Why Value?

[dualstow]

Harry Browne eventually moved from a collection of Growth stock funds to the S&P 500.
A lot of pp’ers seem to like value stocks.

I am still partial to value stocks.

Every once in a while, I look at the performance of growth stock funds and value stock funds versus VTSAX, Vanguard’s total domestic (U.S.) stock index fund. Any one of the three can be on top at any given time. They take turns.

Tell me: What do you like about Value?

[vnatale]

Harry Browne eventually moved from a collection of Growth stock funds to the S&P 500.
A lot of pp’ers seem to like value stocks.

I am still partial to value stocks.

Every once in a while, I look at the performance of growth stock funds and value stock funds versus VTSAX, Vanguard’s total domestic (U.S.) stock index fund. Any one of the three can be on top at any given time. They take turns.

Tell me: What do you like about Value?

In January 2003 when I made my one and only portfolio allocation I went heavy into both Value and Small Cap Value, believing that aligned with who I am overall -- a value person.

In retrospect I would have been better off with growth, S&P 500 since then and even this year so far.

[Smith1776]

Harry Browne eventually moved from a collection of Growth stock funds to the S&P 500.
A lot of pp’ers seem to like value stocks.

I am still partial to value stocks.

Every once in a while, I look at the performance of growth stock funds and value stock funds versus VTSAX, Vanguard’s total domestic (U.S.) stock index fund. Any one of the three can be on top at any given time. They take turns.

Tell me: What do you like about Value?

I'd say it's a combination of two things: 1) my own cognitive bias, 2) what I've read about the "academic evidence":

1) This is something of a confession. I spent so many years of my life reading the writings of Ben Graham and Warren Buffett. If I simply throw my hands up in the air and buy a total market fund instead of investing in the more niche concept of value, I feel like I would have wasted all that time I sunk into reading and research. In a sense, I invest in value to prevent my own feelings of regret.

2) The evidence presented from folks like Fama, French, Swedroe, Felix, etc. seems robust enough for me to commit to value. I agree with Cliff Asness that the historical outperformance of value is sometimes behavioural and sometimes risk based. In the dotcom bubble it was probably behavioural. In other times I think it's just compensation for the fact that value firms are in some sense riskier.

I also like Swedroe's idea that one can tilt to small cap value but lower the total % of the portfolio dedicated to stocks while maintaining the same expected return. This would then improve the portfolio's overall risk-reward ratio as there is more "room" left in the portfolio for diversifying alternatives.

Just my perspective. I've noticed that these types of discussions have ignited all out wars on the Knuckleheads forum.

[dualstow]

At some point, the number of surly bogleheads grew too great in number for me to bear. And, if you respond to them the moderators treat you like you’re part of the problem.
Just ignore them, Smithers. Surf for info and never post there.

[Smith1776]

At some point, the number of surly bogleheads grew too great in number for me to bear. And, if you respond to them the moderators treat you like you’re part of the problem.
Just ignore them, Smithers. Surf for info and never post there.

Well said, my friend.

[whatchamacallit]

I looked at value funds really hard and couldn't bring myself to believe in them.

I think for a value fund to continuously work it would have to be a highly active fund.

From what I could remember, all of the historical out performance is based on indexes that were not actual funds during the out performance times.

Try to find an actual value fund that out-performed the total stock market index.

[vnatale]

I looked at value funds really hard and couldn't bring myself to believe in them.

I think for a value fund to continuously work it would have to be a highly active fund.

From what I could remember, all of the historical out performance is based on indexes that were not actual funds during the out performance times.

Try to find an actual value fund that out-performed the total stock market index.

Tyler should have some answers for you since his Golden Butterfly is the Permanent Portfolio with a value funded added to it equally.

[dualstow]

…
From what I could remember, all of the historical out performance is based on indexes that were not actual funds during the out performance times.
…

Hah! That’s a very very interesting find, if true, whatcha. I think I remember an article saying something along the same lines about funds in general.

Anyway, Smithers, that’s a very candid answer.

[Kevin K.]

There are endless articles and of course threads on Bogleheads about the validity of the value premium going forward, whether it'll come back (cyclically) after being in the toilet, even whether the Fama-French data are real (huge thread on that on Bogleheads now if you've got a few hours to spare).

Perhaps Tyler will weigh in here but IMHO the brilliance of his choice to add SCV to the TSM of the PP is shown by clicking on at the "exposures" tab on Portfolio Visualizer:

https://www.portfoliovisualizer.com/bac ... 9xStmyI4EU

The pure TSM allocation is of course almost 100% mega-cap growth companies. the 50:50 TSM/SCV is split almost exactly evenly between small, mid and large cap companies. Now of course that's a massive tilt to SCV but once could certainly see why a risk-averse investor might not want to have their entire growth asset be a total market fund whose fate depends on how exactly 7 mega-corporations fare going forward (i.e. the so-called Magnificent 7).

