boglerdude wrote: ↑Wed Apr 29, 2020 12:17 am
Why has international underperformed. Why do markets keep getting it wrong
Turn the question upside-down... why has the S&P 500 outperformed since March 2009? All of the outperformance has come since then.
QE, buybacks funded by corporate junk rated and BBB borrowing meant to enrich insiders, the passive investing mania (FIRE sheeple), bubbles in US based tech and shale unicorns which make no profits... take your pick. How sustainable are any of those? And taken together?
That's why don't get wedded to any fixed narrative.
From the NY Times article I provided the link to above:
"An economic downturn almost always favors giants like Microsoft, Apple and Amazon, the country’s three most valuable companies. But the demand for their shares has only been amplified by a crisis that seems almost tailor-made for their future success.
Even as analysts have trimmed expectations for all three companies’ quarterly earnings, which they’ll report this week, their stocks are climbing. Their combined value rose more than three-quarters of a trillion dollars since the recent market low — more than the cumulative gain of the bottom half of all stocks in the S&P 500.
Investors are betting, in part, that the Covid-19 crisis accelerates the already growing power of America’s corporate colossuses.
“The firms that were the top dogs going into the crisis also happen to have the most resilient business models because they can do everything online,” said Thomas Philippon, a professor of finance at New York University. “It turns out Amazon was one of the most successful businesses in the U.S., and on top of it, they are the ones who can keep processing orders.”
Besides benefiting from their gargantuan size, Microsoft, Amazon and Apple are all sitting on mountains of cash that will make them largely immune to the funding squeezes other companies are experiencing.
But the depth of the current economic decline makes it reasonable to expect that such large companies will emerge in an even more dominant position this time around, said Mr. Philippon, who last year published a book, “The Great Reversal,” that examines the competitiveness of the American economy.
“This one is likely to be much worse because the death rates of small businesses is likely to be even higher,” said Mr. Philippon.
The difference in investor expectations for large and small companies is stark: The Nasdaq 100, an index of the largest technology companies — which also happen to be the largest companies in the country — is down 0.6 percent this year. The Russell 2000 index, which tracks small public companies, is down 22 percent — roughly double the 11 percent in losses for the S&P 500.
That has supercharged the giants’ boom.
According to data from Goldman Sachs, the top 10 stocks in the S&P 500 this month accounted for roughly 27 percent of the total value of the index. That surpassed the previous peak, which came during the tech stock frenzy of the late 1990s. The top five companies alone — Microsoft, Apple, Amazon, Alphabet and Facebook — account for 20 percent of the index."
So it goes way beyond U.S. vs. International. My read on this is that it's kind of Jack Bogle's old arguments for owning only TSM if you're a U.S.-based investor writ large. U.S.-based mega-corporations, since the '08 crisis, have become irreversibly dominant, at least in the short run. The fact that a lot of their growth has been based on stock buybacks and other chicanery doesn't seem to matter. They have the ability to thrive and grow while Int'l, EM and small caps of all sorts are crushed by debt, lack of cash, dependence on brick-and-mortar locations, etc.
I'd be curious to hear what leading MPT folks like Bernstein, Swedroe or the DFA crowd think of these developments, which clearly accelerated in the wake of the '08 crisis and now seem poised to achieve warp speed in light of the pandemic.
Kevin K. wrote: ↑Wed Apr 29, 2020 9:49 am
So it goes way beyond U.S. vs. International. My read on this is that it's kind of Jack Bogle's old arguments for owning only TSM if you're a U.S.-based investor writ large. U.S.-based mega-corporations, since the '08 crisis, have become irreversibly dominant, at least in the short run. The fact that a lot of their growth has been based on stock buybacks and other chicanery doesn't seem to matter. They have the ability to thrive and grow while Int'l, EM and small caps of all sorts are crushed by debt, lack of cash, dependence on brick-and-mortar locations, etc.
I'd be curious to hear what leading MPT folks like Bernstein, Swedroe or the DFA crowd think of these developments, which clearly accelerated in the wake of the '08 crisis and now seem poised to achieve warp speed in light of the pandemic.
