5 Myths About Dividend Growth Investing [View article]
Robert The question is simple, was your strategy either unique or optimal. You have to compare it with other alternatives to determine if it was. Without doing so you have no clue. That is what factor analysis shows you. In other words, if you earn say 8% a year and another strategy with same or less risk earns 10%, while you think you did well, you were not well rewarded for the risks you took and you should have had higher returns, and would have with a more optimal strategy
5 Myths About Dividend Growth Investing [View article]
Robert Like I said, if you want to show that there is something unique about dividend strategies the gold standard in finance is a regression analysis using a factor model. That is what you'll see in any peer reviewed journal.The work I've seen and shown shows there is nothing unique
If you want to back up your statements with facts run a regression and show us the alpha in the strategy. If not there is nothing unique. Period
No matter how much you protest or how strong your statements that doesn't make them right. Provide the facts and we'll all believe
5 Myths About Dividend Growth Investing [View article]
Robert
To show it's special you need to simply run a factor regression on the strategy and see if there is an alpha there. If not then the returns are fully explained by the exposure to those factors, beta, size, value and MOM. And then there is nothing special.
That four factor model has been the standard in finance for now about 15 years. Its preeminence is now being challenged by an alternative model
The authors of the September 2012 study, “Digesting Anomalies: An Investment Approach,” which covers the period 1972-2011, propose a new multifactor model that goes a long way to explaining many of the anomalies that neither the Fama-French three-factor model nor the Carhart four-factor model (adding momentum as the fourth factor) can explain. In the new model (which they call the q-factor model), the expected return of an asset in excess of the riskless rate is described by the sensitivity of its return to four factors: • The market excess return (MK T). • The difference between the return on a portfolio of small-cap stocks and the return on a portfolio of large-cap stocks (rME). The size factor earns an average return of 0.31 percent per month and is statistically significant at the 5 percent level. • The difference between the return on a portfolio of low-investment stocks and the return on a portfolio of high-investment stocks (R*A/A). The investment factor earns an average return of 0.44 percent per month and is statistically significant. It’s worth noting that the investment factor is highly correlated with the value premium (0.69), suggesting that this factor plays a similar role to that of the value factor. • The difference between the return on a portfolio of high return on equity (ROE) stocks and the return on a portfolio of low return on equity stocks (rROE). The ROE factor earns an average return of 0.60 percent per month, and is statistically significant. Also of importance is that the rROE factor has very low correlation with the Fama-French factors. Thus, we can conclude that this factor provides important new information missing from the Fama-French model. In addition, it has a high correlation (0.50) with the momentum factor, meaning that rROE would play a similar role as the momentum factor in analyzing performance. They also found that the investment and return on equity factors are almost totally uncorrelated, meaning that they are independent, or unique, factors.
5 Myths About Dividend Growth Investing [View article]
Robert, I am not picking on dividend paying stocks. Just pointing out that focusing on them is not supported by any evidence nor any logic. Doing so has led to inefficient strategies--including inferior diversification. There are better ways to achieve the same objectives --like just having a high tilt and low beta portfolio. If interested I suggest you read this piece http://bit.ly/WZXwlZ
It is a bit dated but the strategy held up very well during 2008 bear market and we have been using it for about 20 years now.
5 Myths About Dividend Growth Investing [View article]
Dave You are just parsing words here. Please stop. There is no INDIVIDUAL stock selection in the sense of choosing them by some fundamental analysis. The way the funds we use are run is they define an asset class and then basically buy them all in market cap weighted manner--though don't strictly stick to that because that has negatives like forced trading. Instead they use patient trading strategies including algorithmic trading programs.
I did answer the high yield question, if you don't understand that I can't help you.
RE focused on income, that as I explained makes no sense unless the only thing one cares about is preserving their bequeth desire. And that can force really poor decisions.
5 Myths About Dividend Growth Investing [View article]
Chuck, see my response to Dave's comment above High dividend (low p/d) is a very defined term, just as low P/E is,
As to a high growth of div strategy, I did not say it was "not sound" What I said is it's nothing special. That is shown in a factor regression which shows the sources of returns of a strategy, And it shows you can replicate that in more efficient ways. Certainly more diversified.
