Value is Not Dead - This Time It's Not Different
By Don Schreiber, Jr. - WBI Founder and CEO
(Printable PDF available below)
In my 36-year career, I’ve heard the same faulty reasoning for market projections time and time again. One of my favorites is that “this time it’s different”. The first time I heard these four words uttered in relation to investing was just before the market crash in 1987. At that time, pundits were trying to justify why the bull market would continue even in the face of overvaluation. I heard it again in 1999 as internet stocks became all the rage and companies were going public and achieving billion dollar market caps, even though they had yet to produce revenue or profit. A well-known economist I followed, Dr. Robert Goodman, stood at the podium at the Financial Planning Association’s forum (then the IAFP), and said “it is never different”. He said when you hear those words attempting to justify why a bull trend will continue, then it’s time to take some chips off the table. At the time I thought they were words to live by.
Lately, we have heard “this time it’s different” applied to value investing. The most ardent suggest that value investing - which generally outperformed growth in the past - is dead.¹ I would suggest value’s underperformance to growth is a phenomenon of an elongated bull market cycle that has favored large-cap growth and especially tech companies. Late-stage bull market rallies tend to favor technology and momentum stocks, and this cycle has confirmed that bias.² Fed easy monetary policy has only served to exaggerate this tendency by removing downside volatility and backstopping the markets’ move higher.³ As investors have crowded into large-cap indexes, the largest capitalization stocks (tech) have enjoyed excess price momentum and increasing capitalization weight within the index.
A closer analysis of the long-term performance of value indexes versus growth indexes has demonstrated that value outperformed growth during the complete market cycle from 2000-2017. S&P 500 Value and Russell 3000 Value significantly outperformed their growth index counterparts by providing 30% and 75% more return per year, respectively.
Taking an even deeper look at value versus growth across capsizes shows that small and mid-cap companies have outperformed their large-cap counterparts, and that value clearly outperformed growth when viewed across full market cycles. I take the long view because most investors have a fairly long investing lifetime where they are committing capital over 30, 40, 50 years or more in the hopes of building enough capital to generate the retirement income they need. I think it’s easier to become successful investors if you know what really works, versus what happens to look good in the moment.
Chart data provided by: Morningstar, Total Return, 2018. Hypothetical $1,000,000 initial investment. Past performance does not guarantee future results. Indices are unmanaged and cannot be invested in directly.
For more on topics like these, subscribe to our weekly podcast Bull|Bear Radio.
Past performance does not guarantee future results. The views presented are those of Don Schreiber, Jr., and should not be construed as investment advice. Don Schreiber, Jr. or clients of WBI may own stock discussed in this article. All economic and performance information is historical and not indicative of future results. This is not an offer to buy or sell any security. No security or strategy, including those referred to directly or indirectly in this document, is suitable for all accounts or profitable all of the time and there is always the possibility of loss. Moreover, you should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice from WBI or from any other investment professional. To the extent that you have any questions regarding the applicability of any specific issue discussed to your individual situation, please consult with WBI or the professional advisor of your choosing. This information is compiled from sources believed to be reliable, accuracy cannot be guaranteed. Information pertaining to WBI’s advisory operations, services, and fees is set forth in WBI’s disclosure statement in Part 2A of Form ADV, a copy of which is available upon request.
Russell 1000 Value Index: comprised of Russell 1000 companies with lower predicted and historical growth rates. Russell 1000 Growth Index: comprised of Russell 1000 companies with higher predicted and historical growth rates. Russell 2000 Value Index: comprised of Russell 2000 companies with lower predicted and historical growth rates. Russell 2000 Growth Index: comprised of Russell 2000 companies with higher predicted and historical growth rates. Russell 3000 Value TR Index: comprised of Russell 3000 companies with lower predicted and historical growth rates. Russell 3000 Growth Index: comprised of Russell 3000 companies with higher predicted and historical growth rates. S&P 500 Value Index: measures value stocks using three factors: the ratios of book value, earnings, and sales to price, within the constituents of the S&P 500 Index. S&P 500 Growth Index: measures growth stocks using three factors: sales growth, the ratio of earnings change to price, and momentum, within the constituents of the S&P 500 Index.
¹ Cussen, Mark P. “Value or Growth Stocks: Which Are Better?” Investopedia, Investopedia, 14 Dec. 2017
² Hough, Jack. “4 Stock Picks for an Aging Bull Market.” Barron's, 17 Feb. 2018
³ Galakis, John. “Quantitative Easing and Macroeconomic Volatility.” FactSet Insight, 23 May 2016