Bernstein, Swedroe, DFA, etc are biased in their views. They will not budge. Their livelihoods depend on it. They've already been arguing their stance for 20 years now, they aren't just going to wake up one day and say "my bad, I was wrong" even though all evidence shows they have been wrong. Why do people continue to respect and listen to people that have never once in their career actually been right in any of the advice they have given? The very moment Fama/French released their research on factors is the very moment it stopped working. They will all hold to their guns for what could be another 20 years of underperformance. And unfortunately some people will continue to listen to them and ride the wave of underperformance along with them.
The trends of large cap growth stocks didn't even start 10 years ago. They started almost 20 years ago, at the bottom of the tech bust in ~2002-2003. From that period on growth has consistently dominated value. Large has mostly out performed small (unlike growth/value small/large actually has had some periods of strength but on the whole have still underperformed). International did have a good run in the early 2000's, but since then has been flat on it's face with absolutely no sign of life. I think the problem is that "small", "value", and "international" indexes have an extremely high percentage of zombie companies. These are companies that deserve to be cheap. Do I believe that all small, value, and international companies should be avoided? Absolutely not. But one should be very picky in what they invest in. I don't think that buy and hold on small, value, or international index funds are a particularly good deal at the moment. In a low growth world, large cap U.S. growth stocks will continue to shine.
Kevin K. wrote: ↑Wed Apr 29, 2020 9:49 am
So it goes way beyond U.S. vs. International. My read on this is that it's kind of Jack Bogle's old arguments for owning only TSM if you're a U.S.-based investor writ large. U.S.-based mega-corporations, since the '08 crisis, have become irreversibly dominant, at least in the short run. The fact that a lot of their growth has been based on stock buybacks and other chicanery doesn't seem to matter. They have the ability to thrive and grow while Int'l, EM and small caps of all sorts are crushed by debt, lack of cash, dependence on brick-and-mortar locations, etc.
I'd be curious to hear what leading MPT folks like Bernstein, Swedroe or the DFA crowd think of these developments, which clearly accelerated in the wake of the '08 crisis and now seem poised to achieve warp speed in light of the pandemic.
Bernstein, Swedroe, DFA, etc are biased in their views. They will not budge. Their livelihoods depend on it. They've already been arguing their stance for 20 years now, they aren't just going to wake up one day and say "my bad, I was wrong" even though all evidence shows they have been wrong. Why do people continue to respect and listen to people that have never once in their career actually been right in any of the advice they have given? The very moment Fama/French released their research on factors is the very moment it stopped working. They will all hold to their guns for what could be another 20 years of underperformance. And unfortunately some people will continue to listen to them and ride the wave of underperformance along with them.
The trends of large cap growth stocks didn't even start 10 years ago. They started almost 20 years ago, at the bottom of the tech bust in ~2002-2003. From that period on growth has consistently dominated value. Large has mostly out performed small (unlike growth/value small/large actually has had some periods of strength but on the whole have still underperformed). International did have a good run in the early 2000's, but since then has been flat on it's face with absolutely no sign of life. I think the problem is that "small", "value", and "international" indexes have an extremely high percentage of zombie companies. These are companies that deserve to be cheap. Do I believe that all small, value, and international companies should be avoided? Absolutely not. But one should be very picky in what they invest in. I don't think that buy and hold on small, value, or international index funds are a particularly good deal at the moment. In a low growth world, large cap U.S. growth stocks will continue to shine.
So is it a bad decision to go with something like the Russell 1000 Growth ETF (VONG) instead of a Total Market Index which will contain a lot of utility and consumer staples etc? If you think the Total Market Index is too highly concentrated though, don't look at the LC growth indexes which are almost 40% in the top 10 stocks.
jalanlong wrote: ↑Wed Apr 29, 2020 2:12 pm
So is it a bad decision to go with something like the Russell 1000 Growth ETF (VONG) instead of a Total Market Index which will contain a lot of utility and consumer staples etc? If you think the Total Market Index is too highly concentrated though, don't look at the LC growth indexes which are almost 40% in the top 10 stocks.
Not a bad thing at all. Seeing as how growth both outperformed in the recent bull and bear cases, I think one could make an argument that large cap growth is a perfectly fine "core holding". You could also split 50/50 TSM/large-cap growth. Or you could even track the returns over time and stay tilted to large cap growth as long as it continues to work. This is a 2 decade long trend, it's likely to continue, and you'll know when it's over.