Note that there is evidence on high profitability firms outperforming, see the two papers I cited in my response to Dave, but none on high dividend (they actually underperform other value strategies) and none on high growth of dividend companies, at least that I am aware of. And now we are seeing funds developed to track a high profitability factor.
5 Myths About Dividend Growth Investing [View article]
Dave doesn't matter if you believe it or not, those are the facts from a recent paper, unfortunately it's not publicly available.
I have no clue about your comment that "what they do is not stock selection" The funds we use (DFA and Bridgeway) certainly select stocks based on criteria defined by the asset class they are trying to represent, using academic definitions, (not fundamental anaysis) and then they screen for MOM. So I have no clue what you are talking about in terms of playing language games.
High dividend stocks are defined in same way low p/e or low p/b stocks are defined. Value stocks for example are typically bottom 30% by p/b, p/c, p/s or p/d. That's how academics define a high dividend stock. Now there are of course ETFs and funds that use their own definitions.
And you might just read the post on high growth of dividend stocks too. It's all covered there, BTW-in case you are interested in the latest academic research you might read this blog on the profitability factor
5 Myths About Dividend Growth Investing [View article]
Keep this in mind In 2009, 14 percent of firms around the world eliminated their dividend, and 43 percent of firms reduced their dividend. In other words, dividends provide an illusion of safety.
I've written another blog on the subject of dividends so watch for it at my blog here http://cbsn.ws/AchOUv;contentBody
And if interested here are some posts on dividend strategies.
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
For individual investors the best place to buy individual bonds is at original issue when all investors buy at the same price, so no mark ups. Otherwise it's tough as market is pretty opaque with exception of Treasuries. We buy about $4 billion a year so we get the same prices Vanguard gets when it buys and can often get more attractive prices because we will buy small (odd) lots for clients but they want big lots of liquid bonds.
My guess is that Fidelity and Schwab are pretty good places to try and buy individual bonds. Wish I could help with more specifics
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
giorgiolb That is not what I said. Why do you continually distort what I've said? I have never said that there isn't skill, nor that one cannot beat the market using it. Show me anywhere I said that.
And I've never said the system is rigged. Nor have I ever said big sophisticated managers CANT beat their indices. Never said most of the things you say I said. In future would be helpful if you did what I do when citing someone, taking their exact statements and put them in quotations.
As to defeatist, nothing of the sort. It's recognizing that the odds are best in my favor by not playing. No different than playing roulette. The surest way to win is not to play.
But further, if it was using your words, defeatist, then I would recommend and use pure index funds. But I've never owned any. I believe that using science/evidence that superior strategies result, which give you good chance of beating indices, simply by eliminating the negatives of indexing (forced trading, transparent reconstitiuton, using momentum screens, and so on
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
giorgiolb "So everyone IS average? A flat bell curve is a new concept. Perhaps you should do a research paper on that one."
So show me where I said anything remotely like that. What I said was that we have a tendency to be overconfident of our skills. 80-90% of people think they are above average which is impossible, yet that is a fact. Of course only 50% can be above average. So if you or anyone thinks they are above average there is a good chance they are simply overconfident. Doesn't mean they aren't above average
Now to move on what investors also fail to understand is that being above average in investment skills doesn't mean that you will produce above average returns, not by a long shot. The reason is that it's a very different game. One reason is that there are costs, it's not a zero sum game with a winner and a loser like say tennis or chess. The other is that you are not competing one on one with other individuals, who you might be lot smarter than or know more. The problem that most investors don't understand is that you are competing against the collective wisdom of the market which is a lot tougher competitor than the average investor. Remember about 90% of all trading is done by big sophisticated institutions with lots of smart people and lot more resources than you or I have. And they are setting prices. The game is very different. Obviously when about 90% of actively managed funds underperform on AT basis in long term being above average still leaves you with below benchmark results.