[dualstow]

Do you tilt to value, Kevin? I guess you adopted the Golden Butterfly. Did you tilt to small cap value or just value before Tyler invented that portfolio?

TSM or Total Stock Market is just a mirror of the market, is it not? If Apple is a large part of VTSAX it’s because it’s a large part of the market.
I don’t think it’s fair to say

might not want to have their entire growth asset be a total market fund whose fate depends on how exactly 7 mega-corporations fare going forward (i.e. the so-called Magnificent 7).

when it’s small cap value funds and even broad value funds that are concentrated in fewer stocks. And the components of those funds are not equal-weighted either, are they?

But more importantly, what’s Magnificent or what’s FAANG changes. They rise and fall. No one was talking about Nvidia or Super Micro Computer (SMCI) a relatively short time ago, and maybe Apple and Google will sunset in our lifetime. But the index, VTSAX, it just keeps churning out good results if you wait long enough. Despite not having the exposure in portfolio #2 in that link (tab), it has amazing returns.

I suppose when you gain more even exposure from the TSM/SCV combo, you lose out on some of the gains of the Magnificents.

This is the part of the post where I feel like I’m stating the obvious and experience self doubt because I suspect that I must be missing something
Are there funds that replicate a combo of TSM and SCV? Why isn’t it more popular?

[dualstow]

ADDING to the above so that I don’t keep editing:
What I mean is, if you individually bought and held the Magnificent 7, you would of course get dinged when one of them invariably slides. If you buy the total market, some unknown that you never would have thought to buy is going to grow to become part of the next favored group, the Fantabulous 8. The only way to capture it is by owning it the first place, with Total Market.
Unless of course, you can picks stocks like Warren Buffett.

[Kevin K.]

Do you tilt to value, Kevin? I guess you adopted the Golden Butterfly. Did you tilt to small cap value or just value before Tyler invented that portfolio?

TSM or Total Stock Market is just a mirror of the market, is it not? If Apple is a large part of VTSAX it’s because it’s a large part of the market.
I don’t think it’s fair to say

might not want to have their entire growth asset be a total market fund whose fate depends on how exactly 7 mega-corporations fare going forward (i.e. the so-called Magnificent 7).

when it’s small cap value funds and even broad value funds that are concentrated in fewer stocks. And the components of those funds are not equal-weighted either, are they?

But more importantly, what’s Magnificent or what’s FAANG changes. They rise and fall. No one was talking about Nvidia or Super Micro Computer (SMCI) a relatively short time ago, and maybe Apple and Google will sunset in our lifetime. But the index, VTSAX, it just keeps churning out good results if you wait long enough. Despite not having the exposure in portfolio #2 in that link (tab), it has amazing returns.

I suppose when you gain more even exposure from the TSM/SCV combo, you lose out on some of the gains of the Magnificents.

This is the part of the post where I feel like I’m stating the obvious and experience self doubt because I suspect that I must be missing something
Are there funds that replicate a combo of TSM and SCV? Why isn’t it more popular?

I'm truly the poster child for the old Bogleheads cliché "nobody knows nothing" dualstow. I only shared the comparison of SVC/TSM vs. TSM from Portfolio Visualizer out of respect for Tyler, whose genius I never cease to be amazed by.

I still think the Golden Butterfly is one of the best risk parity portfolios of all time - provided that one replaces the LTT's with intermediate or short term Treasuries. But the arguments for it are all rear view mirror stuff just like with anything else. The small cap aipha disappeared right about when it was first publicized, the 40 year bond tailwind is over and the persistently inverted yield curve makes T-bills a far saner default choice than the archaic and indefensible PP/GB barbell.

Personally I just have TSM and a smattering of VXUS on the equity side and a coward's barbell of VGSH and VTIP for bonds along with 4+ years of residual living expenses in T-bills. But I admire folks who have the conviction and fortitude to stick with things like SCV or LTT's for decades.

[dualstow]

I understand. Thank you! If I recall, you had a portfolio checkup with Allan Roth or a similar professional which I’m sure helps one stick to the plan.

[ArthurPooh]

The pure TSM allocation is of course almost 100% mega-cap growth companies. the 50:50 TSM/SCV is split almost exactly evenly between small, mid and large cap companies. Now of course that's a massive tilt to SCV but once could certainly see why a risk-averse investor might not want to have their entire growth asset be a total market fund whose fate depends on how exactly 7 mega-corporations fare going forward (i.e. the so-called Magnificent 7).

