Robusta fundamental, leveraged investments

[craft]

Whatever approach an investor uses it is all about the odds. Thinking like a poker player is key Oddson.

Goid point Odds-on and to think I have been thinking Odd - Son when I see your name.:

I guess the Tom Knapp link between and the superinvestor speach and Tweedy Browne is not lost on you.

 

[kermit345]

Fair enough sinner although from the charts I just looked at it seems the outperformance has only been since mid to late 2010. Also I wasn't probably precise enough with what I said, the research I was presented with showed that value investing outperformed over the longer-term and not over 1-3 year periods.

If you look at those same index's you've shown since 1/1/2001 the value index has outperformed the growth index by almost double.

79.73% vs 40.11%

Or if you look back as far as google finance would let me - 4/8/2000 the value index had also outperformed the growth index by even more:

102.85% vs 19.07%

This leads me to believe that while the growth index is outperforming value at the moment since the GFC, i'd like to see how it has gone maybe 4-5 years from today.

EDIT: Note the index's are made up in a similar fashion to the research I was presented with - This index uses Price to Book (essentially the inverse of Book to Market as i've said before in here) and also only uses the small cap area.

 

[sinner]

Fair enough sinner although from the charts I just looked at it seems the outperformance has only been since mid to late 2010.

Definitely not only since 2010. This is a secular change in the market which began distinctly with the Quant blowup in 2007.

Also I wasn't probably precise enough with what I said, the research I was presented with showed that value investing outperformed over the longer-term and not over 1-3 year periods.

So precisely how many years of underperformance will be required for you to 'change your mind'? I don't know why it's such a bloody argument, personally I just rate metrics like this by 6 month momentum and tend to float with whichever has the highest momentum. Why run a value metric when it's consistently underperforming the index? You don't gain anything, there is no chance of 'missing out', it's pretty easy to rotate out of market cap index into value index or growth index and vice versa.

If you look at those same index's you've shown since 1/1/2001 the value index has outperformed the growth index by almost double.

79.73% vs 40.11%

Or if you look back as far as google finance would let me - 4/8/2000 the value index had also outperformed the growth index by even more:

102.85% vs 19.07%

Um yep, like I pointed out already to tech that the majority of financial research literature is focusing specifically on the outsized returns in value for decades. Try not to get hung up on the % performance since these are highly dependant on the start date, using ratios tends to avoid this issue "how much value is one growth worth, how much growth is one value worth".

Rather I am pointing out that this old news is no longer functional. If you want to keep running with it that's fine, I'm happy to let the numbers do the talking.

This leads me to believe that while the growth index is outperforming value at the moment since the GFC, i'd like to see how it has gone maybe 4-5 years from today.

lol, assume you've travelled back in time to 2007-2008, today is 4-5 years since then. Unless you are now claiming something has changed in the global economy today that will return value to its old position?

EDIT: Note the index's are made up in a similar fashion to the research I was presented with - This index uses Price to Book (essentially the inverse of Book to Market as i've said before in here) and also only uses the small cap area.

I just use the Russell2000 models because they are more economically representative. You can see the exact same thing in mid cap growth:value ratio or large cap growth:value ratio. You can compare international growth versus international value.


I find it hard to accept that this isn't a secular change in the market, but realistically choose not to get bloody about it, value is just a metric, happy to use the metric which provides the best return and not lose sleep about those that are underperforming.

 

[odds-on]

Goid point Odds-on and to think I have been thinking Odd - Son when I see your name.:

I guess the Tom Knapp link between and the superinvestor speach and Tweedy Browne is not lost on you.

Craft,

I believe in value investing as it puts the odds in the investors favour. I read as much as I can on the topic (familiar with Superinvestors, Tweedy etc), however I do believe it is critical that an investor must tailor their value investing approach to suit both themselves and the market they invest in. As mentioned on other threads there is not only earning risk and financial risk to consider but there is valuation risk, which means not only overpaying but asking a serious question about whether an investor can actually assess that business properly. I have endless amusement reading a certain blog and the analysis made by posters. In a lot of cases unless you actually have to work at some of the companies (or at least within the industry) for decades to really be able to value the company properly. I accept my poor business assessment and lack of interest in the finer points of accounting so instead just use basic financial ratios, common sense and a cheap price. All I really ask a lot of the time is:-

• Am I at least 80% confident the company will be earning money in the medium term?
• Will I double my money in the medium term?

A top “investment” book is called The Hole in One Gang. It is about a couple of UK punters in the 90’s who noticed the mispricing on hole in one odds for the major golf tournaments. They acted properly by doing thorough research, quitting their jobs and spending 3 months travelling round the UK laying bets with every bookie they could. They made a killing. I am happily waiting for the day (hopefully in my lifetime) on the ASX when an “Hole in One” type event comes up – every single dollar that I have will be put on it. If you have not already read Poor Charlie’s Alamanac I recommend it, if my memory serves me correct he puts the Washington Post purchase as a 1 in a 30 year bet.

