The Viability of the Value Premium Part III: The Investor's Long HaulSubmitted by Desmond Wealth Management, Inc. on September 8th, 2019
So far in our five-part series on value investing, we’ve explored the factor’s origins and proposed that evidence-based investors would be well-advised to keep the faith on value investing (relative to their personal financial goals and risk tolerances).
Still, we understand. A decade is a long time to tolerate disappointing numbers, while awaiting an expected reward. For many of us, our children are about the only other misbehaving “investment” we’re willing to put up with for that long.
However, as is the case for any other source of expected investment returns (including the equity premium itself), we prefer to consider value stock performance over a decade or more, since the expected outperformance can go into hiding for years on end – and often has.
In a 2015 CFA Institute post, Enterprising Investor contributor Dougal Williams commented (emphasis ours): “A ‘disappearing’ value premium, even over a 10-year stretch, is nothing new. In fact, since the late 1970s, 27% of all rolling 10-year periods have seen a negative value premium.” Of course, on the flip side, this means 73% of them delivered a positive premium.
These seem like pretty good odds. However, when a source of expected return does resurface after a hiatus, it’s often in the form of an exuberant leap nobody saw coming, except in hindsight. For example, in the same CFA Institute post, Williams pointed out that growth stocks had outperformed value by 2.1% annually for the decade ending October 2000. Then, abruptly, the tables turned; value bested growth by 35% over the next five months. Based largely on this single surge, value ended up outperforming growth by 2.4% for the 10 years ending May 2001.
In short, only those who can tolerate the doldrums tend to still be around to reap the unpredictably timed windfalls that often dramatically impact your end returns. As Vitaliy Katsenelson of Contrarian Edge has suggested more recently, “Value investing is not dead; it is just waiting until all value managers lose their hair and capitulate.”
Next, we’ll offer additional evidence-based insights contributing to our patient approach to value investing.