Yes some people do beat the RIGHT BENCHMARKS, not some arbitrary index, which is a problem--Many compare their returns to say the S&P when they invest in say value stocks. But beating benchmarks may also be result of luck, not skill. And it's very hard to tell the difference in many cases. Yet when individuals outperform they tend to attribute it skill and when they fail they attribute to bad luck.
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
The following is the perfect example of misinformation
"Not everyone is "average" however, some of us have higher aspirations or specific goals unmet by the guaranteed mediocrity of a basket of index funds."
This shows a complete misunderstanding of the issue. And it's one of the most common errors investors make. First, index funds don't provide mediocre or average returns. They provide MARKET Returns less low costs. By definition that means they will provide above average returns compared to the average investor. And the evidence, just check S&Ps Active vs. Passive Scorecard, is that as you increase the investment horizon the larger the percentage of active managers they outperform, and once you add taxes the odds of beating them go down even further
I would then add that while index funds are good vehicles, they have some negatives which can be improved on. And fund families like DFA and Bridgeway and Vericymetry among others have done. In DFAs case now for 30 years. So using them increases the percentage of active managers you are likely to outperform.
In fact even Buffett has said that you should use index funds as they virtually guarantee that you'll outperform the vast majority of investors.
On a more humorous note,. overconfidence (thinking we are above average) is an all too human trait. Research shows that about 80-90% of us think we are above average at things like driving and investing. Which means the odds are that if you think you're better than average, you're probably overconfident. Probably.
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
Gratian Thanks for the comments Note that I didn't simply "diss" anything. What I attempted to do was to point out what I believe are the easily identified flaws in the strategy, showed the evidence, so that people could at least make an informed decision. I'd note that most people have a big problem in making investment decisions because the education system has totally failed the public. Unless one gets an MBA in finance it's likely that they have not taken a single course in capital markets theory. And if they have read books on investing its more likely that its along the lines of how to pick stocks or get rich quickly or whatever the latest fad is rather than books citing the academic literature. So they are often making uninformed, or misinformed decisions.
For example in regard to income approach vs total return approach, there is a whole body of research on what is referred to as safe withdrawal rates. My guess is most investors haven't read that literature. For those interested there are many articles and papers on the subject and among the best writes on the subject is Michael Kitces. Those interested might try reading this as one example http://bit.ly/W3y0pE
In my writings I try to present the evidence and then investors can at least make an informed decision.
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
Roger What did I say that leads you to believe that I believe in market timing? Just curious. Having said that I do believe, because the evidence demonstrates that, that momentum does exist and can be used to help returns. In fact the equity funds I use and recommend employ screens to avoid buying stocks with negative momentum.
I also have suggested in my books two TIPS strategies. One buy and hold, the other a shifting maturity approach based on current yields relative to historic means. The basis of that is that if there is one thing that tends to (not guaranteed) revert to the mean it's real interest rates. And it's certainly not a guarantee for higher returns. But there are other reasons which I have mentioned.
I also on rare occasions have sold assets when they appeared to be in a bubble based on valuations. Again I knew I could be very early and would have to stay the course but ultimately believed it would be proven correct. So in 1998 I sold all growth stocks and shifted to what the NYT called the Larry Portfolio--an all small value portfolio, though globally diversified, and lower equity allocation. That has so far been very effective at achieving its goals, keeping returns up and cutting left tail risk. That was the only trade I did basically until just recently when I sold my US REITS and moved them to small value stocks. So that is now 2 equity trades in 14 years.
Bottom line is that I don't think you can benefit from timing if done frequently-- but there are times, rare, when valuations signal that assets are too highly valued. Now there is no fine line to tell you that. So was the S&P in a bubble in 98 when I sold and the P/E approached 25 or was it when it went to 27 or 30 or what? And if you sell how do you know when to get back in? When it hits 20 or 18 or what. Thus I think the best strategy for almost all investors is to diversify across asset classes and rebalance, which forces you to sell when valuations rise and buy when they fall. Just the opposite of what most people do.
5 Myths About Dividend Growth Investing [View article]
The question is simple, was your strategy either unique or optimal. You have to compare it with other alternatives to determine if it was. Without doing so you have no clue. That is what factor analysis shows you.
