Great piece by Jason Zwieg in this weekend’s WSJ. Zwieg offers some solace to investors who still think financials and fundamentals are a more meaningful indicator of corporate performance than fantasies and fairytales about the future. Emphasis is ours.
Pop quiz: Name the giant store whose customers scoff at whatever goes on sale, but flock to buy whatever costs the most.
It isn’t a supermarket. It’s the stock market—especially over the past decade, when value stocks have moldered in the bargain bin. Such companies, trading at low prices relative to their earnings, net assets or other measures, have underperformed pricier growth stocks by one of the longest and widest margins on record.
Is value investing dead?
No.
When will it recover?
When Value Lags Growth this Much the Future for Value Investors is Often Bright
Financial logic says cheap stocks should ultimately earn higher returns than expensive ones; the less you pay for a piece of the future, the more you will earn in the end. Emotional logic, however, says investors will often overpay for excitement.
Therefore, you should always be prepared for value to lag growth in the short run, even though cheap stocks have earned higher returns over the full sweep of decades. And “the short run” can mean many years.
This isn’t the first time value has underperformed growth for at least 10 years, says Savina Rizova, head of research at Austin, Texas-based Dimensional Fund Advisors LP, which manages about $610 billion.
Value trailed in 10-year spans ending in the late 1930s, the late 1990s and every year after 2010—about 15% of the total periods.
Over the ensuing decade after such poor returns, value tended to bounce back sharply, beating growth by an average of more than 8 percentage points a year.
After lagging by 3 percentage points annually over the 10 years ending in 1998, for example, value stocks outperformed growth by more than six points annually over the next 10 years.
History is punctuated with periods when investors made more money buying expensive stocks than cheap ones—for a while, anyway…
It can hurt to sit on your hands while growth investors are clapping theirs to celebrate big gains on expensive stocks that keep getting more expensive. But, sooner or later, value investors will be getting the applause.
Read more here.
