Opinion: Is value investing dead?
Reprinted courtesy of MarketWatch.com
Published: June 25, 2019
To read the original article click here
One of the questions I hear from investors every week is some variation of the following:
“I understand that value stocks in the past were very profitable, but over the most recent (fill in the blank with a number) years, they seem to have lost their luster. Can I rely on the so-called value premium to continue in the future?”
If I’m brutally honest, I must answer no.
No, you cannot rely on ANYTHING about the future, because as I have pointed out many times in many ways, anything can happen.
Personally, I believe investing in value stocks is a terrific option. The same factors that made value investing a good deal in the past are very likely to persist into the future.
However, there’s very little that I can guarantee about future investment returns, and none of it is useful if you’re trying to gain an edge on your fellow investors.
Here are three guarantees I can make:
• Future returns won’t be exactly the same as past returns.
• Future returns will surprise you; sometimes in a pleasant way and sometimes in an unpleasant way.
• At some point you will know exactly what you should do with your money this week to get the best return. But by the time you get that knowledge it will be too late to take advantage of it.
Sorry to deliver all that bad news, but sometimes it’s my job to tell people what they really don’t want to hear.
Now, back to value stocks and the question of whether they’re dead.
Most academics will tell you that one or two — or even 10 — years of returns aren’t very meaningful for getting beyond random market behavior.
So let’s look at the past 20 years and see what we can learn. For example, does 20 years of past performance tell us anything about the next 20 years of performance? (Here’s the spoiler: sometimes yes, sometimes no.)
At the end of 1999, I made several bold predictions about the future. I said I expected that
• Stocks would do better than bonds.
• Small-cap stocks would do better than large-cap stocks.
• Value stocks would do better than growth stocks.
• Emerging markets stocks would do better than the S&P 500 index SPX,
I was mostly right, though the stocks vs. bonds comparison was right or wrong mostly depending on the indexes you use for comparisons.
Long-term corporate bonds, both government and corporate, outperformed the S&P 500 by as much as 1%, though the stock index beat U.S. Treasury bills by more than 3%.
Let’s say stocks outperformed bonds, but just barely.
Small outperformed large: The DFA small-cap blend index DFSVX,
Value outperformed growth, whether you were measuring large-cap stocks, small-cap stocks, emerging markets or international developed markets.
Emerging markets outperformed the S&P 500 and the U.S. total market index VTI,
Does this mean I was a genius or a guru? No. My predictions were based on long, long historical results.
My most basic prediction, that stocks would outperform bonds, should have been a no-brainer.
In 1999, recent history was heavily on my side. The S&P 500 had just finished 20 years with stunning compound returns of 17.7%. In that same 1979-1998 period, long-term government bonds had returned 11.1% and T-bills 7.2%.
Both those bond figures were way above the long-term averages, due in large part to a very large and long-term decline in interest rates — a decline that could not possibly repeat itself unless interest rates turned negative…meaning that lenders would start paying borrowers to take money from them.
In 1999, the returns from the most recent 20 years were not a particularly reliable guide to the next 20 years.
I remember the closing days of 1999, when the bull market in stocks was raging and people were sure that their fortunes could be made easily if they bought any stock with “dot-com” in its name.
Nobody, and I really mean nobody, was predicting in 1999 that stocks would barely break even for the next decade through two bruising bear markets.
Here’s another interesting question: Going back even further, at the start of 1979 could an investor have used results from the most recent 20 years to accurately predict the returns of 1980 through 1999?
Hardly.
From 1959 through 1978, the S&P 500 index compounded at 4.3%. In the following 20 years, it compounded at 17.7%.
From 1959 through 1978, long-term government bonds compounded at 3.4%. In the following 20 years, those bonds compounded at 11.1%.
My takeaway from these and many other numbers from the past is that recent performance (even as long as 20 years) is a poor guide to future performance.
But longer term history seems much more solid.
The 91-year history we have of stock and bond returns supports my general predictions from 1999, and I doubt very much that those predictions will change. They are based on probabilities, and that’s the best anyone can do.
To sum up: No, I don’t think value investing is dead. Neither is stock investing or small-cap investing. The hoped-for results won’t show up in every year or even in every decade.
But I see no reason to think that the long-term trends are obsolete.
The best way to deal with these facts is to apply diversification and be patient. Don’t put all your money into any single asset class. And for sure, don’t jump around from asset class to asset class depending on which way the investment winds happen to be blowing.
Make a sensible plan that is supported by long-term history. Then put that plan into practice and stick with it.
For more thoughts on value investing check out my latest podcast, “Is the Value Premium Dead?”
Richard Buck contributed to this article.
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