How low can we go?

[Dont_know_mind]

That's true, but I think it still has some merit, and my feeling is that it's a lot harder to separate the "desirable" value from "crap" value than a lot of people assume. I think the logic is, if you are buying a large basket of value stocks (an index), you remove some of that idiosyncratic risk of value trap companies, and over time, the good more than makes up for the bad.

I also notice, you seem to trust some of these value factors enough as a screening tool to arrive at your opinion of US tech ....





The other thing I've read with value, is that it tends to go through very long periods of underperformance, followed by periods of huge outperformance. That makes me think a lot of the issue is behavioral. I think it's really hard to stick to a strategy for years when it seems like it's not working, especially when plausible narratives follow ("cheap for a reason"), making it all the more compelling to throw in the towel. I'm not ruling out that things could be different this time, I just think it's likelier that history will repeat/rhyme.

I also like international for many of the same reasons.

Something that gives me pause that the time hasn’t quite arrived for value or international is that there doesn’t seem to be all-around towel chucking. Maybe we’re close though.

I think if I had to weigh things in terms of what I believe in (in order most to least):
1. I do believe in long term under-oversupply/capital investment cycles for commodities
2. I don’t believe in long term exceptionalism of one country persisting
3. I don’t believe in reversion to the mean as an investable foundation.

3. I think leads one as a value investor to tend to adopt a martingale betting/investment strategy of larger bets or keep investing until it turns around (resulting in larger net size- same effect).

It’s inevitable that as a value investor, as the price reduces, it seems better value and you should keep going. This can lead to serious problems so you have to check your scaling, 95% confidence interval and what you lose if it goes the other way - if for example growth continues outperforming for 40 years, if there is no recession for 40 years and other seemingly unlikely scenarios.

So right now I am thinking where could I be wrong. Here is what I think currently:
1. If there is a vaccine and resource prices and demand doesn’t pick up further, this could crush the value bulls
2. If there is no vaccine and value doesn’t get crushed, this is actually quite bullish

I tend to think there are still too many people who believe in value for it to be a straight lay up. The holding cost is great and carry is good, but it might need to be wrung out a bit more.

I’m hopeful it will turn around by 2022 and in the meantime tech investors can knock themselves out. I’m happy to hold value here but I’m not expecting any near term outperformance.

My pessimism aside, there could be a punchy move at any stage and I want to be a holder here in case that occurs. In the meantime what I calculate are sustainable dividends on what I hold are great compared to borrowing costs, which makes it very comfortable to hold on that level.

[Perry Ict]

Something that gives me pause that the time hasn’t quite arrived for value or international is that there doesn’t seem to be all-around towel chucking. Maybe we’re close though.

I think if I had to weigh things in terms of what I believe in (in order most to least):
1. I do believe in long term under-oversupply/capital investment cycles for commodities
2. I don’t believe in long term exceptionalism of one country persisting
3. I don’t believe in reversion to the mean as an investable foundation.

3. I think leads one as a value investor to tend to adopt a martingale betting/investment strategy of larger bets or keep investing until it turns around (resulting in larger net size- same effect).

It’s inevitable that as a value investor, as the price reduces, it seems better value and you should keep going. This can lead to serious problems so you have to check your scaling, 95% confidence interval and what you lose if it goes the other way - if for example growth continues outperforming for 40 years, if there is no recession for 40 years and other seemingly unlikely scenarios.

I can definitely see those first two points. On point 3, I think it really depends on what you are referring to - in my mind, those other things you listed (investment cycles for commodities, and changes in market leadership internationally) both refer to a type of "reversion to the mean".

But I agree that reversion to mean can't be assumed as a rule in just any context. And, it makes sense to account for the possibility that this time could be different, or that the reversion may take longer than historically, whether due to fundamental or behavioral factors.

I realize these things are hard to predict, so I try to offset my "tilts" to small, international, and value with a more standard allocation to a large cap US stock fund that will help me stay the course if the market doesn't do what I expect it to do. It will be interesting to see what happens going forward.

[Dont_know_mind]

I can definitely see those first two points. On point 3, I think it really depends on what you are referring to - in my mind, those other things you listed (investment cycles for commodities, and changes in market leadership internationally) both refer to a type of "reversion to the mean".

But I agree that reversion to mean can't be assumed as a rule in just any context. And, it makes sense to account for the possibility that this time could be different, or that the reversion may take longer than historically, whether due to fundamental or behavioral factors.

I realize these things are hard to predict, so I try to offset my "tilts" to small, international, and value with a more standard allocation to a large cap US stock fund that will help me stay the course if the market doesn't do what I expect it to do. It will be interesting to see what happens going forward.

Yes, I generally agree that reversion to the mean is a tailwind, but I think it's easy to overestimate it.
That has been a mistake for me in the past.
I think if you can take the best from value and growth strategies in terms of their reasoning, this is a powerful thing.

On the subject of 3. and mean reversion, being diversified does protect you a lot. 2 things stand out to me:
a) mean reversion does not have to occur, but often does
b) I've found it impractical to not invest because of overvaluation alone in the last 20 years. Or at least the returns are terrible if you do it this way. I think what has worked for me is to find a sweet spot, wait for it and hit full swing. Buffett has a great analogy about this. However, there's a always a chance you could be wrong.

https://www.youtube.com/watch?v=P305CTi8_FQ

I think value investing and DCF averaging into value often leads down the slippery slope of greater risk. This got me looking into martingale betting systems and kelly criterion in terms of sizing:
https://en.wikipedia.org/wiki/Martin...betting_system)

I don't actually use any of that in practice. But I did realize thinking about martingale that using that system does not increase your likelihood of success, but can increase your risk of ruin. So what I do now is wait for a good pitch and swing full tilt and that's it. I used to think that dynamic changes were important but I think less so now. They are probably useful, but only as long as this doesn't cause you to average down into a hole. But I could be wrong on this and my thinking is still evolving. I think also your strategy has to be consistent with your personality and be comfortable to do for decades. With the caveat that the biases are towards cognitive errors and poor decision making under stress.

