, etc.
It seems more important to look at value not relative to growth, but to value’s own historical trend.
Am I thinking about this correctly?
The way you evaluate this is to compare both Growth and Value relative to their own historical valuations. Right now, Value is at roughly the historical average in the US, and extremely cheap in exUS markets. Growth, however, is historically overvalued relative to its own history.
But Value funds can combat this to a certain degree by having higher concentrations in Value stocks, which you sacrifice some diversification for. You would need the spreads to be narrow across the entire spectrum of stocks which is unlikely given how the markets work.
Value outperformance has nothing to do with market inefficiencies. The past few years Value has outperformed; does that mean the markets became less efficient?rkhusky wrote: ↑Tue Apr 25, 2023 5:24 pmA lot of the value outperformance was from past eras where markets were less efficient. Since the WWW was just starting in the early 90’s, about the same time as the FF model was published, the modern era of investing could be said to have started in the early 2000’s, which was still a good time for Value. Since then, there is no clear consensus for a positive value premium.Nathan Drake wrote: ↑Mon Apr 24, 2023 9:11 pmIf this is the case, then why do we have quantifiable measures of higher volatility in aggregate for Value stocks vs Growth stocks, as well as persistently higher value premiums as showcased in the chart I posted previously in this thread?rkhusky wrote: ↑Mon Apr 24, 2023 8:54 pm I think the uncertainty in future total return for value stocks is about the same as for growth stocks. The market has an expectation that the future total return of growth stocks will be higher than for value stocks, compared to current total return, hence their higher price. In that sense, average return expectations is the big driver for price for these market segments.
For individual stocks, uncertainty in total return is a bigger driver of prices. For two stocks with similar total return expectations, the one with lower uncertainty in total return will command a higher price. Similarly, if two stocks have similar uncertainty, the one with higher return expectations will fetch a higher price. If stock investors had control over return, the stocks with higher uncertainty would command a higher return.
If I look at the future instead of the past, the uncertainty of total return for value stocks is about the same as for growth stocks. Can all the growth stocks that have had little to no profit actually make money? Or can the growth stocks that are making money expand and make even more money? Can the value stocks that seem to be on the path to bankruptcy turn things around?
Will the value companies that consistently make money but haven’t been able to expand or find new markets do so? The future remains hazy.
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: AVUV - difficult to hold
Since 1972, small cap growth has been riskier than small cap value:
https://www.portfoliovisualizer.com/bac ... ion2_2=100
Why hasn't this "risk" given us excess return?
https://www.portfoliovisualizer.com/bac ... ion2_2=100
Why hasn't this "risk" given us excess return?
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Re: AVUV - difficult to hold
Because it contains a lot of junk that appeals to gamblers chasing skew, the behavioral aspect is real and unlikely to be arbitraged as long as humans have a propensity to gamble on lottery picks. We are seeing signs of these behaviors all over the place the past few years. These don’t appear to be compensated risk premiumsrushrocker wrote: ↑Wed Apr 26, 2023 12:45 am Since 1972, small cap growth has been riskier than small cap value:
https://www.portfoliovisualizer.com/bac ... ion2_2=100
Why hasn't this "risk" given us excess return?
Value is clearly riskier than “the market”
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: AVUV - difficult to hold
It definitely is. But so is growth.Nathan Drake wrote: ↑Wed Apr 26, 2023 12:50 amBecause it contains a lot of junk that appeals to gamblers chasing skew, the behavioral aspect is real and unlikely to be arbitraged as long as humans have a propensity to gamble on lottery picks. We are seeing signs of these behaviors all over the place the past few years. These don’t appear to be compensated risk premiumsrushrocker wrote: ↑Wed Apr 26, 2023 12:45 am Since 1972, small cap growth has been riskier than small cap value:
https://www.portfoliovisualizer.com/bac ... ion2_2=100
Why hasn't this "risk" given us excess return?
Value is clearly riskier than “the market”
https://www.portfoliovisualizer.com/bac ... ion2_2=100
https://www.portfoliovisualizer.com/bac ... ion2_2=100
As you mentioned about growth underperforming. To me, that explanation is a more compelling risk based explanation than for value. Higher standard deviations, bigger drawdowns, and lots of lottery picking with chances to go bust. Sounds awful risky to me. So why not higher returns than a market-neutral asset class?