What I would love to do it create a value investing play book for the ASX. For any type of the business on the ASX th eplay book gives the three key points to use in making an investment decision to maximise expected value. For example, buy any of the big four banks if they meet the following criteria:-

1. Trading below book value
2. The oligopoly is intact
3. Bank meets certain financial risk criteria.

Hold until either you make a decent ROI or it fails on 2. or 3. If the price drops keep buying. You get the idea, get rid of the noise and keep it simple to execute.

Cheers

Oddson

 

[tech/a]

So pretty well all here are still nutting out their plan
No one has portfolio returning a long term profit.

Read in context.
I didnt mean the whole world.

Will read and reply to all others when I have time.

 

[motorway]

Definitely not only since 2010. This is a secular change in the market which began distinctly with the Quant blowup in 2007.

Growth Vs Value
with the benefit of hindsight

http://www.iinews.com/site/pdfs/JPM_Summer2009_RA.pdf


Margin of safety

Looking for the exceptional cases

Absolute Vs Relative

All apply to all forms of analysis.

Time as in Market Conditions / phase





Motorway

 

[sinner]

Growth Vs Value
with the benefit of hindsight

Motorway

Thanks for the great article motorway, I think kermit might find the chart titled "Exhibit 1" rather interesting in lieu of the discussion of 'outperformance'...

It is unsur- prising that, when the dispersion in valuation multiples widens, usually growth concurrently beats value, and vice versa. At the peak of the tech bubble in early 2000, after a stellar period for growth stocks, Valuation Dispersion had widened more than at any time in U.S. capital mar- kets history.11 This laid the foundation for seven consec- utive years of success for value investors. Then, after this seven-year winning streak for value stocks, the dispersion of valuation multiples was nearing all-time lows. This, in turn, laid the foundation for the debacle that occurred in value stocks from 2007 to early 2009.

 

[craft]

Thanks for the great article motorway, I think kermit might find the chart titled "Exhibit 1" rather interesting in lieu of the discussion of 'outperformance'...

Well I'm confused. I thought you were arguing structural change and Kermit cyclical. That report clearly adds weight to the growth-value cycle.

 

[craft]

There are a few here like me hat can tell from people's postings if they trade or not and of those if they are profitable .

So pretty well all here are still nutting out their plan
No one has portfolio returning a long term profit.

Read in context.
I didnt mean the whole world.

I can only conclude that you are not as insightful as you think.

 

[sinner]

Well I'm confused. I thought you were arguing structural change and Kermit cyclical. That report deficiently adds weight to the growth-value cycle.

You can see the "Exhibit 1" chart to see what I mean, there is a longer cyclical relationship which was happening just fine for a long time.


At the end of the chart, the cycle breaks down (magnitude blowout which indicates very high instability of the 'kernel').

The outperformance which kermit mentioned, unfortunately is only the result of the mean reversion from that blowout. Cyclical outperformance of either growth or value would have been many many orders of magnitude smaller.

 

[kermit345]

sinner, don't really understand why you've came into a thread where some decent discussion was happening and now using your sarcasm and attempting to belittle others?

Anyhow, I've read through that article motorway provided a couple of times and correct me if i'm wrong but this is what I took from it:

- Value and Growth have continued to be cyclical over the very long term
- The market continues to regularly pay a premium for growth stocks and is relatively good at picking these growth stocks however continue to pay a high premium for them which somewhat negates outperformance.
- The cap weighted portfolio is essentially a growth portfolio as its weighted to the largest companies obtaining the highest premiums and has underperformed the value portfolios on all timeframes and had greater volatility (10 yr, 20yr, 50yr and 50yr CAPM adjusted)
- The article states that the market 'never failed to overpay' for the growth companies and even though it picked stocks with growth prospects accurately, but then overpays compared to value stocks by roughly double, hence leading to outperformance of value stocks if/when they realise their earnings growth

Question: If its stating that value is better found when the dispersion is wider does that indicate that if your very selective in your 'value' investments and only invest when there is deep deep value with large MOS that this is a perfrect situation for you to outperform?

Anyhow, I agree with you sinner that growth v value is cyclical, has a structural change happened? well who knows the article even states itself that it takes a long long time to realise but that it is a possibility.

Also note the sentence on the same page as Exhibit 3:
"Value has outperformed growth in most years, in most markets around the world, for decades."

So if we have undergone a structural change then you may very well be correct that value will now become the underperformer, but i'm personally happy to stick with the value approach for now.

 

[craft]

You can see the "Exhibit 1" chart to see what I mean, there is a longer cyclical relationship which was happening just fine for a long time.
View attachment 46693

At the end of the chart, the cycle breaks down (magnitude blowout which indicates very high instability of the 'kernel').

The outperformance which kermit mentioned, unfortunately is only the result of the mean reversion from that blowout. Cyclical outperformance of either growth or value would have been many many orders of magnitude smaller.

The study reinforces that over the long term too much is paid for growth irrespective of whatever the value-growth cycle may be doing. The skew is in favour of value. Growth will have relatively smaller periods of outperformance when the cycle is most favourable.
Are you saying Kermit drew his conclusions by only looking at data since 2000? Maybe Kermit can clarify.

