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Buying value stocks may be better than buying an index, but identifying value stocks is hard and time consuming. Wouldn't the average investor be better off buy

Buying value stocks may be better than buying an index, but identifying value stocks is hard and time consuming. Wouldn't the average investor be better off buying index funds, since the average investor does not have the time, inclination, or training to find value stocks?

imtringued 5y ago
It's called factor investing and it's a niche for a reason. (It's worth it, but not for everyone).
dbsmith83 5y ago
You can always just let someone else do the research and buy shares of Berkshire Hathaway
- throw0101a 5y ago
  Berkshire Hathaway has under-performed the S&P 500 for >10 years now. And one of the main reasons why they're doing so well at all is probably because they have a sizeable holding of AAPL.
  - paulpauper 5y ago
    i don't think it has. also, it has less volatility.
    - throw0101a 5y ago
      As of late 2021, if you invested ten years back: * https://seekingalpha.com/article/4423498-berkshire-hathaway-versus-s-and-p-500-through-years https://seekingalpha.com/article/4423498-berkshire-hathaway-... Note: price only comparison. S&P 500 funds generally give dividends (which can be re-invested). The (very) recent pull back has evened things out a bit: > Over the past year, Berkshire is up 33%, double the gain in the S&P 500. The stock is now ahead of the S&P 500 over the past 10 years, 15.4% annualized versus 14.5% for the index, but still behind in the past five years, 13.3% annualized against 14.9% for the index. * https://www.barrons.com/articles/warren-buffetts-berkshire-hathaway-is-trouncing-the-s-p-500-this-year-51646409527 https://www.barrons.com/articles/warren-buffetts-berkshire-h... Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it.
      - dbsmith83 5y ago
        The article is all about the really long overview though. It is basically arguing that the market gaining is not a given. See the Japan example starting around 1990. That was over 30 years ago. If you look at Berkshire Hathaway 20 years back, it is clearly beating out the S&P500 by a lot. > Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it. Agreed. I hope to not be very invested in the stock market when I only have 10 years of work left. Seems too risky.
    - lotsofpulp 5y ago
      How do you define volatility? How can a market weighted index of the top 500 publicly listed US companies be more volatile than a single company? Which itself is 25%+ invested in a single other company and then the rest spread out over a handful of other companies. Edit: also, BRK’s outsize AAPL investment is the only reason BRK is even close to keeping up with SP500 index.
      - the_gastropod 5y ago
        Volatility is a statistical measurement. It's calculated by: 1. Find the mean of the data points 2. Calculate the difference between each data value and the mean (variance) 3. Square those variances 4. Add the squared variances together 5. Divide the sum of the squared variations by the number of data values
- rdtwo 5y ago
  You are just buying Apple shares by proxy
pantulis 5y ago
I believe indexes protect me from my own lack of knowledge on market operations and analysis. I have a couple of investments in indexed funds and of course I do not expect them to be resilient to bubbles or crashes. If what the FA says was true everyone would be doing this "value investing". It's about how you balance risk vs benefits.
brightball 5y ago
All completely true. The average investor should probably be using a financial advisor. One of the biggest reasons that most of these funds work is the volume of people in the US with 401k plans that have fund-only options. Every pay period the stocks in these funds get automatically purchased without many decisions involved so you're going to continue seeing them steadily and safely increase. Ultimately, investing boils down to finding something where you're comfortable. 401k investing makes people comfortable because of all the pre-tax benefits. Even if you make bad picks, you're still making the percentage of income tax every single time. A lot of people invest directly in real estate or franchise businesses. Others in big, safe, dividend payers. Some people buy timber land. IMO it's just going to be comfort level and experience.
- scarface74 5y ago
  No one should be using a financial advisory unless they are a fiduciary who gets paid based on the amount of assets under management. Most people don’t need a financial advisor when they are in the accumulation phase. After paying off high interest debt, save 3-6 months in retirement, put as much as you can in an index fund or a target date fund in a 401K and call it a day. Most people can’t afford to max out their retirement plans. After you do that, then a fiduciary advisor might come in handy.
  - brightball 5y ago
    The 401k funds are effectively an automated advisor. It’s tough to draw the line in a conversation like this because I completely agree with everything you said. An advisor only comes in at the point that a person is investing their money directly and consistently. Your average person doesn’t have the market knowledge or the time to learn it so an advisor is likely the best bet for the average person in that scenario. Anyone willing to do some research and learn will likely find their own comfort zone without an advisor.
    - deleted 5y ago
      [deleted]
  - 5y ago
colinmhayes 5y ago
There are value index funds. Vanguards is VTV
- sbelskie 5y ago
  The article suggests that “value investing” is not just about price ratios (which is mostly all such indexes can offer).
  - imtringued 5y ago
    They still offer superior performance by avoiding bubbles.
  - deleted 5y ago
    [deleted]
bumby 5y ago
A potential interesting alternative comes from the low-volatility anomaly. Stocks that demonstrate low volatility tend to over-perform over long stretches of time. So if one was able to invest in low-volatility index funds, the article's author would theoretically be able to avoid the massive bubble swings while still potentially beating the market (albeit probably not by large margins).
- maigret 5y ago
  You might be confusing volatility and growth here. One doesn’t imply the other.
  - bumby 5y ago
    Can you help me understand what you mean? The low-volatility anomaly shows that investing in low volatility (low risk) assets tend to outperform over long stretches of time. It's a counter-intuitive result (hence being an anomaly) because the CAPM says lower risk assets should provide lower rates of return. So, as I understand it, the CAPM does imply volatility should correlate with returns because the risk-premium is weighted by beta. I.e., low volatility stocks tend to be low beta stocks. lower beta implies lower returns under CAPM. The anomaly contradicts that model
satai 5y ago
Then just pick a value index. Or a total market index but other weight then market cap (fundamentals...).
baxtr 5y ago
Yes, agreed. This is comparing Apples and Oranges. Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the peak of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now. I think it is easy to dismiss indices in a bear situation. When in doubt, zoom out and relax.
- throw0101a 5y ago
  > Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the height of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now. It should be noted that the NASDAQ is heavily skewed to one particular sector, and so less diversified. Going for the S&P 500, US Total Market (Russell 3000), or world index would spread the risk around more. Even investing only at market peaks, as long as you didn't panic and sell, would still give results most people would find satisfactory: * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market...
- deleted 5y ago
  [deleted]
thomasfl 5y ago
Actively managed funds with low costs and a value investment style, can be a good alternative to picking stocks. It can be a good idea to identify actively managed funds that have performed better than the market in the past (ie. they have got alpha). Which investment style the fund has used, can be identified using number crunching (using fama french factor analysis). For example Warren Buffet uses a mixture of value and quality investement style. I work for a Fintech startup. We are working on a tool to do quantitative fund analysis.
- VBprogrammer 5y ago
  Actively managed funds don't tend to come with low costs as a general rule. It's more expensive to pay a bunch of interns to sit around generating reports and a rockstar to actually pick which stocks to buy or sell at each moment than it is to simply make a few trades to keep the portfolio in line with the market.

