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Small Cap Value Investing: Is It Still Worth It in 2025?
882 Plays5 days ago
Karsten Jeske (Big Ern) and Paul Merriman engage in a lively debate about Small Cap Value Investing versus Broad Market Strategies.
Should you tilt your portfolio toward small-cap value to capture a potential risk premium, or is sticking with broad-based funds like VTSAX the more reliable approach? With decades of financial expertise, Karsten and Paul offer opposing yet insightful perspectives to help you refine your long-term investment strategy.
Watch and Subscribe on YouTube
In This Episode, We Discuss:
1️⃣ Small Cap Value Premium: 📜 Historical data and its implications for modern portfolios.
2️⃣ VTSAX vs. Small Cap Value: ⚖️ Should investors embrace simplicity or pursue specialization?
3️⃣ Risk Premium Debate: 🎢 Does small-cap value justify the added risk in today’s market?
4️⃣ Sequence of Returns Risk: ⏳ The dangers of timing when withdrawing in early retirement.
5️⃣ Market Timing vs. Buy-and-Hold: 🎯 Are disciplined investors better off avoiding tactical shifts?
6️⃣ Portfolio Construction Tips: 🏗️ Allocating assets for growth, diversification, and resilience.
7️⃣ Nuances in Factor Investing: 🔬 Exploring quality screens, value premiums, and active management.
🔗 Paul Merriman's Links:
🌐 Merriman Financial Education Foundation
📊 Quilt Charts (Referenced in the Episode):
📺 YouTube Video Explaining the Two Charts
Graph 1: 4 US Asset Class Indexes & 4 Fund Combo Relative Return Ranking (1928-2023)
Graph 2: Asset Classes & 4 Fund Combo (1928-2023) - Return Rank Frequency
🔗 Karsten’s Links:
📊 Recent Post on Small Cap Value
🔗 David’s Links:
🍏 Forget About Money on Apple Podcasts
🎧 Forget About Money on Spotify
#retirement #investing #smallcap #paulmerriman #karstenjeske
🎧 Listen & Subscribe: Don’t miss future episodes where we explore the best investment strategies, financial independence, and wealth-building insights. Hit subscribe and tap the bell 🔔 to stay updated!
📜 Disclaimer: This podcast is for entertainment and informational purposes only. It is not financial advice. Always consult a qualified financial advisor before making major financial decisions.
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Transcript
Introduction to Paul Merriman and Karsten Jeska
00:00:00
Speaker
Welcome to the Forget About Money podcast. Today we've got Paul Merriman and Karsten Jeska. Yes, both of these very highly intelligent money guru, passionate people, love to help everyone with their finances. I'm very honored that they're both here on the same show with me. I'm a little intimidated, I gotta say.
Debate on Small Cap Value in Wealth Portfolios
00:00:22
Speaker
We are going to talk about probably one of the nerdiest debates that you can have inside the financial independence community or personal finance community. And that's the role of small cap value in long-term wealth portfolios. Today, we'll explore two distinct approaches to long-term investing. Paul Merriman's tilt towards small cap value and Karsten Yesca's preference for broad market simplicity with VTS AX.
00:00:47
Speaker
By the end, you'll have a clear understanding of the risks, returns, and practical applications of these strategies. As you listen to this podcast, you are going to realize that these gentlemen have spent years and years of research and effort educating all of us on investing.
00:01:04
Speaker
And this is for the individual everyday investor who might just be wanting to go that little extra step, whether it's just for your academic knowledge or to get a little bit better return out of your portfolio. Both of these gentlemen come from different backgrounds. They attack this problem with a unique perspective.
Paul's Advocacy for Small Cap Value
00:01:23
Speaker
Paul, can you please explain where your passion comes from for small cap value and what that means to the individual investor or the people who follow you and your teachings. Happy to David and and thank you for the invitation and it's ah it's going to be fun. In fact, I'm going to learn from Carsten. I know it's coming. But here here is where I come from and i and I remember the conversation I had with John Bogle
00:01:52
Speaker
in 2017 when he was talking about the goal he had for the investors at Vanguard. And it was always about enough and making sure that you could make it through the rest of your life ah and and and and die with financial dignity. I come from a slightly different place. I come from a place that really what I want for people is more than enough.
00:02:18
Speaker
And I truly think that people will have enough if all they do is invest in ah in in a regular large cap oriented diversified S and&P 500 or total market index fund, I think they'll get there. But I believe from what I learned in 1994 from the people at Dimensional Funds that with the addition of some, and it doesn't have to be much,
00:02:43
Speaker
That small cap value asset class will give people an opportunity to have more than enough. And I think that that is is is worth the effort if we can figure out whether the risk is worth taking.
Karsten's Skepticism on Small Cap Value
00:02:59
Speaker
Thank you very much, Paul. Carson, you're best known, I believe, for your work with safe withdrawal rates, but you're also a techie, a spreadsheet geek. It doesn't take long to go through your website to be like, well, at least for me, maybe I'm a little out of my league here.
00:03:14
Speaker
but it's very interesting in, but you run the numbers. So whats what's your origin and why are you so passionate about either pro or con small cap value? Yeah. So let me, let me put it this way. I'm not generally against small cap value, right? Because if you own VTS AX, you have some small cap value in there, right? So I'm i'm just wondering what is the rationale be behind adding even more and than you already have in your VTS AX fund. and And by the way, I'm also, I don't want to be seen as the hardcore Bogle head, right? Who's religious about just broad index ah because I come from finance world. We, I used to be involved in active strategies, right? The market timing, long, short equity. And ah so we were constantly looking for alpha sources when we were constantly looking for ways to beat the market.
00:04:05
Speaker
so if somebody approaches me with an idea how to beat the market i'm definitely all ears and i'm not going to be somebody who says i'm gonna brushes the science is our market is efficient can't be possible to meet the market so i definitely would be very interested in coming up with some alpha sources because i mean as as paul said right you do it the easy way you do it there can i is something like the J.L. Collins way, you will get rich eventually, but well, could we get rich maybe a little bit faster, right? Or then in retirement, right? Could we push say the 4% withdrawal rate rule of thumb, right? It's not a rule, it's a rule of thumb. Could we push this just a little bit higher and then
00:04:48
Speaker
if you think about how we can, how just maybe a half percentage point extra return or 1% extra return, right? How that compounds over a long period. So, and then in retirement too, right? Think about how even 50 basis points or a hundred points of extra returns, say 1 percentage point extra return right increases your retirement budget. right So if you could withdraw not 4% but 5% in retirement, it's not an increase by 1%, it's an increase by 25% in your retirement budget. So I'm 100% on board with looking for opportunities for better returns and better portfolio construction.
00:05:28
Speaker
I just, and and by the way, I noticed obviously that small cap value has done extremely well between say 1926 and 2006, but the last 18 years of returns were not that but not that great. And this is this is something that I'm struggling with. but where why What's the reason for that?