In other words, if you earn say 8% a year and another strategy with same or less risk earns 10%, while you think you did well, you were not well rewarded for the risks you took and you should have had higher returns, and would have with a more optimal strategy
Good luck to you
Best wishes
Larry
5 Myths About Dividend Growth Investing [View article]
5 Myths About Dividend Growth Investing [View article]
Like I said, if you want to show that there is something unique about dividend strategies the gold standard in finance is a regression analysis using a factor model. That is what you'll see in any peer reviewed journal.The work I've seen and shown shows there is nothing unique
If you want to back up your statements with facts run a regression and show us the alpha in the strategy. If not there is nothing unique. Period
No matter how much you protest or how strong your statements that doesn't make them right. Provide the facts and we'll all believe
Best wishes
Larry
5 Myths About Dividend Growth Investing [View article]
To show it's special you need to simply run a factor regression on the strategy and see if there is an alpha there. If not then the returns are fully explained by the exposure to those factors, beta, size, value and MOM. And then there is nothing special.
That four factor model has been the standard in finance for now about 15 years. Its preeminence is now being challenged by an alternative model
The authors of the September 2012 study, “Digesting Anomalies: An Investment Approach,” which covers the period 1972-2011, propose a new multifactor model that goes a long way to explaining many of the anomalies that neither the Fama-French three-factor model nor the Carhart four-factor model (adding momentum as the fourth factor) can explain. In the new model (which they call the q-factor model), the expected return of an asset in excess of the riskless rate is described by the sensitivity of its return to four factors:
• The market excess return (MK T).
• The difference between the return on a portfolio of small-cap stocks and the return on a portfolio of large-cap stocks (rME). The size factor earns an average return of 0.31 percent per month and is statistically significant at the 5 percent level.
• The difference between the return on a portfolio of low-investment stocks and the return on a portfolio of high-investment stocks (R*A/A). The investment factor earns an average return of 0.44 percent per month and is statistically significant. It’s worth noting that the investment factor is highly correlated with the value premium (0.69), suggesting that this factor plays a similar role to that of the value factor.
• The difference between the return on a portfolio of high return on equity (ROE) stocks and the return on a portfolio of low return on equity stocks (rROE). The ROE factor earns an average return of 0.60 percent per month, and is statistically significant. Also of importance is that the rROE factor has very low correlation with the Fama-French factors. Thus, we can conclude that this factor provides important new information missing from the Fama-French model. In addition, it has a high correlation (0.50) with the momentum factor, meaning that rROE would play a similar role as the momentum factor in analyzing performance. They also found that the investment and return on equity factors are almost totally uncorrelated, meaning that they are independent, or unique, factors.
Best wishes
Larry
5 Myths About Dividend Growth Investing [View article]
http://bit.ly/WZXwlZ
It is a bit dated but the strategy held up very well during 2008 bear market and we have been using it for about 20 years now.
Best wishes
Larry
5 Myths About Dividend Growth Investing [View article]
You are just parsing words here. Please stop. There is no INDIVIDUAL stock selection in the sense of choosing them by some fundamental analysis. The way the funds we use are run is they define an asset class and then basically buy them all in market cap weighted manner--though don't strictly stick to that because that has negatives like forced trading. Instead they use patient trading strategies including algorithmic trading programs.
I did answer the high yield question, if you don't understand that I can't help you.
RE focused on income, that as I explained makes no sense unless the only thing one cares about is preserving their bequeth desire. And that can force really poor decisions.
Best wishes
Larry
5 Myths About Dividend Growth Investing [View article]
High dividend (low p/d) is a very defined term, just as low P/E is,
As to a high growth of div strategy, I did not say it was "not sound"
What I said is it's nothing special. That is shown in a factor regression which shows the sources of returns of a strategy, And it shows you can replicate that in more efficient ways. Certainly more diversified.
Note that there is evidence on high profitability firms outperforming, see the two papers I cited in my response to Dave, but none on high dividend (they actually underperform other value strategies) and none on high growth of dividend companies, at least that I am aware of. And now we are seeing funds developed to track a high profitability factor.
