Value Investor Benchmark

[Packer16]

As a result of the Martin Asset Management thread, I was thinking of appropriate value investor benchmarks.  I think for most small (less than $10 million to invest) investors the small cap value index fund is the best because you can buy it as an alternative to active management and only pay 8bps.  What to do you think and what benchmarks do you use?

 

Packer

[ASTA]

I think that to go the index way one can measure up against Richard A. Ferri or just copy his portfolio one of the easiest ways to invest in the world :D just re balance 1 or every second year. For myself I just go with S&P and if I beat it over a longer period I am happy. However my goal is to get more then absolute 5% compounded and i'll be happy. 

[CorpRaider]

"Agreed.  I use prfz and/or vbr as a yardstick/touchstone."  Wow, PRFZ is kicking my ass...

[frommi]

Because i invest internationally i use VT as a benchmark. Using an US based smallcap index would not be fair to my portfolio. I have a problem with an absolute return as a benchmark because i like to have a smooth ride instead of volatile up- and downswings you would see with pure smallcap indices. And its probably stupid to compare a 2x levered portfolio to a normal index because the risk of losing everything is endlessly higher. So i would vote for a risk adjusted measurement like sharpe ratio or something else, because risk control is the reason i have become a value investor. But thats just me, Eric has surely a different opinion on that topic. :)

[ERICOPOLY]

So i would vote for a risk adjusted measurement like sharpe ratio or something else, because risk control is the reason i have become a value investor. But thats just me, Eric has surely a different opinion on that topic. :)

 

Me?  No, the reason why I recently retired from managing my RothIRA (as well as my wife's) is to eliminate myself as the systemic risk to my family's financial security  :)

 

Sometimes you need to hand the keys to a friend when you are at the party if you know you have a problem.

[plato1976]

Not sure how matters it is

small value probably outperformed SP500 in the past 13 years

but from 1925 there are many periods small value underperformed

 

I am not sure in overall how much small value outperformed SP500 in the past 100 years

And there is counter-argument that if you change to equal weight instead of cap weight for stocks in SP500, you dramatically reduce your underperformance against small value (equal weight doesn't help small value as much)

 

I feel either way (using small value, or use SP500) doesn't make a big difference

unless we use PackerIndex then most of us will feel pretty bad :)

 

 

As a result of the Martin Asset Management thread, I was thinking of appropriate value investor benchmarks.  I think for most small (less than $10 million to invest) investors the small cap value index fund is the best because you can buy it as an alternative to active management and only pay 8bps.  What to do you think and what benchmarks do you use?

 

Packer

[stahleyp]

Since 2004, according to Morningstar VBR (small cap value) has underperformed VBK (small cap growth).  98.19% vs 156.57%. S&P 500 62.05%

 

Whoa, whoa, Eric!

 

I must have missed this. What are you doing these days with the Roths?

[ERICOPOLY]

Whoa, whoa, Eric!

 

I must have missed this. What are you doing these days with the Roths?

 

Roughly 30% went to MPIC.

 

 

 

[stahleyp]

Good for you man. I'm glad to hear that for Sanj, too. :)

[LC]

I use SPY & IWM, as I would be passively invested in those if I were not managing my funds.

[ukvalueinvestment]

I benchmark myself against the FTSE All World Index, measured in GBP (I'm based in the UK).  My thinking is that as an individual investor, I can invest in pretty much anything in the world, therefore my benchmark should reflect that.

 

I've only just started measuring my performance.  Over many years, I hope to beat 12% annualised.  My thinking is that long term performance of the index is probably about 6-8%, which reflects GDP growth + Inflation + Dividends.  I then hope to make an extra 5% or so through investing in the right spots (bias towards smaller caps, "cheap"), and skill.  I feel that there are tens of thousands securities out there and by having the discipline to turn down all of them except the best ten or so, I should, over time, outperform by several percentage points.

[Hielko]

I also consider a world wide equity benchmark as the most appropriate (MSCI World in euro's in my case) because that's probably what I would invest in if I wouldn't be an active investor. In practice I usually invest in companies that are way smaller than those in the benchmark, but I think I should get the blame/credit for the possible under/over performance of illiquid small caps vs large caps; it's an active decision from me to focus on those kind of assets.

[Orange]

If you're a value investor and are serious about testing the value that your stock picking adds, you should be benchmarked against a value index, in my opinion. Something along the lines of the S&P's bottom quintile p/b or p/e or p/s. If you are hand picking cheap p/e stocks, you are only adding value if you can outperform the market's group of low p/e stocks. Otherwise, it pays to simply index to said group. That saves time, energy, fees (if you're paying someone to manage your money), and risk.

 

Most value managers would never do this, of course. But that is because most truly do not add value, especially after fees. A basket of low p/e stocks always outperforms the larger market over the super long term, so it is a higher hurdle to jump, and the VAST majority of value investors/managers cannot make the leap. Nor should they even be trying.

[Hielko]

If you pick a value manager you want to benchmark that manager to a value index because you made the asset allocation/bet on the value factor; he needs to perform within that space. But if you have no constraints - usually the case for a private investor - I think it makes sense to opt for a benchmark that is as "decision free" as possible since the asset allocation is also your responsibility.

 

If I invest 100% of my portfolio in companies in the S&P 500 I don't think that the S&P 500 would be an appropriate benchmark. If the S&P 500 goes down 25% next year, my portfolio 20% and MSCI world is flat it's not a good result because the decision to invest everything in the S&P 500 would have been a bad one, even though I would have 'out-performed' the index.

[AchilliesValue]

I prefer an absolute benchmark so I use inflation plus 10% (stolen from Longleaf). The idea of benchmarking yourself vs purchasing power makes the most sense to me.

 

The fund I work on uses the Russell 3000 Value which is probably one of the best choices out of the mainstream indexes. I'd recommend that or the Equal Weight Russell 2000. 

 

I've thought about keeping track of the formula funds ETF returns as if I can't beat the "magic formula" I may as well just do that. The only problem is I think the tax leakage is quite high and not reflected in those returns.