HB also originally proposed using growth funds in the PP.
jalanlong wrote: ↑Wed Apr 29, 2020 2:12 pm
So is it a bad decision to go with something like the Russell 1000 Growth ETF (VONG) instead of a Total Market Index which will contain a lot of utility and consumer staples etc? If you think the Total Market Index is too highly concentrated though, don't look at the LC growth indexes which are almost 40% in the top 10 stocks.
Not a bad thing at all. Seeing as how growth both outperformed in the recent bull and bear cases, I think one could make an argument that large cap growth is a perfectly fine "core holding". You could also split 50/50 TSM/large-cap growth. Or you could even track the returns over time and stay tilted to large cap growth as long as it continues to work. This is a 2 decade long trend, it's likely to continue, and you'll know when it's over.
HB also originally proposed using growth funds in the PP.
I know that if you backtest from the 1970s until now you will see that value and total mkt have beaten growth. But in context of a PP. if other assets are for recession or deflation, then I don't see why I wouldn't want to lean towards growth stocks and avoid stocks like utilities which generally perform better in an environment that I already have covered by other assets.
jalanlong wrote: ↑Wed Apr 29, 2020 2:12 pm
So is it a bad decision to go with something like the Russell 1000 Growth ETF (VONG) instead of a Total Market Index which will contain a lot of utility and consumer staples etc? If you think the Total Market Index is too highly concentrated though, don't look at the LC growth indexes which are almost 40% in the top 10 stocks.
Not a bad thing at all. Seeing as how growth both outperformed in the recent bull and bear cases, I think one could make an argument that large cap growth is a perfectly fine "core holding". You could also split 50/50 TSM/large-cap growth. Or you could even track the returns over time and stay tilted to large cap growth as long as it continues to work. This is a 2 decade long trend, it's likely to continue, and you'll know when it's over.
HB also originally proposed using growth funds in the PP.
I know that if you backtest from the 1970s until now you will see that value and total mkt have beaten growth. But in context of a PP. if other assets are for recession or deflation, then I don't see why I wouldn't want to lean towards growth stocks and avoid stocks like utilities which generally perform better in an environment that I already have covered by other assets.
Go back and test from 2003 to today and you'll see different. These things go in large multi-decade trends. If you want to just hold TSM, go for it, nothing wrong with that. But, if you want to optimize... growth is where it's at until the paradigm shifts.
jalanlong wrote: ↑Wed Apr 29, 2020 2:12 pm
So is it a bad decision to go with something like the Russell 1000 Growth ETF (VONG) instead of a Total Market Index which will contain a lot of utility and consumer staples etc? If you think the Total Market Index is too highly concentrated though, don't look at the LC growth indexes which are almost 40% in the top 10 stocks.
Not a bad thing at all. Seeing as how growth both outperformed in the recent bull and bear cases, I think one could make an argument that large cap growth is a perfectly fine "core holding". You could also split 50/50 TSM/large-cap growth. Or you could even track the returns over time and stay tilted to large cap growth as long as it continues to work. This is a 2 decade long trend, it's likely to continue, and you'll know when it's over.
HB also originally proposed using growth funds in the PP.
I know that if you backtest from the 1970s until now you will see that value and total mkt have beaten growth. But in context of a PP. if other assets are for recession or deflation, then I don't see why I wouldn't want to lean towards growth stocks and avoid stocks like utilities which generally perform better in an environment that I already have covered by other assets.
Go back and test from 2003 to today and you'll see different. These things go in large multi-decade trends. If you want to just hold TSM, go for it, nothing wrong with that. But, if you want to optimize... growth is where it's at until the paradigm shifts.
I wonder how small of a portfolio is too small? As well as the Russell 1000 Growth ETF has done the past 10 years, the Russell Top 200 Growth has done even better. But that only holds 127 stocks. The top 10 stocks are 50% of the portfolio and the other 190 round out the fund. Microsoft is 11% of the fund.
jalanlong wrote: ↑Wed Apr 29, 2020 3:17 pm
I wonder how small of a portfolio is too small? As well as the Russell 1000 Growth ETF has done the past 10 years, the Russell Top 200 Growth has done even better. But that only holds 127 stocks. The top 10 stocks are 50% of the portfolio and the other 190 round out the fund. Microsoft is 11% of the fund.
Concentration is a double edged sword. It can work for you or against you. Mega-cap growth concentration has been *the* trade for years now. Do you want more diversification or more concentration? I personally have no issues concentrating to chase alpha, but I also track the inter-market trends regularly and will know when it's time to jump off the train.
