Marty Whitman makes a bold statement in his recent letter:
“I am disappointed that a Nobel Prize was awarded to Eugene Fama, who studies only markets and prices; and whom, I daresay, does not focus on Form 10-Ks or the footnotes to a corporation’s audited financial statements.”
Marty makes goes on to convey the message that he is able to identify inefficiency in the market because he does so much “homework” and analysis. In other words, his skill is much higher than that of other market participants.
Great story, Marty, but let’s analyze the evidence.
Larry Swedroe has a sweet counterattack to Marty’s claim. First, a comparison against Third Avenue Value Fund and the DFA Large Cap Value Fund, which uses simple quant methods to trade value:
The Third Avenue Value Fund (TAVFX) is a global fund that Morningstar classifies as large value. Thus, we can compare its returns with those of the DFA Large Cap Value Fund (DFLVX) and the DFA International Value Fund (DFIVX). TAVFX had annualized returns of 7.50 percent, while the two DFA funds returned 7.67 percent and 7.47 percent, respectively.
So Marty roughly generates what the braindead DFA Large Cap Value Fund generates. Marty does a lot of homework; DFA sorts stocks on book-to-market. Their performance is the same. The market may not be efficient (depending on your beliefs about the value factor), but it is certainly competitive when it comes to accessing the “value factor.”
What about Marty’s bread and butter Small Cap Value Fund?
We now turn to the performance of the Third Avenue Small Cap Value Fund (TASCX). Over the 15-year period, it had annualized returns of 9.13 percent. DFA’s Small Cap Value Fund (DFSVX) returned 11.90 percent, outperforming TASCX by 2.77 percentage points per year. I would add that while TASCX is mostly a domestic fund, it does have the freedom to buy international stocks. Morningstar showed that non-U.S. stocks currently made up about 6 percent of the fund’s holdings.
Larry’s article goes on with examples that highlights the irony of Marty’s comments. Enjoy…
Maybe Whitman is just mad because he’s getting beat by Fama in the marketplace?
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