00:05:46
Speaker
I can talk to that. I think David, I think that is a there couple of things there that are hot buttons
Historical Data and Long-term Strategies
00:05:53
Speaker
to me. One of the things that we produce is a telltale chart and the telltale chart was, was to the best of our knowledge, something that, that I know he Bogle used it, whether he created the idea, I don't know, but But the bottom line is you can go back and you can look at the relative returns of the S and&P 500 to small cap value going back to 1927 or so. And what you'll find is at the end of the 90s some year that if you did a lump sum investment starting in 1927,
00:06:30
Speaker
you would have about 12 times more money from the s and p i mean from the small cap value than the S and&P 500. Now that's based on ah on a whole bunch of assumptions about the past, but that's what we got. On the other hand, if what you did was you dollar cost averaged over that period of time, instead of lump sum, the advantage is about 23 to one. So 12 to one, 23 to one suggests there's something there.
00:07:00
Speaker
That's kind of the end of the good news because the bad news is about 80% of that period of time, small cap value was struggling to keep up with the S and&P 500. So this is not a slam dunk. This is something that if you look at the history of it, you see that you have these spurts of outperformance.
00:07:24
Speaker
Now, by the way, the same thing is true of the of the S and&P 500. If we didn't have 1995 to 1999, the compound rate of return would be very different from what we know today. So I from what from the evidence that I see, if people have that ability and Carson, you talked about that extra half to one percent, the tables we look at conclude that if you add twenty percent small cap value you've got a shot if the future looks like the past you've got a shot at an extra one half to one percent again looking backwards looking much further than the last sixteen years obviously in fact
00:08:08
Speaker
We do have real returns out of a DFA small cap value fund going back to 1993 and it has produced a decent premium, not as much as expected when we first were introduced to that by Fama and French, but there were periods where the small cap value doubled the return of the S and&P 500, doubled it and then came back down and then doubled it again and then came back down. So it has been a struggle for the um all of the 30 plus years, but it still has produced a premium at the end of that time.
00:08:50
Speaker
It kind of depends on when you look at it, how well it's doing, but it does have periods of of solid outperformance, or it has. I can't say what it will do in the future. Karsten, what is your baseline argument against small cap value? Right. So I mean, as I wrote in my recent blog post, obviously if you start your windows in 1926, everything looks extremely good.
00:09:18
Speaker
And I did the other way around. but So I said, what if we start windows at varying points and they all have the same endpoint, namely 2024. So if you do that, then, well, I mean, first of all, since 2006 actually is a small cap value has underperformed.
Recent Performance and Market Timing
00:09:38
Speaker
which was not the it's it's not the longest stretch of underperformance, but what's unique about this underperformance is that it has lacked quite a bit. So the the magnitude of underperformance is, ah in in my view, unprecedented. If I look at my charts, it's not so much the length, but the magnitude was higher.
00:10:00
Speaker
unprecedented So that means if you had started investing in small cap value in 2006 and you ended in 2024, you would have had very underwhelming performance. so which By the way, i mean some of us in the fire community, right i mean we we have a relatively short horizons, both the in the accumulation. So if you just catch the wrong stretch of time, ah you will have very poor returns.
00:10:24
Speaker
And then even going further back, so I think my calculations were that if you go back to something like the 1990s or 1980s even, because between 1980 and 2006, you had outperforms of small cap value, but that was all given back then over the last 18 years. So if I look at just pointto point to point investors,
00:10:46
Speaker
that started somewhere in the 1980s and they ended in 2024, they were all still just even with the S and&P 500. At least according to my calculation. so in my I use the ETF returns from iShares, they go back to 2002 and before that I use some simulated returns are basically I look at what were the exposures of these ETFs with respect to ah the pharma French, these style factors that that these these are the same pharma and French that that Paul just mentioned.
00:11:20
Speaker
So, and then, and then I did make sure that the, that the outperformance of the forefront portfolio over the time stretch that Paul uses is also about 1.7%. So that at least I line those things up. And then if I go further back with the simulated performance, at least there's some still a little bit underwhelming performance even before 2000.
00:11:43
Speaker
before two thousand and two maybe going back all the way to nineteen eighty two and then if you had started investing well before nineteen eighty two yes i mean then you're absolutely killing it what's market value the same is true too. What if you do regular investments and because now sequence of return comes in right sequence of return is because now the most important part when you invest is towards the back end of your accumulation period because that's when you have the biggest balances and so i'm actually going all the way to.
00:12:13
Speaker
or going all the way back to the 1970s, you would still underperform with a regular investment versus small cap value. so and And then again, maybe with different funds, if you had used the DFA funds, you would have done a little bit better. But with the DFA funds, you also would have some AUM fee for the for the financial advisor potentially. So anyways, I'm just saying that the most recent performance of small cap value has been has been very underwhelming. So I just wanted to get that out.
00:12:41
Speaker
Okay, I've got to say that this is the most animated I've ever seen in Paul's face. He's got this gradual oh trying nervous conversations in there. For example, DFA has ETFs today. No, they didn't have ETFs in 1993 when they came out. But I can tell you if you chart on Morningstar DFA, DFSVX from its initial 1993 starting point,
00:13:09
Speaker
Through to today, you have a significant premium over the S and&P 500. I mean, we know we know that. And what we also know is today we have two ways to get to the DFA kind of investment. Maybe more than two, but the two I know of are Avantis,
00:13:29
Speaker
and DFA. We have access to their they are ETFs that replicate the the belief in how you build a small cap value. And there's lots of evidence that says that there's there's not just one way to to build small cap value and some are very under productive. But I know this, the last five years, the return of the DFA and the avantus small cap value ETFs have almost doubled all of the Vanguard ETFs in small cap value. and and And Vanguard, I think, has four different small cap value ETFs. Maybe it's even five, I'm not sure. But but the bottom line is is those funds are now available to the public from DFA.
00:14:18
Speaker
And avatas is doing some work that that may be as as as good as DFA for people who want diversification. And I'll make one more comment, David. I'm sorry. i'm I don't want to take too much time here. But I do know this, that if you started small cap value in 1927,
00:14:36
Speaker
It took you until about 1940 something before you caught up with the S and&P 500. So it has not been an easy trip for small cap value. It has been a lifetime fight to get the right to perform. And and and and so i I think what hurts people is that people are going to be attracted to small cap value at market peaks.
00:15:02
Speaker
They're gonna say, boy, now there's someplace I should have part of my money. That is the worst time to get into small cap value. You're better off to get into small cap value when it's been been performing terribly. Do you agree with that, Carson? is this This sort of goes into what I think the biggest differences between you guys are. I think i think Paul, you're in the camp of... and i You look at numbers, you think value, you think you're going to get a deal if it's been undervalued for a while and what's the likelihood that the future will result in a bounce back up for small cap value because it's been trodden for so long or underperformed for at least what, since 2006 you said, Karsten? I think that's, I think I heard that.
