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Podcast Episode – Meir Statman
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Tag: Value Investing
What Happened to Value
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