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Re: AVUV - difficult to hold
It’s an uncompensated risk, like stock pickingrushrocker wrote: ↑Wed Apr 26, 2023 12:57 amIt definitely is. But so is growth.Nathan Drake wrote: ↑Wed Apr 26, 2023 12:50 amBecause it contains a lot of junk that appeals to gamblers chasing skew, the behavioral aspect is real and unlikely to be arbitraged as long as humans have a propensity to gamble on lottery picks. We are seeing signs of these behaviors all over the place the past few years. These don’t appear to be compensated risk premiumsrushrocker wrote: ↑Wed Apr 26, 2023 12:45 am Since 1972, small cap growth has been riskier than small cap value:
https://www.portfoliovisualizer.com/bac ... ion2_2=100
Why hasn't this "risk" given us excess return?
Value is clearly riskier than “the market”
https://www.portfoliovisualizer.com/bac ... ion2_2=100
https://www.portfoliovisualizer.com/bac ... ion2_2=100
As you mentioned about growth underperforming. To me, that explanation is a more compelling risk based explanation than for value. Higher standard deviations, bigger drawdowns, and lots of lottery picking with chances to go bust. Sounds awful risky to me. So why not higher returns than a market-neutral asset class?
Value is not uncompensated, we clearly see persistent and robust premiums
Not all risks are compensated
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: AVUV - difficult to hold
Well that is a very convenient story. It's true to say that we have seen persistent and robust premiums, in all markets, and averse to redefinition. It's also true to say it was compensated, but whether it was easy to capture that compensation as a retail investor is another question. Costs and barriers to trading where much greater in the past, which could be the only reason that premium existed. Now days, all of Wall Street has a super computer combing the mines for excess returns, 24/7, and we can buy small cap value in 2 seconds on a cell phone. How can it truly be so simple to say that there's a known premium going forward?Nathan Drake wrote: ↑Wed Apr 26, 2023 1:04 amIt’s an uncompensated risk, like stock pickingrushrocker wrote: ↑Wed Apr 26, 2023 12:57 amIt definitely is. But so is growth.Nathan Drake wrote: ↑Wed Apr 26, 2023 12:50 amBecause it contains a lot of junk that appeals to gamblers chasing skew, the behavioral aspect is real and unlikely to be arbitraged as long as humans have a propensity to gamble on lottery picks. We are seeing signs of these behaviors all over the place the past few years. These don’t appear to be compensated risk premiumsrushrocker wrote: ↑Wed Apr 26, 2023 12:45 am Since 1972, small cap growth has been riskier than small cap value:
https://www.portfoliovisualizer.com/bac ... ion2_2=100
Why hasn't this "risk" given us excess return?
Value is clearly riskier than “the market”
https://www.portfoliovisualizer.com/bac ... ion2_2=100
https://www.portfoliovisualizer.com/bac ... ion2_2=100
As you mentioned about growth underperforming. To me, that explanation is a more compelling risk based explanation than for value. Higher standard deviations, bigger drawdowns, and lots of lottery picking with chances to go bust. Sounds awful risky to me. So why not higher returns than a market-neutral asset class?
Value is not uncompensated, we clearly see persistent and robust premiums
Not all risks are compensated
Re: AVUV - difficult to hold
It's not so simple and unknown. It's more accurate, I think, to infer a premium is reasonably likely, though might be reduced by arbitrage. It's likely to persist, at least somewhat I think, since behavioral and cognitive errors are also likely to persist among at least some investors. That is, some investors have unrealistically lofty expectations for sexy growth companies while dismissing more mundane but financially solid value companies.rushrocker wrote: ↑Wed Apr 26, 2023 1:27 am Well that is a very convenient story. It's true to say that we have seen persistent and robust premiums, in all markets, and averse to redefinition. It's also true to say it was compensated, but whether it was easy to capture that compensation as a retail investor is another question. Costs and barriers to trading where much greater in the past, which could be the only reason that premium existed. Now days, all of Wall Street has a super computer combing the mines for excess returns, 24/7, and we can buy small cap value in 2 seconds on a cell phone. How can it truly be so simple to say that there's a known premium going forward?
ROTH: 50% AVGE, 10% DFAX, 40% BNDW. Taxable: 50% BNDW, 40% AVGE, 10% DFAX.