00:15:41
Speaker
I mean, that's at least that's what the pharma French style factor has been down since then. And obviously some of these more active funds, because but obviously something very passively managed is also down. I'm sure that the DFA and this Avantis fund, there there is some additional active management in there. Right. So big is there are people who have pointed this out. Well, maybe for example, maybe value alone is not sufficient anymore. Right. We have to screen first by value, but then also it kick out the junk. Right. So because sometimes very poorly performing stocks, right, right before bankruptcy, they seem really good value, but then they basically drop out of the index and you lose a hundred percent on those and they will never come back.
00:16:29
Speaker
And so if we do an additional screen, not just on the value, but also on the quality versus junk, there's another style factor that people have come up with. Then ah we can read out some of these ah problem value stocks. and But and now we're obviously waiting until some actively managed funds and so increases of complexity and Also maybe that also becomes eventually not so reliable anymore but yeah i mean that's that's that's something i just want to pick up on something. That's possible because that's significant because this is obviously something that we both agree on.
00:17:08
Speaker
Because the old story on why value works, it's not some kind of a super secret, special sauce that only the smartest investors know about, right? So because once you write a paper in 19, I think 1992, a farmer French published that,
00:17:25
Speaker
in some very famous finance journal, ah everybody knows about it, right? So this is not some secret alpha source that that you can you can basically become a stock picker overnight. This is very likely a risk premium, right? And the risk premium is that ah traditionally value stocks have been clobbered more in economic downturns and growth stocks didn't have to, re even so the the name growth stock is actually almost a misnomer because it means that growth stocks have actually less attachment to economic growth because they can grow on their own, right? This is why they're called growth stocks, not because they are relying on economic growth.
00:18:03
Speaker
Whereas basically these value stocks very often these are brick and mortar companies that are very reliant on economic growth so they will go down in value if the economy goes through a recession whereas growth stocks they can grow on their own through innovation or taking away market share from their competitors but ostensibly some of the value stocks potentially too right.
00:18:25
Speaker
And so that was always the story, which basically means that ah so value stocks are the dangerous asset class to be in right before the economy turns down again. So that's something to keep in mind. And so in fact, if you are sitting right now, imagine you you were fortunate enough over the last 20 years and you were in VTSAX and you outperformed
Investment Strategies and Portfolio Composition
00:18:51
Speaker
small cap value stocks and you wonder, well, as so I'm listening to Paul Merriman and Carsten and they talk talk about this risk premium is now a good time to get into a small cap value. So you would almost say, well, maybe I wait until the economy takes a nosedive and then all stocks go down, but value stocks go down more. And then I shift into value stocks because then I want to capture the upside. So there would be, yeah, I mean, you would almost become a little bit of a market timer there.
00:19:19
Speaker
to capture this risk premium. You want to capture the risk premium going out of the recession, but you don't want to be exposed into the recession. So that that would be something of ah of a market timing idea here. Paul, what's your response to Karsten? Well, the the challenge I have First of all, is that I'm trying to teach people to be buying holders. And, and so I don't disagree with everything you say about the the cycle and the the likely outcome of different parts of the cycle, but it's contrary to a pure buy and hold strategy. And I, I think that the work that, that, that we're doing is going to remain pure buy and hold. But I do think this, that people need to understand a huge difference.
00:20:03
Speaker
between like the S and&P 500 or the total market index is that if you look at the performance, particularly of the S and&P 500, you will find the difference at the end of of of a decade or a year is going to be very little compared to one S and&P 500 with another S and&P 500. It will typically be the expense ratio difference.
00:20:26
Speaker
that's going to show up that will make one better than the other. Now, the total market index, people seem to slice and dice that a little differently, so it's not quite as pure as the S and&P 500. But I do know this, when it comes to small cap value, small cap growth, large cap growth, large cap value, there are at least six major ways to slice and dice those indexes.
00:20:53
Speaker
So that when you look, and I've got one of the studies that I provided to you, David, it shows historically over the last 15 years, the range of returns for the different small cap value indexes. And it's about a two and a half percent difference between the top return And the bottom return now that you know you were talking karsten about picking up an extra half or a percent and here we have just in the return of the indexes themselves a two and a half percent difference from top to bottom so it's not you you don't go out and just buy any small cap value fund.
00:21:33
Speaker
It's really important that you understand the construction and the commitment that they have, because some small cap value indexes are built to underperform. And you mentioned it, Carson, mainly because they're they have a commitment to holding stocks that are close to being out of business.
00:21:55
Speaker
yep So if I'm an investor and I hear this and I say, okay, maybe I'm going to put at least a small percentage of my overall net worth or portfolio into small cap value. And now I just heard that not all small cap value indexes are created equal. Now I'm just shrugging my shoulders, throwing my hands up.
00:22:13
Speaker
how do i How do I clear that up, Paul? Well, you you go to palmerriman.com and we tell you what ETF we think you should use. And as a matter of fact, we're about to redo the list. We do it every two years, but it's our best in class ETFs. And AVUV, that's the Avantis, a small cap value fund.
00:22:37
Speaker
ah we think is one of the finest and we think the DFVS at ah dimensional funds is another a fine fund. In fact, they had almost the same performance over the last five years. They were the they were the top performers because they do look at quality as you mentioned Carson and and weed out. so and And if I could just also point out David that this The fact that the total market index has about eight or nine percent in in small cap funds themselves, but about half of that small cap value. And that is, in a sense, almost a wasted effort historically because small cap growth makes about four percent less per year than small cap value. You put them together and you basically got the S and&P 500.
00:23:28
Speaker
So people say, how come the total market index doesn't make more than the S&P 500? And since they've been academics attracted going back to 1928 or something, there's a one-tenth of 1% difference. People are not being paid for the exposure to small cap value. And the way they could do it, if I could help them in this regard, you love the total market index.
00:23:58
Speaker
By the S and&P 500, 15%, which is about, I think, what they have in small and mid cap in the total market index, put that in small cap value. 15% small cap value, 85% S and&P 500, I think you would indeed get a but a premium over the rest of your life. Now see, I have the problem. You guys are young. I don't have a long life. I need small cap value to perform now. for me That is, I mean, that's the same with the people who want to retire, the fire people. They want stuff to happen now. The market has no obligation to give us anything now.
00:24:44
Speaker
We have a mutual friend, Rick Ferry, and he is the host of the Bogleheads on Investing podcast. And I told him I was going to be speaking with both of you gentlemen today. And here's his question. And I think this is a good place for it because of what you just said, Paul. Why do I need small cap value? Why try to outperform the market by taking higher risk than the market? And in this case, I confirmed he equates the market with VTS AX.