Best wishes
Larry
5 Myths About Dividend Growth Investing [View article]
I have no clue about your comment that "what they do is not stock selection" The funds we use (DFA and Bridgeway) certainly select stocks based on criteria defined by the asset class they are trying to represent, using academic definitions, (not fundamental anaysis) and then they screen for MOM. So I have no clue what you are talking about in terms of playing language games.
High dividend stocks are defined in same way low p/e or low p/b stocks are defined. Value stocks for example are typically bottom 30% by p/b, p/c, p/s or p/d. That's how academics define a high dividend stock. Now there are of course ETFs and funds that use their own definitions.
And you might just read the post on high growth of dividend stocks too. It's all covered there,
BTW-in case you are interested in the latest academic research you might read this blog on the profitability factor
http://cbsn.ws/ZkujNC
and this one
http://cbsn.ws/W3qATN
Best wishes
Larry
5 Myths About Dividend Growth Investing [View article]
In 2009, 14 percent of firms around the world eliminated their dividend, and 43 percent of firms reduced their dividend. In other words, dividends provide an illusion of safety.
I've written another blog on the subject of dividends so watch for it at my blog here
http://cbsn.ws/AchOUv;contentBody
And if interested here are some posts on dividend strategies.
• Why a high dividend strategy is dangerous http://cbsn.ws/WO6h2D
• Factors to consider for high-dividend stock strategies http://cbsn.ws/W0q5cU
• Should you follow a high dividend strategy? http://cbsn.ws/IqShUc
• Why a high-dividend strategy is not a good approach http://cbsn.ws/IHkt0E
• Can dividend yield predict returns? http://cbsn.ws/X1ZmU9
• The dangers of dividend-paying stocks http://cbsn.ws/IqTZ7X
Best wishes
Larry
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
My guess is that Fidelity and Schwab are pretty good places to try and buy individual bonds. Wish I could help with more specifics
Best wishes
Larry
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
That is not what I said. Why do you continually distort what I've said?
I have never said that there isn't skill, nor that one cannot beat the market using it. Show me anywhere I said that.
And I've never said the system is rigged. Nor have I ever said big sophisticated managers CANT beat their indices. Never said most of the things you say I said. In future would be helpful if you did what I do when citing someone, taking their exact statements and put them in quotations.
As to defeatist, nothing of the sort. It's recognizing that the odds are best in my favor by not playing. No different than playing roulette. The surest way to win is not to play.
But further, if it was using your words, defeatist, then I would recommend and use pure index funds. But I've never owned any. I believe that using science/evidence that superior strategies result, which give you good chance of beating indices, simply by eliminating the negatives of indexing (forced trading, transparent reconstitiuton, using momentum screens, and so on
Best wishes to you
Larry
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
"So everyone IS average? A flat bell curve is a new concept. Perhaps you should do a research paper on that one."
So show me where I said anything remotely like that. What I said was that we have a tendency to be overconfident of our skills. 80-90% of people think they are above average which is impossible, yet that is a fact. Of course only 50% can be above average. So if you or anyone thinks they are above average there is a good chance they are simply overconfident. Doesn't mean they aren't above average
Now to move on what investors also fail to understand is that being above average in investment skills doesn't mean that you will produce above average returns, not by a long shot. The reason is that it's a very different game. One reason is that there are costs, it's not a zero sum game with a winner and a loser like say tennis or chess. The other is that you are not competing one on one with other individuals, who you might be lot smarter than or know more. The problem that most investors don't understand is that you are competing against the collective wisdom of the market which is a lot tougher competitor than the average investor. Remember about 90% of all trading is done by big sophisticated institutions with lots of smart people and lot more resources than you or I have. And they are setting prices. The game is very different. Obviously when about 90% of actively managed funds underperform on AT basis in long term being above average still leaves you with below benchmark results.