Re: AVUV - difficult to hold
It did in the past. Now it is the result of random market fluctuations. Value is underperforming in 2023.Nathan Drake wrote: ↑Tue Apr 25, 2023 9:49 pm Value outperformance has nothing to do with market inefficiencies. The past few years Value has outperformed; does that mean the markets became less efficient?
Re: AVUV - difficult to hold
There are lots of different kinds of risk and not all are captured by standard deviation and max drawdown. Because of how cap weighting works, value tends to have a lower correlation to the market than growth, and therefore introduces tracking error regret. There are also industry risks with value. Value strategies tend to allocate to riskier parts of the economy. We're seeing that show up in volatility with the banking drawdowns recently and AVUV's heavy allocation to financials. But it doesn't always show up in volatility and instead shows up with risks like FOMO (e.g. "will small cap value companies be the ones to benefit from AI") due to the fact that value strategies tend to allocate to out of favor industries and sometimes "old economy" areas of business.rushrocker wrote: ↑Wed Apr 26, 2023 1:27 amWell that is a very convenient story. It's true to say that we have seen persistent and robust premiums, in all markets, and averse to redefinition. It's also true to say it was compensated, but whether it was easy to capture that compensation as a retail investor is another question. Costs and barriers to trading where much greater in the past, which could be the only reason that premium existed. Now days, all of Wall Street has a super computer combing the mines for excess returns, 24/7, and we can buy small cap value in 2 seconds on a cell phone. How can it truly be so simple to say that there's a known premium going forward?Nathan Drake wrote: ↑Wed Apr 26, 2023 1:04 amIt’s an uncompensated risk, like stock pickingrushrocker wrote: ↑Wed Apr 26, 2023 12:57 amIt definitely is. But so is growth.Nathan Drake wrote: ↑Wed Apr 26, 2023 12:50 amBecause it contains a lot of junk that appeals to gamblers chasing skew, the behavioral aspect is real and unlikely to be arbitraged as long as humans have a propensity to gamble on lottery picks. We are seeing signs of these behaviors all over the place the past few years. These don’t appear to be compensated risk premiumsrushrocker wrote: ↑Wed Apr 26, 2023 12:45 am Since 1972, small cap growth has been riskier than small cap value:
https://www.portfoliovisualizer.com/bac ... ion2_2=100
Why hasn't this "risk" given us excess return?
Value is clearly riskier than “the market”
https://www.portfoliovisualizer.com/bac ... ion2_2=100
https://www.portfoliovisualizer.com/bac ... ion2_2=100
As you mentioned about growth underperforming. To me, that explanation is a more compelling risk based explanation than for value. Higher standard deviations, bigger drawdowns, and lots of lottery picking with chances to go bust. Sounds awful risky to me. So why not higher returns than a market-neutral asset class?
Value is not uncompensated, we clearly see persistent and robust premiums
Not all risks are compensated
A couple of the examples of increased risk with value strategies I mentioned above are certainly alive and well despite new and better technology.
Re: AVUV - difficult to hold
The Wall Street supercomputer May have a very different objective function than you do. They may be looking for returns over 5 seconds, 5 minutes, some hours. Maybe they do quarterly reporting and need to show good, stable returns for investors. Maybe you don’t care all all about the next 10 years and want the best portfolio size in year 25.rushrocker wrote: ↑Wed Apr 26, 2023 1:27 am Now days, all of Wall Street has a super computer combing the mines for excess returns, 24/7, and we can buy small cap value in 2 seconds on a cell phone.
That would lead to different willingness to pay for certain assets. For example maybe they are willing to take less returns in expectation to avoid some kind of outcome. Perhaps you don’t care about that outcome, so you buy a little more of the thing they don’t want as much of
Crom laughs at your Four Winds
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Re: AVUV - difficult to hold
Value in exUS is still outperforming this yearrkhusky wrote: ↑Wed Apr 26, 2023 7:14 amIt did in the past. Now it is the result of random market fluctuations. Value is underperforming in 2023.Nathan Drake wrote: ↑Tue Apr 25, 2023 9:49 pm Value outperformance has nothing to do with market inefficiencies. The past few years Value has outperformed; does that mean the markets became less efficient?
Is 100 years of market data all random fluctuations? Why should we trust the market factor over bonds?