00:25:10
Speaker
Well, I mean, we start with bonds. Why leave the safety of bonds? Because we believe we're going to get a premium for leaving the safety of bonds. Why not put everything in large cap growth and let it all hang out? Well, because we believe that large cap growth for all the risk that we take does not in fact historically give us the premium for that risk that we're exposed to. Remember,
00:25:36
Speaker
Large cap growth got beat up terribly in the 2000 through 2002, much worse than the S and&P 500 because the S and&P 500 had value in it. It saved people. Okay. So why have small cap value? This is not about beating the market.
00:25:55
Speaker
ah We got to stop thinking like that, I think, David. It's not about beating the market. What we see the large cap blend asset class as a provider of hopefully is a 10% compound rate of return. It has done that for 96 years. Now, obviously not every decade, but with small cap value, it's simply, it's a different market.
00:26:22
Speaker
It's a different part of the market. Just like treasury bills, they're different than long-term treasuries. The S and&P 500 is different from small cap value, and it has paid a premium of about another 3%. Now, when I first took the class from from from DFA back in the early 90s, they said to expect a 5% premium.
00:26:44
Speaker
for small cap value over the S and&P 500. And there's a lot of history that that has in fact happened. But 2% is supposed to come because of size and 3% is supposed to come because of the value premium. And i'm not I don't have any idea whether it It will pay a two or three or 4% premium in the future. But I do believe this is simply a premium for additional risk. I don't think it's magic. And I don't think it's about the market. I'm not trying to get 10%.
00:27:18
Speaker
I'm trying to get a little more than 10% for the children and charities that I care about. and And that's the reason we do it. Or as Karsten says, to retire earlier. Yeah. So I think, David, you you put your finger on the wound here. And and we don't want to sound like we are these impatient millennials who need the instant gratification because obviously we're all long-term
Challenges for Early Retirees
00:27:43
Speaker
investors. and ah There is something significant about say a 10 year horizon, right? A 10 year horizon is is the horizon over which many fire savers accumulate assets. So if if somebody tells me, okay, here I have this there's new investment idea and i it and it it outperforms occasionally, but sometimes you have a 20 year stretch of underperformance,
00:28:11
Speaker
then yeah so some fire people will say well sorry i'm not interested in that i need something need something more reliable than that and then the same once you're in retirement right so we we talked about this at length when when people interview me on on sequence of return was quite which.
00:28:27
Speaker
Which is the most dangerous time of your retirement? It's the first market cycle after you retire. It's the potential that you retire right at the the market peak, the market takes a nosedive, and even though the index recovers eventually, but your portfolio may not because you might have withdrawn money.
00:28:48
Speaker
over those initial ten years and that will incapacitate your portfolio so badly that even with the market rally even with the market rally that's like the market rally from nineteen eighty two to two thousand that that will still not recover your portfolio and then you run out of money.
00:29:03
Speaker
So, and and then also I have some sympathy for this idea, right? Because I used to work in finance, right? And we used to market strategies that, well, we marketed this to our customers where we said, well, this is going to outperform some benchmark, right? And if it doesn't outperform the benchmark over, over an 18 year stretch, I mean, they were basically, they will not wait until we are 18 to fire you. right I mean, you outperform one year, you get some nasty phone calls, you underperform for two years, they'll put you on probation and after three years, they fire you. so And so I think one of the problems with small cap value is is not so much the
00:29:43
Speaker
The size of the outperformance and underperformance is also the the magnitude of the fluctuations. I think this this is an issue that came up. this There's a big tracking error that you introduce. So there's a tracking error. Somebody uses the VTS AX and somebody uses an alternative strategy. so And you look at not the volatility of that new portfolio, but you look at the volatility of the incremental returns.
00:30:06
Speaker
And if these incremental returns are very volatile, well, that's a problem, right? Because it could mean that you have very long periods of outperformance or underperformance. And so many investors will not find this particularly palatable and attractive. So I am personally looking for some alpha sources that ah it would be nice to have something that outperforms every single month. Of course, that's, that would be unrealistic, but you know if if if If I have something that has some volatility and it might be down a month here, a month there every year, but every, at least every market cycle I outperform and with market cycle, I mean one bear market, one expansion, which could be something like anywhere between five and 10 or 12 years.
00:30:53
Speaker
If over every market cycle I can at least outperform, um then I find this very attractive. But the but what what gives me stomach ulcers with small cap value is that it has underperformed over the last three market cycles. And its that's that's a little bit scary four if you if you ask me. so David, may I just make a comment about the performance and not wanting to underperform? In my case, that is not my goal is not to outperform anything. my My goal is to meet my needs for my cost of living.
00:31:27
Speaker
and hopefully accumulate some more assets for the for the family and and and charities and all. So i don't I don't have any competition with the market. It's only my life that I'm in competition with, but I but ah but i would have you look. another Another table you have, David, it's the sound investing table that shows the returns by decade.
00:31:51
Speaker
going back to 1970, but it also shows the S and&P 500, all the up here, how much money did it make? All the down here, how much money did it lose? Accumulative. Then you look at the portfolio that is the 50-50 S and&P 500 small cap value. All the money it made in the up years, it won't surprise you to find out that it made more than the S and&P 500 in the good years.
00:32:18
Speaker
But it might be surprising to find out that the combination of those two asset classes had lower losses cumulatively than the S and&P 500. Now that tells me that that's starting to qualify for somebody's portfolio that is trying to figure out a way to make it through the bad times. For example, the decade of 70 through 79, the S and&P 500 and made about 5% and the combination made closer to 10. 2000 through 2009, the S and&P 500 loses 1% a year. The combination made a little bit over four. I mean, it's not a home run, but it produced something. And so my question to to our readers
00:33:05
Speaker
is Is that portfolio of half S and&P and half small cap value more risky than the S and&P 500? And I do have a serious question, Karsten, because it's it's it's something that I struggle with. We have this table.
Decade-based Analysis and Diversification Benefits
00:33:21
Speaker
that shows, and you and you actually alluded to the return, it showed the four major equity asset classes going back to 1928. It's in the form of a quilt chart. And what I see there is that the combination of the four, that'd be large cap blend, small cap blend, large cap value, small cap value,
00:33:44
Speaker
The combination of those four was never number one, never number five, always kind of right in the middle because it was the average of the four. And yet that combination, which was way less volatile year to year than the S and&P 500,
00:34:02
Speaker
added almost 1.8% into the compound rate of return. Now my question to you is, and i and i and I mean this because I am not a heavy duty statistician as you are, is that fact that that combination is sitting in there and right around the middle all the time and producing the better rate of return, is that a better unit of return per unit of risk?
