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r/investing•
XorFish

Performance of Small and Big Companies Sorted by Operating Profitability and Book to Market since 1963 US

I summarized the data from the Ken French data library for the 3 way sort based on Size, Operating Profitability and Book to Market.

The S&P500 returned 10.3% per year over this period.

All returns include dividends and are nominal.

https://i.imgur.com/1PClmub.png

I was surprised on how bad the performance of small growth companies with weak operating profitability really is. So this should be a warning to everybody that invests in companies or funds with said characteristics.

The number of companies can be quite low for some of the portfolios, especially in the first few years of the data.

Posted Apr 6, 2021, 10:16 AM UTC

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RamonSecora•

There can be a survivor bias in the data.

What is the definition of "small grow". In other words: when is the "small" measurement taken? In 1963 or now?. If it's "now", that means the company has not grown due to weak profitability. Not a surprising effect. If their profitability in 60 year is not high enough, they don't have resources to expand.

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XorFishOP•

You missunderstand how the portfolios are constructed. The companies are always sorted based on the data that was available at the time. They don't get categorized at one point and stay there forever.

It is always

  1. categorize based on fundamentals
  2. calculate the performance of every portfolio for the following timeframe
  3. repeat

At no point is information from the future used to categorize a security. However, there are no transaction costs and spreads considered for turnover in these portfolios.

The tricky part is to construct a portfolio based on this data that is diversified, limits turnover and considers other metrics like conservative investment and momentum.

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Asinick•

Hey, so I'm woefully undereducated and ignorant.

Operating profitability is just being used as the raw number -- not as a percent of anything, right?
Is the book:market ratio available on any normal site where you'd be looking up stocks? Or is the "book" part of the equation there at least?
Do your numbers 1-4 correspond to the quartile within the respective category [big company or small company]?

Thank you in advance!

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XorFishOP•

Operating Profitability. The operating profitability ratio used to form portfolios in June of year t is annual revenues minus cost of goods sold, interest expense, and selling, general, and administrative expense divided by the sum of book equity and minority interest for the last fiscal year ending in t-1.

https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/Data_Library/variable_definitions.html

The book to market ratio is probably pretty close to price / book. Although I'm not completely sure, there might be some small differences.

1-4 are the quartiles within each category.

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Asinick•

Thanks for the info! :)

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-veskew•

What etf focuses on small + HML+ RMW? I see only AVUV

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XorFishOP•

AVDV as well as the offerings from Dimensional.

VBR might also consider it, however the exposure is not as strong as with the funds from Avantis and Dimensional.

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Radians•

VioV or IJS were what I used before AVUV came about.

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