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: AVUV - difficult to hold
More flawed arguments that ease of access means diminished or no premiums going forwardrushrocker wrote: ↑Wed Apr 26, 2023 1:27 amWell that is a very convenient story. It's true to say that we have seen persistent and robust premiums, in all markets, and averse to redefinition. It's also true to say it was compensated, but whether it was easy to capture that compensation as a retail investor is another question. Costs and barriers to trading where much greater in the past, which could be the only reason that premium existed. Now days, all of Wall Street has a super computer combing the mines for excess returns, 24/7, and we can buy small cap value in 2 seconds on a cell phone. How can it truly be so simple to say that there's a known premium going forward?Nathan Drake wrote: ↑Wed Apr 26, 2023 1:04 amIt’s an uncompensated risk, like stock pickingrushrocker wrote: ↑Wed Apr 26, 2023 12:57 amIt definitely is. But so is growth.Nathan Drake wrote: ↑Wed Apr 26, 2023 12:50 amBecause it contains a lot of junk that appeals to gamblers chasing skew, the behavioral aspect is real and unlikely to be arbitraged as long as humans have a propensity to gamble on lottery picks. We are seeing signs of these behaviors all over the place the past few years. These don’t appear to be compensated risk premiumsrushrocker wrote: ↑Wed Apr 26, 2023 12:45 am Since 1972, small cap growth has been riskier than small cap value:
https://www.portfoliovisualizer.com/bac ... ion2_2=100
Why hasn't this "risk" given us excess return?
Value is clearly riskier than “the market”
https://www.portfoliovisualizer.com/bac ... ion2_2=100
https://www.portfoliovisualizer.com/bac ... ion2_2=100
As you mentioned about growth underperforming. To me, that explanation is a more compelling risk based explanation than for value. Higher standard deviations, bigger drawdowns, and lots of lottery picking with chances to go bust. Sounds awful risky to me. So why not higher returns than a market-neutral asset class?
Value is not uncompensated, we clearly see persistent and robust premiums
Not all risks are compensated
Is that the case for basic total market index funds? Those are far more ubiquitous than SCV funds in retirement plans
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: AVUV - difficult to hold
All participants can, and must in aggregate, own the market portfolio. All participants can not own the SCV portfolio. The more people that own it, the more its returns revert to the return of the market.Nathan Drake wrote: ↑Wed Apr 26, 2023 9:18 am More flawed arguments that ease of access means diminished or no premiums going forward
Is that the case for basic total market index funds? Those are far more ubiquitous than SCV funds in retirement plans
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Re: AVUV - difficult to hold
Yup. Don't tilt more than you believe.Yesterdaysnews wrote: ↑Fri Apr 21, 2023 1:06 pm I absolutely find the data behind factor investing convincing and believe AVUV is a good product.... but man does it make it difficult to hold, especially in an IRA where there is no tax consequence to dumping it.
It seems to be a significant drag on overall portfolio returns for me personally. International has even done better overall.
I can see the allure of factor investing but it absolutely tests the commitment of the investor and who knows may never actually yield any excess returns..... Factor investing is a tough game to play.
1) Invest you must 2) Time is your friend 3) Impulse is your enemy |
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Re: AVUV - difficult to hold
None of this is logically consistentrushrocker wrote: ↑Wed Apr 26, 2023 9:56 amAll participants can, and must in aggregate, own the market portfolio. All participants can not own the SCV portfolio. The more people that own it, the more its returns revert to the return of the market.Nathan Drake wrote: ↑Wed Apr 26, 2023 9:18 am More flawed arguments that ease of access means diminished or no premiums going forward
Is that the case for basic total market index funds? Those are far more ubiquitous than SCV funds in retirement plans
Prices are set at the margin by active trading
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
- burritoLover
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Re: AVUV - difficult to hold
If you want to take on more risk on the equity side, without increasing its allocation, tilting towards factors would be the way to do it. It's that simple.
These conversations are always ridiculous because usually those pooh-poohing factors envision it as some free lunch, while the factor-heads think the historical factor premiums are highly likely to persist going forward. Both are wrong.
These conversations are always ridiculous because usually those pooh-poohing factors envision it as some free lunch, while the factor-heads think the historical factor premiums are highly likely to persist going forward. Both are wrong.
Re: AVUV - difficult to hold
In the past there were inefficiencies and random fluctuations. Now there is much less inefficiency and the random fluctuations are the main drivers of value under- and over-performing.Nathan Drake wrote: ↑Wed Apr 26, 2023 9:08 amValue in exUS is still outperforming this yearrkhusky wrote: ↑Wed Apr 26, 2023 7:14 amIt did in the past. Now it is the result of random market fluctuations. Value is underperforming in 2023.Nathan Drake wrote: ↑Tue Apr 25, 2023 9:49 pm Value outperformance has nothing to do with market inefficiencies. The past few years Value has outperformed; does that mean the markets became less efficient?