00:34:26
Speaker
I think that's actually, so if we start in 1970, that may actually explain why maybe the small cap value premium fizzled now, because it's no longer been the the the risk premium that people were talking about. right I mean, it was right out of the gates and night in the Great Depression, small cap and value got hammered and you have this economic correlation. And then I think even into the 1970s, there was still some of that effect going on. And then something changed and something flipped in the 90s and early 2000s, right? Because in 2000, the dot-com bust, that was more painful for growth stocks. And also the the most recent recession, 2022,
00:35:13
Speaker
Actually, growth stocks got hurt more than value stocks. And so maybe if this growth exposure has now flipped towards the growth stocks, maybe that maybe that's the end of the of the value premium. and you know yeah ah I'll tell you why I i struggle with that. Anytime we use a period of time, for example, since 2000, what is the compound rate of return of the S and&P 500 bin?
00:35:43
Speaker
I think it's 8%, 9%. Okay. I have in my table. Okay. I, well, since 2004, unfortunately it's 10.5%. So as you see at 2004, we don't pick up 2000. We don't have that cost there. But my my point is simply this, the market, the return for small cap values since 2000 has been okay. The return for the S and&P 500 has been okay, but it's nothing like the previous period. I mean, the previous 25 years, the S and&P 500 compounds at 17 and a half percent from 1975 to 1999. But since then, it's about half of that.
00:36:26
Speaker
are we to conclude that the S and&P 500 is no longer the the great investment that it's been in the past? I don't i think these are, first of all, these are nominal returns. And I mean, I have some charts where I look at real returns and it's actually quite amazing how much, and then you put this on a log scale and you look at the the path of the S and&P 500, it is such a beautiful straight line up with a lot of fluctuations around it. It's like a rubber band pulls it back yeah to some long-term trend growth rate. And I think the long-term real return is 6.7%.
00:37:05
Speaker
I don't think there has been any significant shift in the S and&P 500 long-term return. And we can talk about, well, maybe maybe returns are going to be a little bit slower because we are a more mature economy, right?
00:37:21
Speaker
There might be some limits to growth. Maybe we can knock off a percent of that. But I think the the trend growth rate for the the cumulative real return, total return obviously, with dividends reinvested for the S and&P 500, there is not really any kink point where where it says suddenly something flips in the 1970s and it keels over. ah quite Quite the opposite. of People were amazed how just the S and&P 500 can keep plowing like that.
00:37:48
Speaker
But that's not been the case with the, I mean, obviously you make this case all the time, right? the The small cap value premium looks like a step curve, right? I mean, it kind of, mine it maybe even goes down a little bit, gets hurt during the recession. And then there is, there are these very slow, very ah short spurts of growth in that small cap value premium historically, ah where it worked beautifully over relatively. yeah And is this.
00:38:14
Speaker
I mean obviously it makes your point you want to be invested long term because you you cannot time this very well even though I mean as as I said right my timing strategy would be I wait until the bottom of the next recession and then I go into small cap value if I want to milk this premium but i but i still I still wanted to make this point. So what if small cap value has just lost this this this shine and has lost its luster because the last 25 years, the obviously the correlations were not anymore as they were, say in the 1920s to 1970s at least.
00:38:52
Speaker
And then also going forward, right? So my theory is that I think US growth hinges on the success of all of these high flying growth companies, right? Because artificial intelligence, machine learning, both on the software and hardware side, this US is where all of the technology and innovation happens. It would, for example, explain why value premium still exists in some other countries because they are not as tech heavy. we are. but our I would almost say it goes the other way around. It's not that our growth stocks are dependent on economic growth. It's actually the other way around. Our economic growth is dependent on our growth stocks and we better hope that they do well because if not, then i mean this this is the next technological revolution. It's the next great productivity boost that hopefully we can milk over the next 10 to 20 years. ah
00:39:43
Speaker
I think i think there's there there is at least a possibility that maybe there will never be the another growth spurt in the small cap value premium because <unk>s it's actually the other way around. Growth growth stocks now deserve the growth premium.
00:40:00
Speaker
Well, the DFA and the, and the, and the Avantis small cap value funds for the last five years have approximately doubled in value. That's a pretty good return. That does not sound like something that's down and out. So, I mean, I have the df DFSVX. Okay. I have 10 years. The DFSVX is up by 37% and the S and&P 500 is up by 180% over the last 10 years though.
00:40:28
Speaker
But I don't think it's not a huge difference over the last five the last five years. I think it's up about 97% according to the chart. But ah i I do think that the question is, is the risk premium of small growth large internet. I mean, there are people who might think that the there is no risk premium anymore in the international markets. and and And yet in the past, we've been through that and then they come back. I don't have any reason to believe that that there is a change in the risk premium for small cap value. I think this is just a normal, very long, again, if David will but will share the telltale chart, you'll see every one of these sideways movements that go on for like 17 years.
Personal Investment Strategies
00:41:19
Speaker
I think there are three of them that go on for 17 years.
00:41:24
Speaker
before that they start out producing the S and P 500. By the way, it doesn't mean that they quit making money. It's that they, it's it's that they did not show a premium over the S and P 500. They just performed in line with the S and P 500. So that's still pretty good and most in most cases. Yeah.
00:41:44
Speaker
I am not smart enough and I'm not willing to do all the work that you and your team has put together to put all this back testing. But earlier, Paul, you were mentioning particularly particular small cap value index as being different or performing differently over time.
00:42:01
Speaker
I wonder if Karsten, your back test testing data, if you use the same information that Paul used, would it change anything? And I know I'm not asking you to do it right now. Just my memory. Can you just do all the computations in your head? That'd be great.
00:42:16
Speaker
So, so first of all, I get the same relative performance. The forefront portfolio outperforms the S and P 500 by 170 basis points over the same time horizon. So if, if I use some assumptions on the way going back.
00:42:31
Speaker
and and I think you use annual data i prefer monthly data because i want to see the the intra year fluctuations especially the one to grab the the market peak around nineteen twenty nine i prefer to have that with monthly data but ah yeah so i don't think we had very different assumptions.
00:42:50
Speaker
So, i but but i can I can obviously, I can look at what what you had. So, you do do you is are these ah publicly available data at DFA or did you have to, do you have to pay for that or? I suspect there is a way that you could you could certainly get your hands on it.
00:43:08
Speaker
I, David, one thing that might be interesting for your, your, your listeners is, I mean, we've taught, we've debated, talked about small cap value. A question is whether we actually own small cap value or whether this is just a, a, a, a, an interesting conversation. Do you want to address that question or not?
00:43:32
Speaker
Well, I think it's a great question because I mean, we're we're all we're on a video right now and or of somebody's ear sending messages. So it's probably a question that people have any time they hear someone talking about money, how much in their personal life do they actually reflect what they're speaking about? So sure.
