This time isn’t different – Reports of value securities’ death are greatly exaggerated

Derive the intrinsic value of a company and compare it to the market price.  Buy if cheap and sell if expensive.[1]  Benjamin Graham and David Dodd wrote these words in their magnum opus, Security Analysis Principles and Technique in 1934. 

Essentially, they identified a way in which to move asset purchases from the realm of speculation to mathematical calculation.  Much later, Basu (1977) first published his academic paper on the superiority of value strategies in comparison to the general market.  “To the extent low P/E portfolios did earn superior returns on a risk-adjusted basis, the propositions of the price-ratio hypothesis on the relationship between investment performance of equity securities and their P/E ratios seem to be valid.”[2]  There’s been a prodigious measure of articles on the decline of value securities in the financial press over the past decade.  Have value stocks really lost their vigor?  According to Dimensional Fund Advisors, “Value stocks have underperformed growth stocks over the past decade. In the US, the annualized compound return has been 12.9% for value stocks, or those trading at a low price relative to their book value. That contrasts with 16.3% annualized compound return for growth stocks, or those with a high relative price.”[3]  This doesn’t necessarily mean that value stocks have underperformed, but rather that growth stocks have significantly outperformed.  In the graph below, it should be clear that value stocks are well within their margin of error in respect of expected return assumptions.  What should also be evident from the graph is the extent to which growth stocks have outperformed in recent history, thus creating a ripe opportunity for inaccurate causal inferences or generalizations suggesting this era is “different”.

As of June 30, 2019. In US dollars. Fama/French indices provided by Ken French. See Index Descriptions in the appendix for descriptions of Fama/French index data. Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is no guarantee of future results.

“Undervaluations caused by neglect or prejudice may persist for an inconveniently long time, and the same applies to inflated prices caused by overenthusiasm or artificial stimulants.”[4]  It shouldn’t come as a surprise that having a 10-year negative premium, much like the last ten years in value, is not an unusual event.  It’s happened before in the US.  Furthermore, according to Research Affiliates, “If valuations were to mean-revert today, value will outperform growth by 35.3%.”[5]

As an investor, what is the appropriate course of action based on the information above?  For tactical investors, paring back growth equities might be a prudent decision.  However, if you’re investment horizon is long-term and you don’t need funds/income currently, make sure you’re rebalancing your portfolios according to your investment plan.  The great economist John Maynard Keynes once opined, “In the long run we are all dead.”  However, in the world of investments, in the long run, investments will achieve their expected returns.

Risk Warnings and Important Information

This article is for information purposes only and is not intended to be relied upon as a forecast, research or investment advice. The value of investments can fall as well as rise.  You may not get back what you invest. Investments involve risks. The investment return and principal value of an investment may fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original value. Past performance is not a reliable indicator of future results.

Although the information is based on data which MASECO considers reliable, MASECO gives no assurance or guarantee that the information is accurate, current or complete and it should not be relied upon as such.

[1] Graham, B., Dodd, D.L. (1934).  Security Analysis Principles and Technique.  New York and London. McGraw-Hill Company Inc.


[3] Dimensional Fund Advisors.

[4] Graham, B., Dodd, D.L. (1934).  Security Analysis Principles and Technique.  New York and London. McGraw-Hill Company Inc.

[5] Kalesnik, V., PhD, Reports of Value’s Death May Be Greatly Exagerated, Fall 2019, Research Affiliates Investment Symposium

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