Is 100 years of market data all random fluctuations? Why should we trust the market factor over bonds?
Stocks and bonds are different investments. Value and growth stocks are the same investment - in fact a value stock can become a growth stock, and vice-versa.
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Re: AVUV - difficult to hold
Why are factor premiums unlikely to persist if that argument is wrong?burritoLover wrote: ↑Wed Apr 26, 2023 10:12 am If you want to take on more risk on the equity side, without increasing its allocation, tilting towards factors would be the way to do it. It's that simple.
These conversations are always ridiculous because usually those pooh-poohing factors envision it as some free lunch, while the factor-heads think the historical factor premiums are highly likely to persist going forward. Both are wrong.
Is the market premium gone?
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
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Re: AVUV - difficult to hold
Market inefficiencies have nothing to do with risk premiumsrkhusky wrote: ↑Wed Apr 26, 2023 10:22 amIn the past there were inefficiencies and random fluctuations. Now there is much less inefficiency and the random fluctuations are the main drivers of value under- and over-performing.Nathan Drake wrote: ↑Wed Apr 26, 2023 9:08 amValue in exUS is still outperforming this yearrkhusky wrote: ↑Wed Apr 26, 2023 7:14 amIt did in the past. Now it is the result of random market fluctuations. Value is underperforming in 2023.Nathan Drake wrote: ↑Tue Apr 25, 2023 9:49 pm Value outperformance has nothing to do with market inefficiencies. The past few years Value has outperformed; does that mean the markets became less efficient?
Is 100 years of market data all random fluctuations? Why should we trust the market factor over bonds?
Stocks and bonds are different investments. Value and growth stocks are the same investment - in fact a value stock can become a growth stock, and vice-versa.
If you believe in market efficiency, you should believe in risk premiums for stocks with additional fundamental risks that are compensated
20% VOO | 20% VXUS | 20% AVUV | 20% AVDV | 20% AVES
Re: AVUV - difficult to hold
Investors should seek a premium for taking a risk. But that’s difficult for stocks because investors have no control over stock returns. While investors might be able to discern that one stock appears to have higher risk compared to another stock, the investor has no control over the returns of either stock.Nathan Drake wrote: ↑Wed Apr 26, 2023 10:30 amMarket inefficiencies have nothing to do with risk premiumsrkhusky wrote: ↑Wed Apr 26, 2023 10:22 amIn the past there were inefficiencies and random fluctuations. Now there is much less inefficiency and the random fluctuations are the main drivers of value under- and over-performing.Nathan Drake wrote: ↑Wed Apr 26, 2023 9:08 amValue in exUS is still outperforming this yearrkhusky wrote: ↑Wed Apr 26, 2023 7:14 amIt did in the past. Now it is the result of random market fluctuations. Value is underperforming in 2023.Nathan Drake wrote: ↑Tue Apr 25, 2023 9:49 pm Value outperformance has nothing to do with market inefficiencies. The past few years Value has outperformed; does that mean the markets became less efficient?
Is 100 years of market data all random fluctuations? Why should we trust the market factor over bonds?
Stocks and bonds are different investments. Value and growth stocks are the same investment - in fact a value stock can become a growth stock, and vice-versa.
If you believe in market efficiency, you should believe in risk premiums for stocks with additional fundamental risks that are compensated
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Re: AVUV - difficult to hold
The market sets prices which feature higher discount rates for companies seen as riskier. This is efficient markets in actionrkhusky wrote: ↑Wed Apr 26, 2023 10:40 amInvestors should seek a premium for taking a risk. But that’s difficult for stocks because investors have no control over stock returns. While investors might be able to discern that one stock appears to have higher risk compared to another stock, the investor has no control over the returns of either stock.Nathan Drake wrote: ↑Wed Apr 26, 2023 10:30 amMarket inefficiencies have nothing to do with risk premiumsrkhusky wrote: ↑Wed Apr 26, 2023 10:22 amIn the past there were inefficiencies and random fluctuations. Now there is much less inefficiency and the random fluctuations are the main drivers of value under- and over-performing.Nathan Drake wrote: ↑Wed Apr 26, 2023 9:08 amValue in exUS is still outperforming this year
Is 100 years of market data all random fluctuations? Why should we trust the market factor over bonds?