00:43:48
Speaker
Karsten, do you have any small cap value? I don't have designated separate funds, but as I said, I, and by the way, I don't even have the VTS AX because I have fidelity funds, but I have a fidelity total market index fund. I have a, I have a total index fund part of my 401k plan, which will have it in there. But as, as Paul mentioned, right, is a tiny fraction of that is actually small cap value and it's mixed together with small cap growth. So yeah, I have it, but I don't have it in any bigger size than it would be. There would be making up in terms of capital weights, those market cap weights. Sorry. Paul. Well, in my, I developed, I was not an original developer of the ultimate buy and hold strategy that
00:44:36
Speaker
the the distribution of the portfolio across 10 different asset classes. That is the way that my wife and I invest in the buy and hold portion of our portfolio. So we are basically 25% in small cap value. That 25% is half us and half international. We are 25% in small cap blend. That's half us s half international.
00:45:02
Speaker
We are then 25% in small cap in the US, half US, half b blend and half small cap value. And the large is half value and half S and&P 500. So we have basically a little more than half of our money invested in value because the S and&P 500, for example, has some value in it. And the other half is is oriented to growth.
00:45:28
Speaker
And then we have half our money in bonds because we're old. And, and so that is our way of defending against the catastrophic. So if I were to do a pie chart for your generally it's 50% bonds, 25% value, and then 25% S and&P. Well, it's, it's, it's 20 cap related. It's half small cap value. I'm sorry. It's hot. It's half small cap and it's half large cap. It's half us is half international.
00:45:57
Speaker
It's half blend. It's half value. So, and I think we have 13 or 14,000 companies. And if you asked me, how did I do last year or how do I, am am I doing this year? I have no idea because I don't care. I do like them. I know that the portfolio's up because the market's up.
00:46:17
Speaker
But I don't track it on a regular basis. i don't I don't look at it because the first week of each year, my wife and I take 5% to live on. And that's our income for the year. And this next year, we're going to have more than last year because the market's up. So the value of the portfolio is up. That's great.
00:46:38
Speaker
It's great for her. Karsten, in preparation for this podcast, we emailed each other back and forth, and you raised an excellent point about confirmation bias.
Confirmation Bias and Strategy Adaptation
00:46:48
Speaker
What would it take for either of you to change your mind about your portfolio recommendations? Paul?
00:46:54
Speaker
Well, we have done that in the area of ETFs where if we if we think we have ah got a better as DFA has come out with an ETF, we have added that to our list. We do update that. Now, of what you're asking, what would it take at age 81 for me to conclude that the small cap value premium is gone? I don't have that long to live because yeah it wouldn't I wouldn't change my mind because I didn't change my mind about the S and&P 500 when it, when it lost money for 10 years. So is there, Paul, is there a sustained period of time that the SCV smock out value would underperform that would impact your messaging regarding this?
00:47:41
Speaker
Well, another 10 years. yeah You see, the interesting thing is, remember I said that if you dollar cost averaged into the small cap value, you made twice as much as if you is if you lump summed in. The reality is I tell the college kids I teach, I tell them celebrate a bear market, celebrate underperformance.
00:48:06
Speaker
It is likely that the people who continue to invest when the market is down are going to benefit in the future now if one wants to try to market time that and fine tune your entry and exit points in order to try to to to to do better for the long term fine but these these students i just want them to set it and forget it.
00:48:28
Speaker
And, and the the minute, if, if we let poor performance change our mind, we are not going to stay the course because poor performance is just a part of the process, which is the reason you want different asset classes in the portfolio, because you go back and look at that 2000 through 2006 timeframe.
00:48:50
Speaker
If you didn't have any small and you didn't have any value and you didn't have any international in your portfolio, your goose was cooked. The problem is we don't know when that's going to happen. So we invest based on we will just want to have it right when it does happen. The problem with that is it means that you're going to also expose yourself to these asset classes when they are when they are hurting us because we could be in cryptocurrency, which I'm not in either. Good to know. That's probably something that a lot of people would want to know about your crypto. Let me get some more clicks too. It's a very popular subject.
Future Outlook on Small Cap Value
00:49:29
Speaker
Carson, same for you. What kind of data would you need in order to make you more open to tilt toward small cap value?
00:49:36
Speaker
Okay, so I actually almost answered the question before, right? So as I said before, if I see that value stocks again, pick up this economic risk premium, right? I thought, first of all, I'm an economist by training, right? This is why I love this story, right?
00:49:52
Speaker
So if value stocks again create more headache on the downside and then in exchange they recover better and we would probably have to see, obviously the next market cycle we would have to see that and maybe another market cycle where that happens. And then over the average over those market cycles, we also see a good size statistically significant premium again. Then ah yeah, I will obviously reject my null hypothesis that that there is no small cap value if i want to make sure is because i've been accused all you claim that small cap value always under performs from now going forward and that's not what i'm saying i mean and neither am i saying that nor am i investing like that because if i really believe that i would sell all my.
00:50:40
Speaker
S and&P 500 index funds and total market index fund and go into large cap growth companies only. And I'm not doing that. So i'm so for me, actually, the null hypothesis is there there is there is zero or there's very little outperformance in SCB. And yes, I mean, I will obviously reject that hypothesis if I if i see enough data coming in.
00:51:03
Speaker
And that that that makes me makes me think otherwise. But i mean obviously Paul has this great excuse because you're older. You can say they nothing can happen. over I don't have to develop over the next 30 years. And in 30 years, I mean, if you're still alive, you probably don't care anymore. Or we you might you might no longer walk on this earth.
00:51:26
Speaker
But i still i still think that ah definitely for your heritage right i mean what don't you want to put a some some kind of a test for say your two-year-old grandkid right i mean leave them some something to think about hey this is your grandpa i think you should invest in small cap value but look out for this.
00:51:47
Speaker
because i don't want you to sit there in sixty years and then hold on to something to some wrong advice that i gave you and then long after i'm gone. I i would want my grandkids to to check for some some test hey ah challenge what grandpa told us and if you observe this then grandpa was wrong and you do the exact opposite going forward i think that that would be actually it.
00:52:12
Speaker
good Good policy and I think both a grandpa and a financial advisor should be doing that. Well, let me I do want to respond to that because it's one of my favorite topics. and I love that little girl and and that money is set aside to fund her Roth IRA for as long as it helps to fund. And the reason we put it half in the small cap value, we used A-V-U-V and half in avu s it's a total market index at avantas but it's got more value in it than the total market index at vanguard of fidelity but i want her when she's eighteen and she's going to watch a video and she's going to read a letter. And she's going to know that her grandma and grandfather had had a mission with that money for her she's gonna be able to see eighteen years of performance.
00:53:07
Speaker
And she's going to be she's going to see some years the small cap value did better and some years the S and&P 500 did better. and and And then that money is to go into the Roth. And my hope is she will stay 100% equities with this money and this money only in the Roth IRA for the rest of her life.
00:53:28
Speaker
And that when she is 70 and she retires, i I think it will have a huge impact on her ability to live and to give. and and and And I don't want her to second guess because there'll always be a salesperson who's got a better idea.