imtringued 5y ago

It's called factor investing and it's a niche for a reason. (It's worth it, but not for everyone).

dbsmith83 5y ago

You can always just let someone else do the research and buy shares of Berkshire Hathaway

throw0101a 5y ago
Berkshire Hathaway has under-performed the S&P 500 for >10 years now. And one of the main reasons why they're doing so well at all is probably because they have a sizeable holding of AAPL.
- paulpauper 5y ago
  i don't think it has. also, it has less volatility.
  - throw0101a 5y ago
    As of late 2021, if you invested ten years back: * https://seekingalpha.com/article/4423498-berkshire-hathaway-versus-s-and-p-500-through-years https://seekingalpha.com/article/4423498-berkshire-hathaway-... Note: price only comparison. S&P 500 funds generally give dividends (which can be re-invested). The (very) recent pull back has evened things out a bit: > Over the past year, Berkshire is up 33%, double the gain in the S&P 500. The stock is now ahead of the S&P 500 over the past 10 years, 15.4% annualized versus 14.5% for the index, but still behind in the past five years, 13.3% annualized against 14.9% for the index. * https://www.barrons.com/articles/warren-buffetts-berkshire-hathaway-is-trouncing-the-s-p-500-this-year-51646409527 https://www.barrons.com/articles/warren-buffetts-berkshire-h... Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it.
    - dbsmith83 5y ago
      The article is all about the really long overview though. It is basically arguing that the market gaining is not a given. See the Japan example starting around 1990. That was over 30 years ago. If you look at Berkshire Hathaway 20 years back, it is clearly beating out the S&P500 by a lot. > Ten years can be a long slog to stick with a particular stock if your future retirement / financial future depends on it. Agreed. I hope to not be very invested in the stock market when I only have 10 years of work left. Seems too risky.
  - lotsofpulp 5y ago
    How do you define volatility? How can a market weighted index of the top 500 publicly listed US companies be more volatile than a single company? Which itself is 25%+ invested in a single other company and then the rest spread out over a handful of other companies. Edit: also, BRK’s outsize AAPL investment is the only reason BRK is even close to keeping up with SP500 index.
    - the_gastropod 5y ago
      Volatility is a statistical measurement. It's calculated by: 1. Find the mean of the data points 2. Calculate the difference between each data value and the mean (variance) 3. Square those variances 4. Add the squared variances together 5. Divide the sum of the squared variations by the number of data values
rdtwo 5y ago
You are just buying Apple shares by proxy

pantulis 5y ago

I believe indexes protect me from my own lack of knowledge on market operations and analysis. I have a couple of investments in indexed funds and of course I do not expect them to be resilient to bubbles or crashes. If what the FA says was true everyone would be doing this "value investing". It's about how you balance risk vs benefits.