 

[craft]

Are you saying Kermit drew his conclusions by only looking at data since 2000? Maybe Kermit can clarify.

ooops I see Kermit has already clarified.

Forums are a terrible medium for communicating – I thought Sinners contributions were good, it’s unfortunate that you feel offended Kermit.

 

[sinner]

Question: If its stating that value is better found when the dispersion is wider does that indicate that if your very selective in your 'value' investments and only invest when there is deep deep value with large MOS that this is a perfrect situation for you to outperform?

It simply states wide value dispersion indicates during the next 'cycle' value premium will outperform growth premium.

If you are buying 'deep deep value' (whatever that is) stocks with a large 'margin of safety' (a concept which makes 0 sense to me unless you can freeze time) while value dispersion is narrow then you are still likely to under-perform.

This is only an assumption so correct me if I'm wrong, but probably your conception of 'deep deep value' and a large MOS was found at the 2008 low? Well since then small cap value has underperformed small cap growth by 30% and small cap index by 15%.


The issue is similar to other forms of dispersion, the more I think about it. To me it still makes the most sense to just sort by momentum and follow what's working.

 

[kermit345]

craft - sinners contribution is great, maybe i'm just picking up on the way he's putting it across differently - as you say the internet can sometimes be poor for communicating views etc.

My conclusions are drawn from the material i received at a presentation which had supporting data dating back to around 1930 for the US and 1980 for emerging/australia. I only used mid 2000 as the starting point for the iShares comaprisons as that was the earlier point any charts would let me use as a start point (assume this is when the index's were started?)

Anyhow craft has captured my understanding of the article in his 2-3 sentences, essentially the market consistently overpays for growth and this premium reduces performance except in some cycical periods where even though the market continues to pay this premium, the growth outweighs it and they do outperform. However as the article states, this scenario occurs less then how often value outperforms - hence long-term value outperformance.

 

[kermit345]

It simply states wide value dispersion indicates during the next 'cycle' value premium will ....

Fair enough, I guess my question was a pretty poor one, as people determine value differently. It was more in relation to what the article was theoretically suggesting rather then what the market has actually done in recent times.

sinner, following 6 month momentum is probably a fair way to work and you'll probably outperform value AND growth as your capturing the momentum for each in their cyclical natures.

Just personal preference I guess, as i'd personally rather stick to the value approach as I enjoy it and can see that it has the potential to outperform over the very long term - being 25 i'm lucky enough to have time on my side. Maybe I should look at incorporating a growth element to my investing philosophy at some stage when I can see momentum moving against value.

 

[sinner]

The study reinforces that over the long term too much is paid for growth irrespective of whatever the value-growth cycle may be doing. The skew is in favour of value. Growth will have relatively smaller periods of outperformance when the cycle is most favourable.
Are you saying Kermit drew his conclusions by only looking at data since 2000? Maybe Kermit can clarify.

I didn't lose sight of the original kermit quote

Essentially tech/a the figures I posted means that even if your picking the middle of the pack or possibly even the worst of the 'value' stocks your still going to beat the middle of the pack or worst of regular or particularly growth stocks. (From memory the standard deviations were all pretty similar).

Everything I posted was simply to show this statement is unqualified and therefore misleading, especially since the GFC! Value doesn't beat always growth or even the middle of the pack. For the last market cycle (2008 lows) this has been plain false. motorways great article showed there is a fulcrum, which shows clearly you can't just rely on buying value, even over the long term. The "exhibit 1" chart only convinced me further of structural change, in lieu of the huge instability of growth/value ratios, not something you expect from a properly 'stationary kernel'.

 

[tech/a]

This is all very nice.
Charts abound.
Evidence is overwhelming-------------

BUT

How on earth does this help the investor/trader who has to value HIS portfolio
and fill it with " VALUE " stocks---not an index.

His stocks ARE his index.

OR

Are you suggesting you trade the INDEXES?

 

[sinner]

How on earth does this help the investor/trader who has to value HIS portfolio

Mainly it shows how the scientific literature does this. The opposite of most Benjamin Graham techniques really. I decide on a simple/robust valuation metric (e.g. P/B) and then buy the cheapest quintile or decile of stocks. Now I have my portfolio and it is 'valued' as the cheapest N stocks in the universe measured by XYZ metric.

Are you suggesting you trade the INDEXES?

tech I am not sure you grasp entirely?

The "index" you refer to is just another trading system pulled from the scientific literature: buy the N largest stocks by market cap, weighted by market cap, rebalance yearly.

The indices I am referring to are the same, trading systems pulled from the scientific literature: buy the N stocks with the highest/lowest metric in a given market cap range universe and rebalance yearly. These indexes are the answer to your question about

Any papers around on that?

They "value" index is simply the equity curve of a "value" system...

 

[McLovin]

Interesting posts Sinner. Nice to have a balance of opinions.

I'm not sure that value and growth are always mutually exclusive. Value investing is a continuum. Growth at a reasonable price is certainly in there somewhere.