This acknowledged factor theory expert now offers an explanation for why factor investing hasn't worked to increase risk adjusted returns for 20 years and has massively underperformed one factor beta (TSM) for the last 18 years. SCV has failed and multi-factor have failed to beat beta for a long time. Fama previously admitted that he was "surprised" by the unexpectedly long persistence of LCG outperformance. Apparently, Cliff has also been surprised and he offers an explanation for this phenomenon which has to do with social media making the market less efficient. It's about time for factor state of the art experts to admit that there may be some fundamental change in the market and/or the economy that cannot be measured by data mining inputs like PE, PB, etc. on which factor theory is based.
It is clear that factor backtesting models worked well from 1929 to when first described in 1992. It is also clear that an optimally managed SCV fund (DFSVX) substantially outperformed beta (TSM) from 1993 - 2006 which includes the popping of the dot com bubble. Since 2006, as I and others have pointed out, VTI has outperformed DFSVX massively, as mega cap tech growth has dominated the market and SCV has withered. I agree with Mr. Asness that this LCG outperformance seems overdone at times and driven more by hype than results. I am a bit skeptical that AI will turn out as well as the market seems to believe and AI investors are paying a lot for a rosy future that hasn't happened yet.
There continues to be a persistently huge disparity of fundamental parameters between LCG and SCV in PE, PB, DIV, PCF, etc.. There is, however, no law that the market must be coldly rational with numbers without Shiller's animal spirits in asset price setting. Quite clearly, the market sometimes is not rational but it has done far better than most of us who chose not to use it at pricing assets. In order for value to work for investors revision to the mean must occur at some point. Value investors have been waiting a long time for overhyped tech stocks to suffer but mega cap tech growth has continued to thrive in spite of occasional temporary setbacks. We have not yet arrived at the level of bubble euphoria of the dot com era IMO. J M Keynes said the market can stay irrational for longer than you can stay solvent. Quite true. The temporary setbacks and the low but sufficient level of skepticism in these expensive tech darlings have prevented a 1999 bubble so far. Rotation out of big winners and into more diversified stocks may be underway which would be healthy for the market in my opinion. Bull markets need a wall or worry to climb and they collapse when worry disappears and euphoria takes over. Ironically, value investors and factor mavens have been essential in maintaining a level of LCG skepticism that has prolonged this LCG driven bull market so far. I will get very worried indeed when the last value investor gives up.
I confess I did not read Cliff's long article but I have posted a link to it which I believe will work if you'd like to read his latest thoughts.
https://elsevier-ssrn-document-store-pr ... 8cfada7277
Garland Whizzer
It is clear that factor backtesting models worked well from 1929 to when first described in 1992. It is also clear that an optimally managed SCV fund (DFSVX) substantially outperformed beta (TSM) from 1993 - 2006 which includes the popping of the dot com bubble. Since 2006, as I and others have pointed out, VTI has outperformed DFSVX massively, as mega cap tech growth has dominated the market and SCV has withered. I agree with Mr. Asness that this LCG outperformance seems overdone at times and driven more by hype than results. I am a bit skeptical that AI will turn out as well as the market seems to believe and AI investors are paying a lot for a rosy future that hasn't happened yet.
There continues to be a persistently huge disparity of fundamental parameters between LCG and SCV in PE, PB, DIV, PCF, etc.. There is, however, no law that the market must be coldly rational with numbers without Shiller's animal spirits in asset price setting. Quite clearly, the market sometimes is not rational but it has done far better than most of us who chose not to use it at pricing assets. In order for value to work for investors revision to the mean must occur at some point. Value investors have been waiting a long time for overhyped tech stocks to suffer but mega cap tech growth has continued to thrive in spite of occasional temporary setbacks. We have not yet arrived at the level of bubble euphoria of the dot com era IMO. J M Keynes said the market can stay irrational for longer than you can stay solvent. Quite true. The temporary setbacks and the low but sufficient level of skepticism in these expensive tech darlings have prevented a 1999 bubble so far. Rotation out of big winners and into more diversified stocks may be underway which would be healthy for the market in my opinion. Bull markets need a wall or worry to climb and they collapse when worry disappears and euphoria takes over. Ironically, value investors and factor mavens have been essential in maintaining a level of LCG skepticism that has prolonged this LCG driven bull market so far. I will get very worried indeed when the last value investor gives up.
I confess I did not read Cliff's long article but I have posted a link to it which I believe will work if you'd like to read his latest thoughts.
https://elsevier-ssrn-document-store-pr ... 8cfada7277
Garland Whizzer
Statistics: Posted by garlandwhizzer — Mon Sep 09, 2024 3:19 pm — Replies 0 — Views 52