Wouldn't just a small cap (without any value tilt) allocation accomplish the same thing? I share the sentiment of wanting to tilt away from megacap growth stocks, but not the belief in value premium.

[Kevin K.]

I understand. Thank you! If I recall, you had a portfolio checkup with Allan Roth or a similar professional which I’m sure helps one stick to the plan.

Not Allan Roth (a great guy for sure and someone whose brilliant writing I've certainly benefitted from - but I could never have afforded his services even in the highly unlikely event he'd have had time for me!) but yeah after a couple of decades of mostly self-(mis)management of my portfolio I did hire an FA (Jon Luskin, who these days hosts the Bogleheads podcasts) for a one-time review. The value of it, for me, was pretty much entirely for non-portfolio stuff: things like making better use of HSA's for health insurance savings, re-thinking our Social Security claiming strategy, etc. I didn't take any of his portfolio advice - and realized that in fact I knew a lot more about that side of things than he did. I can't remember which famous investing writer it was who said something along the lines of "the mediocre portfolio you can stick with is much better than the more sophisticated with you can't resist tinkering with" but I'm living proof that he was correct. And of course low-volatility allocations like the PP and GB are fantastic for encouraging good investor behavior by nature.

[ArthurPooh]

What I mean is, if you individually bought and held the Magnificent 7, you would of course get dinged when one of them invariably slides. If you buy the total market, some unknown that you never would have thought to buy is going to grow to become part of the next favored group, the Fantabulous 8. The only way to capture it is by owning it the first place, with Total Market.

I think that the issue people have with FAANG/Magnificent 7/Fantabulous 8 is less about the virtues of specific companies on any particular list, and more about the very notion of a few extremely large growth stocks, mostly concentrated in a single sector, with prices heavily driven by expectations rather than present performance (and in case of the four of the M7, seemingly driven by a single product) dominating the entire equity market. Has something like this happened before?

[Kevin K.]

What I mean is, if you individually bought and held the Magnificent 7, you would of course get dinged when one of them invariably slides. If you buy the total market, some unknown that you never would have thought to buy is going to grow to become part of the next favored group, the Fantabulous 8. The only way to capture it is by owning it the first place, with Total Market.

I think that the issue people have with FAANG/Magnificent 7/Fantabulous 8 is less about the virtues of specific companies on any particular list, and more about the very notion of a few extremely large growth stocks, mostly concentrated in a single sector, with prices heavily driven by expectations rather than present performance (and in case of the four of the M7, seemingly driven by a single product) dominating the entire equity market. Has something like this happened before?

This excellent post by Ben Carlson contains the answers to the very good and timely questions you raise (but in short, concentration in the stock market - whether we're talking number of companies or number of industries - is the rule, not the exception.

https://awealthofcommonsense.com/2024/0 ... centrated/

[ArthurPooh]

What I mean is, if you individually bought and held the Magnificent 7, you would of course get dinged when one of them invariably slides. If you buy the total market, some unknown that you never would have thought to buy is going to grow to become part of the next favored group, the Fantabulous 8. The only way to capture it is by owning it the first place, with Total Market.

I think that the issue people have with FAANG/Magnificent 7/Fantabulous 8 is less about the virtues of specific companies on any particular list, and more about the very notion of a few extremely large growth stocks, mostly concentrated in a single sector, with prices heavily driven by expectations rather than present performance (and in case of the four of the M7, seemingly driven by a single product) dominating the entire equity market. Has something like this happened before?

This excellent post by Ben Carlson contains the answers to the very good and timely questions you raise (but in short, concentration in the stock market - whether we're talking number of companies or number of industries - is the rule, not the exception.

https://awealthofcommonsense.com/2024/0 ... centrated/

Thanks for the interesting article. However, it doesn't really address my main point: it's not just concentration in a few companies or sectors that is worrying. It's the fact that all of these are what I would call extreme growth companies, i.e. their price isn't really based on anything they currently do, but on very lofty expectations for the future. In contrast, when I checked out top 10 stocks of Italy (the country with highest concentration per Carlson) I saw established, capital-intensive companies, many of which have been founded decades ago. The Nifty Fifty he references in another also seem to be much less narrative-based.

In short: a megacap growth stock seems to me a contradiction in terms. Of course, markets can stay irrational longer than I can stay solvent, and thus I wouldn't entirely disinvest from them. And I might just be entirely wrong, maybe a neo-Soviet global economy - one monopolist for every internet service, everyone driving the same car, a binary choice in smartphones, and production of meaningless boilerplate (which the current "AI" really amounts to) amounting to majority of GDP - really is the future. But in the meantime it would be nice to tilt into something a little more tangible.