Also, another thing that value tends to underappreciate is that alpha is usually found only in areas where there is very underappreciated market information or poorly available information. What is perceived to be alpha is probably I think mainly market timing or luck.

[Perry Ict]

Yes, I generally agree that reversion to the mean is a tailwind, but I think it's easy to overestimate it.
That has been a mistake for me in the past.
I think if you can take the best from value and growth strategies in terms of their reasoning, this is a powerful thing.

On the subject of 3. and mean reversion, being diversified does protect you a lot. 2 things stand out to me:
a) mean reversion does not have to occur, but often does
b) I've found it impractical to not invest because of overvaluation alone in the last 20 years. Or at least the returns are terrible if you do it this way. I think what has worked for me is to find a sweet spot, wait for it and hit full swing. Buffett has a great analogy about this. However, there's a always a chance you could be wrong.

https://www.youtube.com/watch?v=P305CTi8_FQ

I think value investing and DCF averaging into value often leads down the slippery slope of greater risk. This got me looking into martingale betting systems and kelly criterion in terms of sizing:
https://en.wikipedia.org/wiki/Martin...betting_system)

I don't actually use any of that in practice. But I did realize thinking about martingale that using that system does not increase your likelihood of success, but can increase your risk of ruin. So what I do now is wait for a good pitch and swing full tilt and that's it. I used to think that dynamic changes were important but I think less so now. They are probably useful, but only as long as this doesn't cause you to average down into a hole. But I could be wrong on this and my thinking is still evolving. I think also your strategy has to be consistent with your personality and be comfortable to do for decades. With the caveat that the biases are towards cognitive errors and poor decision making under stress.

Also, another thing that value tends to underappreciate is that alpha is usually found only in areas where there is very underappreciated market information or poorly available information. What is perceived to be alpha is probably I think mainly market timing or luck.

Like you said, it makes sense that mean reversion can be a tailwind if it's used in conjunction with other concepts. My view is that it can be a dangerous thing if you don't diversify away idiosyncratic risk first. A cheap company can always get cheaper, and eventually go out of business in a worst case scenario, so you could end up laddering in all the way to zero. On the other hand, an index of hundreds of companies that is diversified across sectors is unlikely to do such a thing, so mean reversion can be a more helpful tool there, as I see it.

If you don't mind sharing, what was the mistake you made in the past that are referring to, with regard to mean reversion? Were you investing in a specific company or sector?

[Tim]

Just like to point out that revision to mean applies to both favorable and unfavorable variances. That is the math term, just average.
I will let you determine which method you choose: value, growth, dividend growth, indexing or sector.

I will point out that my personal target is BELOW the S&P 500. Why? I carry bonds in my AA, do not want 100 % equities in a portfolio. Don't need it and makes it tons easier to enjoy Mr. Markets gyrations. I find it a little humorous when someone gets aggressive on the equity (tilt) and then diversifies with debt diversification and tries to maximize that. My benchmark is a little below average. Just a below average investor. Perfectly fine.

[Perry Ict]

Just like to point out that revision to mean applies to both favorable and unfavorable variances. That is the math term, just average.
I will let you determine which method you choose: value, growth, dividend growth, indexing or sector.

I will point out that my personal target is BELOW the S&P 500. Why? I carry bonds in my AA, do not want 100 % equities in a portfolio. Don't need it and makes it tons easier to enjoy Mr. Markets gyrations. I find it a little humorous when someone gets aggressive on the equity (tilt) and then diversifies with debt diversification and tries to maximize that. My benchmark is a little below average. Just a below average investor. Perfectly fine.

There's something to be said for simplicity. Some people determine how much they want in equities, how much they want in FI/bonds, pick 2 or 3 broad based funds for those goals, and call it a day. I think that's smart, and I'm coming to appreciate that approach.

With respect to this thread, one thing the past year taught me is that, psychologically, it is much easier for me to buy into weakness with bigger market funds (for example total world) than with things like narrower sector bets, and probably less risky as well. Along those lines, I've been streamlining everything over the past year. I've mostly sold off my individual stock picks, most sector etfs (including gold miners), as well as the majority of specific country etfs; fortunately, the biggest issue with doing this has been cap gains implications, so it could have been worse (in retrospect, I attribute those results to some dumb luck).

With all that said, I still find some of the tilts (such as value, international, and small) compelling after listening to some very smart and successful people like Merriman and Bernstein and others, so I will still continue with those, and maybe make some bets along those lines (like recently, up until a month or so ago, when small and value seemed like bargains). I am not necessarily counting on outperforming the market long term by doing this, but I think it's at least an approach that I'm comfortable with, and probably less risky than other forms of "active" investing.

[Peds]

Almost unanimously we voted that we have not hit bottom yet. I know that this is a WAG but if you had to commit to a number what would you say?

Currently on 4/2/20 the S&P is at 2480 down from a high of almost 3400

this thread has run its course/makes no sense now as 2020 strikes yet again.
11/24/20 s&p: 3635

Lordosis you of course may start *yet another* poll predicting the next new low.