00:53:46
Speaker
And right now she doesn't have enough money that they'll crawl across crushed glass. But when she's got a few hundred thousand dollars, they're going to make promises to her that I'm not going to be there to defend. And so the question we grandparents or parents have is how do we keep their hands off the money? So we're trying and we're trying by get getting it going, but getting that hid into Roth Iris as soon as we possibly can. I love that approach because that you're even thinking about it because one, we I think we can all recognize that even those three sitting here are probably a very small portion of the masses as a whole. And even a smaller portion is thinking that far into the future for their grandchildren. So I think it's awesome that you're doing that, Paul. And I'm sure I know you've got a beautiful family too, Karsten. And I know you're already thinking about these things as well. but And I love talking ah to you, Paul, because you have a few more years on me.
00:54:38
Speaker
And selfishly, I get to take advantage of your perspectives because I know time flies and I know it's not going to be too long out. of My back already thinks I'm there with you already probably, but time does fly and and I take advantage of every chance I get to get the wisdom from really cool people like you.
00:54:55
Speaker
So prior to recording this about a week ago, I put a post on YouTube so that the people who subscribe to the YouTube channel, they can see it and they can engage and participate with me about the show.
Q&A: Premiums from Small Cap Value
00:55:08
Speaker
And I told them that I was going to have you both on and ask what they would like for me to ask you. The first question is from at cap KEP p one nine nine zero one. He starts out with Paul is the man.
00:55:20
Speaker
Approximately how long would one need to wait for a premium to be paid? 30 years, infinity, et cetera, question mark. This is premiums to be earned on on small cap value? I believe so, yes, sir. You know, it's it's an interesting question because, and Karsten addressed this, we have inflation to consider, we have the S and&P 500. It could be, for example, this is this has happened before, the S and&P 500 will go from very high PE ratios to much, much lower PE ratios, ah in in which case you can have a period
00:55:58
Speaker
that the small cap value may outperform because the S and&P 500 is doing poorly. So there's a number of ways that it can happen. like you you don't No one can know. that That is, we have to understand we are in a faith-based business. It's all about faith. We can crunch all the numbers we want. Gene Fama Jr. can give us all the speeches, what's or papers he wants, but it's one interesting thing when when you when you ask these academics what they expect the premium to be. Not whether there will be a premium, but what do they expect it to be? And they'll say, you know, we have no idea.
00:56:40
Speaker
We really don't know what it will be. We just think there will be a premium for small and value and stocks over bonds. I mean, that's the belief that the academic community has. That is very different from the way it was in 1925. In 1925, they believed that stocks were nothing but speculation and the bonds were the real investment for the future. And so what will we believe in 25 or 50 years from now?
00:57:09
Speaker
I don't know. PE e ratios are a matter of faith. And who knows what people are going to be willing to pay for those earnings in the future. So I don't know how long it will take, but what if at the end to 30 years, the return for small cap value is exactly the same as the S and&P 500 or a little bit behind. Does that mean you will have had a terrible return? Probably not. But it would it be the first time in one's life that things didn't turn out the way that we thought they were supposed to? They rarely do turn out the way we expect. So I don't know, Keith, but thanks for the question. And that was Keith from Connecticut.
00:57:52
Speaker
and that he says he hopes you got his letter and happy holidays. Yeah, I actually have ah have a reply to that too, because it reminds me of a discussion. I've had a Twitter and now X and that that is just a, so sometimes discussions go sideways and we started with some small cap value question and then.
00:58:08
Speaker
but the The question is, what is more, quote unquote, guaranteed? The equity premium or the small cap value premium, right? Because I mean, equities, I mean, as I, as I mentioned earlier, right, you look at 150 year return charts since the 1870s and equities is really pretty much a straight lineup for some fluctuations around it. And you could have obviously in the really deep recessions,
00:58:32
Speaker
where even in one market cycle, you don't quite get back up to where you started. So for example, 2001, you just recovered in 2007, and then the next recession starts again. But at least if you go over two market cycles, you have pretty much a almost a guarantee for pretty decent returns. Of course, if you always if you go from the from the peak to the bottom, it looks really bad. If you compare the ah Market peaks or market bottoms you normally you have some kind of a it's not a guarantee, but the guarantee behind it is that obviously if you have economic growth right the stock market itself is being pulled up if GDP is growing right and there's even some economic theory behind it actually the economic growth doesn't even have to be very large,
00:59:21
Speaker
Stock market returns have to be even a little bit higher than than the GDP growth. This is called the neoclassical growth model, and I'm not going to get into the details there. And the reason for that is that in in a growing economy, you would have to have a capital stock that pays some returns. It can't have zero returns forever.
00:59:38
Speaker
The problem with small-cap value is right this this is a premium because you take the difference between between returns and that's a lot less guaranteed. but so i mean i mean the so The answer is, right if you have some faith in the stock market where you say, well, over 30 years, you're probably going to have a pretty pretty good outcome in the stock market, especially with regular investments.
01:00:00
Speaker
Obviously, small cap value is because because you're taking the differences between different parts of the of the stock market. It's a lot less, quote unquote, guaranteed than the overall equity premium. And the overall equity premium, that also can be very frustrating. i mean ah you You mentioned 1926. That's when people said, well, stocks are ah just a bunch of mumbo jumbo and bonds are ah the way to go. It's actually as late as 1982, right? There was the business we cover. Is this the end of stocks?
01:00:28
Speaker
Right. So you have these, you sometimes have these very frustrating periods even for the equity premium, right? And obviously the the difference between two parts of the equity premium is a lot less certain than the equity premium overall. Yeah. So it can be frustrating. So I so i hear you. I just did a podcast about the number one reason to buy index funds.
Guaranteed Returns and Economic Shifts
01:00:53
Speaker
And the last time, this is part two, the last time I did that, we had over a million opens of that podcast. Amazing. And we'll see what part two draws. But but I will ah tell you, it's a very simple point. The only guarantee I know comes from the S and&P 500. And and that that is that when you invest in that, you're going to have a deduction for the expenses. That's guaranteed.
01:01:20
Speaker
right But so is the return that you get more or less guaranteed. On the other hand, with small cap value, the range of returns, and I said this earlier, is very, in fact, there was one year there was a 28% difference between the the number one and the number six.
01:01:38
Speaker
small cap value index fund so you better know if you're gonna be in getting into small cap value that you're getting into a way of building a small cap value fund that you have some reason to believe that it's going to do better than another and so that is the.
01:01:56
Speaker
That is the challenge. And a lot of people will go to Vanguard and they'll buy the cheapest one and think that's the right one. And in fact, that probably isn't the best one because we're not talking about a pure index as as we have with the S and P 500. Here's another question. We've touched on this as well, but I want to ask it. Maybe we can find a different angle. This is from Kiasam. Kiasam is basically mosaic mosaic backwards. The small cat premium seems to have disappeared since 1980 compared to the previous 50 to 60 years. What factors have contributed to this? Do you think the premium will reappear? And if so, why? And if not, why?