[Smith1776]

Whatever "style" you choose, whether it be growth, value, momentum, or total market, just make sure you commit to it. The best investment strategy is the one you can stick to.

[Kevin K.]

What I mean is, if you individually bought and held the Magnificent 7, you would of course get dinged when one of them invariably slides. If you buy the total market, some unknown that you never would have thought to buy is going to grow to become part of the next favored group, the Fantabulous 8. The only way to capture it is by owning it the first place, with Total Market.

I think that the issue people have with FAANG/Magnificent 7/Fantabulous 8 is less about the virtues of specific companies on any particular list, and more about the very notion of a few extremely large growth stocks, mostly concentrated in a single sector, with prices heavily driven by expectations rather than present performance (and in case of the four of the M7, seemingly driven by a single product) dominating the entire equity market. Has something like this happened before?

This excellent post by Ben Carlson contains the answers to the very good and timely questions you raise (but in short, concentration in the stock market - whether we're talking number of companies or number of industries - is the rule, not the exception.

https://awealthofcommonsense.com/2024/0 ... centrated/

Thanks for the interesting article. However, it doesn't really address my main point: it's not just concentration in a few companies or sectors that is worrying. It's the fact that all of these are what I would call extreme growth companies, i.e. their price isn't really based on anything they currently do, but on very lofty expectations for the future. In contrast, when I checked out top 10 stocks of Italy (the country with highest concentration per Carlson) I saw established, capital-intensive companies, many of which have been founded decades ago. The Nifty Fifty he references in another also seem to be much less narrative-based.

In short: a megacap growth stock seems to me a contradiction in terms. Of course, markets can stay irrational longer than I can stay solvent, and thus I wouldn't entirely disinvest from them. And I might just be entirely wrong, maybe a neo-Soviet global economy - one monopolist for every internet service, everyone driving the same car, a binary choice in smartphones, and production of meaningless boilerplate (which the current "AI" really amounts to) amounting to majority of GDP - really is the future. But in the meantime it would be nice to tilt into something a little more tangible.

I think the so-called Magnificent Seven are valued because of their dominance of specific industries and gigantic moats against competitors. But if one wants to diversify (and I certainly see value in doing so) it can be as simple as using VT as one's sole equity position, or holding VTI and VXUS 60:40 to reflect global equity market capitalization. International markets are chock full of companies making real stuff rather than internet dependent fluff.

[dualstow]

Wouldn't just a small cap (without any value tilt) allocation accomplish the same thing? I share the sentiment of wanting to tilt away from megacap growth stocks, but not the belief in value premium.

Well, some see small cap growth as something to avoid, as it has the greatest share of companies most likely to go to zero.
(Full disclosure: I own a small cap index from pre-boglehead/ pre-pp days).

[dualstow]

…
I did hire an FA (Jon Luskin, who these days hosts the Bogleheads podcasts) for a one-time review. The value of it, for me, was pretty much entirely for non-portfolio stuff: things like making better use of HSA's for health insurance savings, re-thinking our Social Security claiming strategy, etc. I didn't take any of his portfolio advice - and realized that in fact I knew a lot more about that side of things than he did. I can't remember which famous investing writer it was who said something along the lines of "the mediocre portfolio you can stick with is much better than the more sophisticated with you can't resist tinkering with" but I'm living proof that he was correct. And of course low-volatility allocations like the PP and GB are fantastic for encouraging good investor behavior by nature.

Ah, I had forgotten that you didn’t implement the advice. I remember Jon Luskin and enjoyed listening to him.
Sticking with a half-decent portfolio is everything, in my opinion.

[vnatale]

Whatever "style" you choose, whether it be growth, value, momentum, or total market, just make sure you commit to it. The best investment strategy is the one you can stick to.

For certain!

Mainly due to my own personal inertia mine has not changed since January 2003, 21+ years ago.

[Smith1776]

Whatever "style" you choose, whether it be growth, value, momentum, or total market, just make sure you commit to it. The best investment strategy is the one you can stick to.

For certain!

Mainly due to my own personal inertia mine has not changed since January 2003, 21+ years ago.

I'm very impressed!

[vnatale]

Whatever "style" you choose, whether it be growth, value, momentum, or total market, just make sure you commit to it. The best investment strategy is the one you can stick to.

For certain!

Mainly due to my own personal inertia mine has not changed since January 2003, 21+ years ago.

I'm very impressed!

Don't be. It is all due to 100% inertia!