The Weekend Wall Street Journal has a great article on value stocks today. So far this year, value is outperforming growth, which is typical in the long-run, but not so much in the short-run, especially when the market as a whole is moving higher.
Some key points in case this goes behind a paywall:
- Value investing and funds don’t mix – Value investing and other people’s money aren’t very friendly. An anecdote from one of the best global value managers of all time shows just how weary investors are of value stocks. He beat the index by 4% for more than a decade, but after 3 years of getting stomped by short-lived dot com stocks, investors pulled two-thirds of their money. Those investors then missed another decade of outperformance.
- 10-year disparities – Value funds returned 6.7% per year in the past ten years, but investors got only 5.5% annually, mostly because investors have a hard time sticking to value stocks. The article suggests a 38% loss in 2008 worried investors who thought “value” meant less downside in the short-term; that isn’t true.
- Value underperforms for long periods – Even the best value investors underperform 33-40% of the time, but their long-term records solidly trump the market. Take Charlie Munger, for example, who lagged the market for 5-6 years but went on to stomp it with 20%+ returns for decades after. Value funds often miss speculative bubbles, but they miss the burst, too.
- Value funds != Value stocks – Value funds are often based on stocks ranked by price to book because that’s how the Fama-French five-factor model works. Value investors don’t give a what about book value, because it’s often overstated or underreported, which I’ve talked about here. Value managers also favor large values stocks over small cap value. Small cap value has historically been the best performing style by a long shot, and likely always will be because of information asymmetry.
- Value takes time – By its very nature, value investing takes a lot of time…most of which is spent waiting. Investors have to be willing to “suffer” before the market proves them right.
- Go anywhere – The money manager cited in the article, Jean-Marie Eveillard, finds bargains in Japan and among gold-mining stocks. I just find this funny since, as a value investor, these are the only two kinds of investments I’d never invest in. It just goes to show that at the end of the day, value is subjective.
The WSJ ends it with a note that value stocks are only 40% cheaper relative to earnings than growth stocks. The historical relationship is 54%. It’s stats like these that will keep investors from value stocks that will keep on posting above-average returns.
Value investing is for the die-hards. Take it or leave it; the methodology isn’t built for the short-run.