Stocks and bonds are different investments. Value and growth stocks are the same investment - in fact a value stock can become a growth stock, and vice-versa.
If you believe in market efficiency, you should believe in risk premiums for stocks with additional fundamental risks that are compensated
Otherwise, nobody would hold value stocks
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Re: AVUV - difficult to hold
It was actually your logic I was refuting lol. That was the illogically inconsistent part, not my reply. Let me try to explain...Nathan Drake wrote: ↑Wed Apr 26, 2023 10:09 amNone of this is logically consistentrushrocker wrote: ↑Wed Apr 26, 2023 9:56 amAll participants can, and must in aggregate, own the market portfolio. All participants can not own the SCV portfolio. The more people that own it, the more its returns revert to the return of the market.Nathan Drake wrote: ↑Wed Apr 26, 2023 9:18 am More flawed arguments that ease of access means diminished or no premiums going forward
Is that the case for basic total market index funds? Those are far more ubiquitous than SCV funds in retirement plans
Prices are set at the margin by active trading
Your question/comment was if ease of access to the TSM could reduce its premium, conflating the idea that ease of access to SCV wouldn't reduce its premium.
I pointed out that everyone can own TSM, but the same can not be said for SCV.
Therefore answer is no for TSM, and yes for SCV.
Re: AVUV - difficult to hold
I would certainly disagree. I think something with P/E of 10 is different from something with P/E of 40. there is at a minimum some information on expected future revenue growth, or perceived riskiness of ability to realize expected upcoming earnings
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- burritoLover
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Re: AVUV - difficult to hold
I didn't say they were unlikely to persist but many factor-lovers seem to think it is highly likely that they'll get the full historical premium going forward. And there is still a possibility that there's no statistically significant premium in the future (or even a negative premium) - that is often not even considered a possibility by many who are factor tilting. I tilt to SCV 30% but I understand that even over 30+ years, it is possible I'll be worse off than if I had just gone with a market-only portfolio.Nathan Drake wrote: ↑Wed Apr 26, 2023 10:28 amWhy are factor premiums unlikely to persist if that argument is wrong?burritoLover wrote: ↑Wed Apr 26, 2023 10:12 am If you want to take on more risk on the equity side, without increasing its allocation, tilting towards factors would be the way to do it. It's that simple.
These conversations are always ridiculous because usually those pooh-poohing factors envision it as some free lunch, while the factor-heads think the historical factor premiums are highly likely to persist going forward. Both are wrong.
Is the market premium gone?
Re: AVUV - difficult to hold
But they are both stocks. You can differentiate every stock from one another by a variety of characteristics, but at the end of the day they are still stocks. They are not bonds for example, or real estate or a small business.
Re: AVUV - difficult to hold
The market sets prices based on expectations of total return and the uncertainty of the return. But investors have no control on the actual return. Unlike bonds or CD’s, where investors can choose the nominal return they want for a given level of risk.Nathan Drake wrote: ↑Wed Apr 26, 2023 10:49 amThe market sets prices which feature higher discount rates for companies seen as riskier. This is efficient markets in actionrkhusky wrote: ↑Wed Apr 26, 2023 10:40 amInvestors should seek a premium for taking a risk. But that’s difficult for stocks because investors have no control over stock returns. While investors might be able to discern that one stock appears to have higher risk compared to another stock, the investor has no control over the returns of either stock.Nathan Drake wrote: ↑Wed Apr 26, 2023 10:30 amMarket inefficiencies have nothing to do with risk premiumsrkhusky wrote: ↑Wed Apr 26, 2023 10:22 amIn the past there were inefficiencies and random fluctuations. Now there is much less inefficiency and the random fluctuations are the main drivers of value under- and over-performing.Nathan Drake wrote: ↑Wed Apr 26, 2023 9:08 am
Value in exUS is still outperforming this year
Is 100 years of market data all random fluctuations? Why should we trust the market factor over bonds?
Stocks and bonds are different investments. Value and growth stocks are the same investment - in fact a value stock can become a growth stock, and vice-versa.
If you believe in market efficiency, you should believe in risk premiums for stocks with additional fundamental risks that are compensated
Otherwise, nobody would hold value stocks