It’s no secret that value investing – Camarda’s preferred strategy – has been out of favor for much of the 21st Century. While Camarda has been very proud of its value-style results in the Strong Stock, Columbia, and Viking portfolios, we truly believe the best is yet to come, and the next decade – or longer! – could be a period of extraordinary profitability for value investing styles. First, some context. Besides looking to pick up assets for less than they’re worth being intuitively appealing, value investing has the strongest academic evidence for long term superior results. For instance, data collected by Nobel Prize-winning economist Eugene Fama and Dartmouth finance Professor Ken French indicates a long term (nearly a hundred years) annual compound rate of 13.5% for value stocks, or about 47% more each year than growth’s 9.2% average return. For a $500K investment over 10 years using those returns, value would return $1.7M compared to growth’s $1.2M – about $500K or 100% more total return. According to the graph below, large cap value has beaten an index approach by over 2 to 1, and a large cap growth approach by almost 7 to 1. That’s on average, but we may do even better in the years ahead. Note also that a small cap value approach – an index approach often used in Camarda’s Columbia on average by some 10 to 1. These are pretty huge differences, but to harness them, history counsels patience – these have been long term effects, and can be easily lost in the knee-jerk noise of what’s hot lately. Since so much of the human mind is hardwired to make decisions on recent information (it’s a bear…run now!), dry, long term data can be discounted, forgotten or ignored, resulting in poor choices and inferior long term results. So patience, discipline, and an ongoing awareness of your long term objectives and best interests is a key to targeting superior returns. Think Warren Buffet: “What we learn from history is that people don’t learn from history…Long ago, Ben Graham taught me that ‘price is what you pay; value is what you get.’ Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down. In the short term, the market is a popularity contest. In the long term, the market is a weighing machine.” Ignore – even distain – what is popular, and make sure you get ample measure for what you pay. That is the essence of value investing.
What’s more, given the out-of-favor recent history for value – indexing and tech-growth stocks have dominated investing fashion for most of the 21st Century so far – the stage could be set for some truly massive gains ahead: the Fama-French data also show out-of-favor periods are usually followed by strong, sustained periods of dramatic value outperformance. The graph below, assembled from Fama-French data by John Buckingham, author of one of my favorite newsletters, tells that story. Going as far back as 1932, value typically outperforms in most periods, but when it does not – around the 2000 dot-com crash, for instance – it typically roars back with outsize gains, in that case nearly 100% more than the returns for growth stocks. In many ways, the current market is similar, with tech growth stocks dominating the field and trading at dizzying valuations. Nobel Prize-winning Yale economist Robert Shiller – author of Irrational Exuberance and predictor of the dot-com crash and the 2008 housing bust – recently said “the only time we’ve had a higher valuation than where we are now was around 1929 and around 2000.” The recent value underperformance is one of the strongest on record, and the exceptional returns for value it may be signaling could be truly historic. Patience and discipline is the key.
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