01:02:34
Speaker
Well, to begin with, it hasn't disappeared. All you have to do is you can go, I mean, we we know we have a public fund that has been doing this run basically by the people who developed the the factor, the the factor models. And that fund, if you go to the chart function at Morningstar, you can see, you can compare it to the S and&P 500.
01:02:58
Speaker
and DFSVX has outproduced the S and&P 500 since 1993 and twice during that period of time. If you sold right there, you were doubled what the S and&P 500 was worth, more than doubled, twice. On the other hand, you also could have sold at a point that it was virtually the same as the S and&P 500. But right now, small cap value fund yeah is is doing okay. It's not as bad as people are painting it to be. So I i think what the commenter was referring to, if you if you look at the, ah first of all, the small cap pharma French factor has been flat since then. And the value factor since 1982, it first went up.
01:03:45
Speaker
to 2006 and then has fallen back down to where it started in 1982. So some actively managed funds probably could have done a little bit better because again, as we said before, they might have done some other factors like momentum betting against beta quality and but the pure pharma fringe value factor has also been flat. I think if you go all the way back again to the to the 1980s, it doesn't mean that it disappeared. It was still it was positive between the 1980s and 2006. And then it has been negative for a net zero. So that I think that's that's where this is coming from. And
01:04:26
Speaker
Yeah. So, and and I also look at, I mean, people should look this up. I was looking at the DFSVX and so this is just, so it's up 385%. Whereas the S and P is up by 1200%. I think, I think this is very, this time word is out on that one. So I think we have to, we have to confirm what, ah what the index actually did and versus the, versus the DFSVX. And I, and I don't think that even, even if they have a different dividend yield that they would have done that much better.
01:04:55
Speaker
Are you looking at the chart function since 1993? I'm doing Yahoo Finance, so not sure how reliable that is, but it did have dividends. But I think the dividend yeah the dividend yield is not that great in the DFS VX. What's the dividend yield? There is 1.32%. It's actually less than the S and&P 500.
01:05:16
Speaker
So I, I think the jury is still out on that one. And it's, I mean, certainly there's been underperformance since 2006. So, and then the question is how far do you have to get back to get back to zero? And then how far do we have to get back where small cap value and a point to point basis ending in 2024 is actually significantly better than the S and P five. hundred i can I can tell you this. I'm looking right now at the Morningstar page. okay And it shows a $10,000 investment in the S and&P 500 has grown to $223,474. That same $10,000 in DFSVX is $286,346.
01:06:02
Speaker
Okay. Um, and so, and you're, and you're right though. I mean, you can look at points of time where if you then look forward, you didn't do better that there was no premium. It doesn't mean they didn't make decent returns. But yeah, I think, I think you're taking the wrong index. The index is the small cap value index. Probably. It's not the S and P 500 index. So probably VFSVX outperformed its benchmark. No. it didn't know have hundred b and p I am looking at, I don't do, do you ever, do you ever use the morning start chart function? No, no, I don't, but I can go to the max and okay. So here's 1993. Okay. All right. Now, now put in VFINX.
01:06:47
Speaker
Compare VF I and vanguard. Okay. That's, that trailed slightly the DFSVX. Okay. Okay. I'll, I'll research that some more, but so again, it's, so it just means that the crossover point is somewhere between 1993 and 2006, right? Where if you had started with the DFSVX and the S and P 500, you would have just done the same until 2024. So.
01:07:14
Speaker
Right. And you can imagine by the way, how exciting people could have been in 2007. I mean, this is the very story that we need to get is, but is that when something is, is like at that point, starting with that $10,000 by April of 2007,
01:07:32
Speaker
DFSVX is worth $83,750. The S and&P 500 is worth 42,000. So one made 32,000 and the other one made 73,000. That would look like this is a place to put all your money.
01:07:48
Speaker
Right. And then it started underperforming. Yeah, exactly. I mean, that's what people need to understand. And we try to be careful not to oversell this stuff. And on the other hand, you know, when you're as enthusiastic as I tend to be, it can cause people to believe something different, I guess. ah Gentlemen, let's end it with this.
Advice for New Investors in 2025
01:08:07
Speaker
If you could offer one piece of advice to a new investor trying to build wealth in 2025, what would it be? Go ahead.
01:08:15
Speaker
No, so this is a new investor just getting started. And I can tell you that that investor is hesitant to put any money in the stock market because that investor thinks that our market is going to go down and it's not worth it. And so I always tell people that was basically me because I got my first job out of grad school pretty much at the market peak in September, 2000. And what What did i do i invested in my 401k and it did terribly the first few months right where i think at some point it was worth less than what i have put in total right even though you you make the contributions and the money was melting way faster than i could put money in and it felt really frustrating but it's very
01:08:58
Speaker
Useless to try to ah time the starting point of your investments if you are a new investor yeah i mean you just get started and goes back to some of the things that paul said earlier in fact one of the best thing that can happen to you is if you have a recession right out of the gates.
01:09:15
Speaker
Well, it has to be a recession right out of the gates and it can't be just a total random walk with drift recession, right? Because then it would have to be some mean reversion in the end, right? The market overreacts usually during a recession and then it rallies again ah much faster than say the Monte Carlo simulation would do. And so you you would have basically the positive side of sequence risk. Right. So you have the recession early on as a saver that helps you because but you could then dollar cost average yourself into the market. And yeah, so my, my recommendation is get started. The best time was last year and because you didn't do it, it's now. And even if there is a recession, hold the course and, and keep doing what, what are you doing?
01:09:57
Speaker
I totally agree. I would just recommend that you celebrate the bear market if you get one, because it is going to pay some of the biggest rewards you'll ever make in the market. As a matter of fact, if you started investing in 1932, you had one of the best 40 year runs that the stock market's ever had. And so it's, I think Carson's got the right advice.
01:10:25
Speaker
I think it's pretty clear both of you are united on that front. Get started and just keep going. yeah consist Stay the course. And by the way, be careful. Don't listen to older people who are crying the blues during the bear market because they will legitimately probably be right. They don't want it, but it's okay for you.
01:10:47
Speaker
Gentlemen, thank you so much for spending your time with me. Thank you, David. Thank you. like I know this is something a lot of people see both. You're both very smart people. You but ah but both have a huge following and it's great to get this conversation of you two seemingly opposed about small cat value together and talking through some of this.
01:11:08
Speaker
Bigger picture c outside of small cat value. I know you agree on much more than you disagree on. Oh yeah, absolutely. Thanks Carson. Enjoy meeting you at dinner and and and Bill was was right. I knew that already. And thank you all for watching and listening.