brightball 5y ago

All completely true. The average investor should probably be using a financial advisor. One of the biggest reasons that most of these funds work is the volume of people in the US with 401k plans that have fund-only options. Every pay period the stocks in these funds get automatically purchased without many decisions involved so you're going to continue seeing them steadily and safely increase. Ultimately, investing boils down to finding something where you're comfortable. 401k investing makes people comfortable because of all the pre-tax benefits. Even if you make bad picks, you're still making the percentage of income tax every single time. A lot of people invest directly in real estate or franchise businesses. Others in big, safe, dividend payers. Some people buy timber land. IMO it's just going to be comfort level and experience.

scarface74 5y ago
No one should be using a financial advisory unless they are a fiduciary who gets paid based on the amount of assets under management. Most people don’t need a financial advisor when they are in the accumulation phase. After paying off high interest debt, save 3-6 months in retirement, put as much as you can in an index fund or a target date fund in a 401K and call it a day. Most people can’t afford to max out their retirement plans. After you do that, then a fiduciary advisor might come in handy.
- brightball 5y ago
  The 401k funds are effectively an automated advisor. It’s tough to draw the line in a conversation like this because I completely agree with everything you said. An advisor only comes in at the point that a person is investing their money directly and consistently. Your average person doesn’t have the market knowledge or the time to learn it so an advisor is likely the best bet for the average person in that scenario. Anyone willing to do some research and learn will likely find their own comfort zone without an advisor.
  - deleted 5y ago
    [deleted]
- 5y ago

colinmhayes 5y ago

There are value index funds. Vanguards is VTV

sbelskie 5y ago
The article suggests that “value investing” is not just about price ratios (which is mostly all such indexes can offer).
- imtringued 5y ago
  They still offer superior performance by avoiding bubbles.
- deleted 5y ago
  [deleted]

bumby 5y ago

A potential interesting alternative comes from the low-volatility anomaly. Stocks that demonstrate low volatility tend to over-perform over long stretches of time. So if one was able to invest in low-volatility index funds, the article's author would theoretically be able to avoid the massive bubble swings while still potentially beating the market (albeit probably not by large margins).

maigret 5y ago
You might be confusing volatility and growth here. One doesn’t imply the other.
- bumby 5y ago
  Can you help me understand what you mean? The low-volatility anomaly shows that investing in low volatility (low risk) assets tend to outperform over long stretches of time. It's a counter-intuitive result (hence being an anomaly) because the CAPM says lower risk assets should provide lower rates of return. So, as I understand it, the CAPM does imply volatility should correlate with returns because the risk-premium is weighted by beta. I.e., low volatility stocks tend to be low beta stocks. lower beta implies lower returns under CAPM. The anomaly contradicts that model

satai 5y ago

Then just pick a value index. Or a total market index but other weight then market cap (fundamentals...).

baxtr 5y ago

Yes, agreed. This is comparing Apples and Oranges. Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the peak of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now. I think it is easy to dismiss indices in a bear situation. When in doubt, zoom out and relax.

throw0101a 5y ago
> Also, keep in mind: If you had invested all your money into a NASDAQ ETF at the height of the Dotcom bubble 20 years ago, you would have earned about 300% in returns by now. It should be noted that the NASDAQ is heavily skewed to one particular sector, and so less diversified. Going for the S&P 500, US Total Market (Russell 3000), or world index would spread the risk around more. Even investing only at market peaks, as long as you didn't panic and sell, would still give results most people would find satisfactory: * https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/ https://awealthofcommonsense.com/2014/02/worlds-worst-market...
deleted 5y ago
[deleted]

thomasfl 5y ago

Actively managed funds with low costs and a value investment style, can be a good alternative to picking stocks. It can be a good idea to identify actively managed funds that have performed better than the market in the past (ie. they have got alpha). Which investment style the fund has used, can be identified using number crunching (using fama french factor analysis). For example Warren Buffet uses a mixture of value and quality investement style. I work for a Fintech startup. We are working on a tool to do quantitative fund analysis.

VBprogrammer 5y ago
Actively managed funds don't tend to come with low costs as a general rule. It's more expensive to pay a bunch of interns to sit around generating reports and a rockstar to actually pick which stocks to buy or sell at each moment than it is to simply make a few trades to keep the portfolio in line with the market.