Since 1928, value stocks have outperformed growth stocks by 3+% per year on average. Legendary investor Warren Buffett is maybe the best-known example of a dedicated value investor, who throughout his career has captured an impressive outperformance of his own – Berkshire Hathaway has outperformed the S&P 500 from 1965 – 2019 by 10.3% per year.

So what is value investing? It is the bargain-shopping of the investment world. Introduced in the 1920s by Benjamin Graham and David Dodd, it’s an investment strategy based on finding stocks that appear to be trading for less than what they are actually worth (through analysis of the company’s balance sheet). In the 1990s, Nobel Laureate Eugene Fama and Kenneth French added fuel to the value fire by arguing that the value premium – the positive return investors get from investing in cheap stocks – largely explained equity outperformance in both the US and International markets. 

Recently, value has not been having its day in the sun. Over the past 10 years, growth stocks have outperformed value by 3.3% per year*. So what happened to value premium? 

Cliff Asness and his colleagues at AQR recently wrote a white paper titled Is (Systematic) Value Investing Dead?  Their argument? Long-term value premiums are alive and well. 

Said differently, even a sound investment strategy with a high expected return, like value investing, can underperform, even for extended periods. After all, without this inherent risk, we wouldn’t expect to see a positive return in the first place. That’s not to say the recent underperformance can’t continue, but if you are looking for the best odds of success, it would be hard to ignore the evidence over the long-term.

Our take: value investing is not dead. Far from it. Instead, true value investors earn their return in periods like these…by sitting still. Warren Buffett is quoted as saying “The stock market is designed to transfer money from the impatient to the patient”. Well said.

*comparing the S&P 500 (with more growth-oriented stocks) with the Russell 1000 Value Index

There are a myriad of financial talking heads crowding the airwaves with baseless predictions. How do we find the few worth heeding? We look for intellectual curiosity – a thirst for understanding what is right and true, regardless of where it may lead. Inside of Hill Investment Group, we savor the voices who stand out in this way. We point you, our tribe who are committed to Take the Long View®, to AQR Capital Management’s new podcast channel “The Curious Investor.” We are especially impressed by its third episode, “Active versus Passive,” featuring a conversation between Vanguard founder John “Jack” Bogle and AQR managing and founding principal Cliff Asness. As the father of the world’s first publicly available index fund, Bogle personifies passive investing like nobody else can. In contrast, Asness has structured AQR on the premise that he and his team can add value to investors’ portfolios by identifying opportunities to apply evidence-based methodology. He’s our modern “active” aficionado, as we’ve described in earlier posts. You’d think the podcast would be a vigorous debate between these two legends. Instead, it exemplifies the considerable common ground and respect they share. Bogle explains:

“We do things very differently from an investment standpoint – to which I would say: So what? … [W]hat I’ve always admired about Cliff is his intellectual soundness. … I’ve always admired that in anybody. And it doesn’t matter whether their intellectual ideas align with my own or not.”

See what I mean? Especially when it comes to the science of investing, nobody has everything figured out. Even if we did, markets evolve over time, generating new insights, possibilities and questions – new subjects to debate. That’s one of the reasons I love what we do. PS: Here’s the iTunes Podcast channel link, if you’d like to “App it.”

Earlier in the month, I attended “AQR University,” held at the University of Chicago and sponsored by fund manager AQR Capital. Given how many Nobel laureates have come out of there (check out that line-up of them on the wall), we know some of the university’s intellectual capital has rubbed off on us. At least it feels that way, based on the fresh perspectives we heard at the event.

University of Chicago professor and author Nicholas Epley was a keynote speaker. I’d read his groundbreaking book, “Mindwise,” but I’d not had the chance to meet him in person.

In his presentation, Dr. Epley shared some of his research into how often we try to read one another’s minds. By frequently relying on body language or “perspective-taking,” he explained how and why our understanding of others is often off-base. What’s a better way to figure out what someone else is thinking? Dr. Epley suggests we should just ask.

We also heard from AQR co-founders Cliff Asness and Dave Kabiller. In today’s fast-paced environment in practical and academic financial economics, it’s important for us to regularly “just ask” colleagues and thought leaders what’s on their minds. This is another way we ensure our evidence-based investment strategies remain guided by peer-reviewed best practices.

For more on Cliff’s views, read this Wall Street Journal article about factor investing. In it, he expressed similar sentiments to the ones he shared with us in person.

Want to know what else we learned in Chicago? Just ask!