Yes some people do beat the RIGHT BENCHMARKS, not some arbitrary index, which is a problem--Many compare their returns to say the S&P when they invest in say value stocks. But beating benchmarks may also be result of luck, not skill. And it's very hard to tell the difference in many cases. Yet when individuals outperform they tend to attribute it skill and when they fail they attribute to bad luck.
Good luck
Best wishes
Larry
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
"Not everyone is "average" however, some of us have higher aspirations or specific goals unmet by the guaranteed mediocrity of a basket of index funds."
This shows a complete misunderstanding of the issue. And it's one of the most common errors investors make. First, index funds don't provide mediocre or average returns. They provide MARKET Returns less low costs. By definition that means they will provide above average returns compared to the average investor. And the evidence, just check S&Ps Active vs. Passive Scorecard, is that as you increase the investment horizon the larger the percentage of active managers they outperform, and once you add taxes the odds of beating them go down even further
I would then add that while index funds are good vehicles, they have some negatives which can be improved on. And fund families like DFA and Bridgeway and Vericymetry among others have done. In DFAs case now for 30 years. So using them increases the percentage of active managers you are likely to outperform.
In fact even Buffett has said that you should use index funds as they virtually guarantee that you'll outperform the vast majority of investors.
On a more humorous note,. overconfidence (thinking we are above average) is an all too human trait. Research shows that about 80-90% of us think we are above average at things like driving and investing. Which means the odds are that if you think you're better than average, you're probably overconfident. Probably.
Best wishes
Larry
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
Thanks for the comments
Note that I didn't simply "diss" anything. What I attempted to do was to point out what I believe are the easily identified flaws in the strategy, showed the evidence, so that people could at least make an informed decision.
I'd note that most people have a big problem in making investment decisions because the education system has totally failed the public. Unless one gets an MBA in finance it's likely that they have not taken a single course in capital markets theory. And if they have read books on investing its more likely that its along the lines of how to pick stocks or get rich quickly or whatever the latest fad is rather than books citing the academic literature. So they are often making uninformed, or misinformed decisions.
For example in regard to income approach vs total return approach, there is a whole body of research on what is referred to as safe withdrawal rates. My guess is most investors haven't read that literature. For those interested there are many articles and papers on the subject and among the best writes on the subject is Michael Kitces. Those interested might try reading this as one example
http://bit.ly/W3y0pE
In my writings I try to present the evidence and then investors can at least make an informed decision.
I hope that is helpful
Best wishes
Larry
Larry Swedroe Positions For 2013: Resist The Temptation To Stretch For Yield [View article]
What did I say that leads you to believe that I believe in market timing? Just curious.
Having said that I do believe, because the evidence demonstrates that, that momentum does exist and can be used to help returns. In fact the equity funds I use and recommend employ screens to avoid buying stocks with negative momentum.
I also have suggested in my books two TIPS strategies. One buy and hold, the other a shifting maturity approach based on current yields relative to historic means. The basis of that is that if there is one thing that tends to (not guaranteed) revert to the mean it's real interest rates. And it's certainly not a guarantee for higher returns. But there are other reasons which I have mentioned.
I also on rare occasions have sold assets when they appeared to be in a bubble based on valuations. Again I knew I could be very early and would have to stay the course but ultimately believed it would be proven correct. So in 1998 I sold all growth stocks and shifted to what the NYT called the Larry Portfolio--an all small value portfolio, though globally diversified, and lower equity allocation. That has so far been very effective at achieving its goals, keeping returns up and cutting left tail risk. That was the only trade I did basically until just recently when I sold my US REITS and moved them to small value stocks. So that is now 2 equity trades in 14 years.
Bottom line is that I don't think you can benefit from timing if done frequently-- but there are times, rare, when valuations signal that assets are too highly valued. Now there is no fine line to tell you that. So was the S&P in a bubble in 98 when I sold and the P/E approached 25 or was it when it went to 27 or 30 or what? And if you sell how do you know when to get back in? When it hits 20 or 18 or what. Thus I think the best strategy for almost all investors is to diversify across asset classes and rebalance, which forces you to sell when valuations rise and buy when they fall. Just the opposite of what most people do.
Hope that clarifies things and is helpful.
Larry