Is value investing still relevant? Yes, in fact, it is the only investment strategy that will never go out of style. It will be relevant until the day stock market seizes to exist.
It is a bold claim, I know, but let me back it up with some examples. First, I want to address the usual misconceptions about comparing value investing to any other investment approach. That misconception lies in the timeline. By definition, value investing is extremely likely to not perform well in the short-term. Especially during the greatest bull run in history of the markets that we are still experiencing today.
Take a look at the chart below.
S&P 500 P/E Ratio
This is historical S&P 500 Price to Earnings ratio by month starting in 2010 until today compared to what is considered to be a long-term historical normal of 15. Over the last 10+ years, the overall market has been expensive. Not crazy high, like some of the individual companies but still higher than historical norms.
Consistent with the overall S&P valuation, most popular stocks today, also trade at extremely high valuations to their fundamentals. Just look at the following Forward looking P/E ratios of some of the most popular stocks today.
Yes, these are great businesses but they are also the most popular businesses on the planet.
What does that mean?
That means these companies and companies like them garner all the attention from analysts, media and individual investors. The more popular they become, the less attractive they become for value investors.
Value investing focuses on finding hidden gems in the market. Finding these gems is easier to do during the times when everybody else is looking elsewhere but it can also take a long time until everybody realizes the value they are missing.
To quote Warren Buffett:
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.
That is the reason we typically find value in the unpopular companies. The downside of course is that you have to wait. That is Why patience in investing is crucial
Good value mitigates risk
Over the long term value stocks outperform everything and often with much less risk than strategies like momentum or growth. Why? Well, the risk is being mitigated by low price. Also consider an added benefit that these stocks are not the ones to fall from all-time highs that extremely popular stocks typically sit at during bull runs.
During recessions, like we saw in 2000 and 2008, drastically overvalued stocks fall sharp and can take decades to recover. Deeply discounted stocks, don’t have that problem.
Consider the following charts.
First one is an investment of $10,000 in CISCO at the beginning of 2000.
If you invested $10,000, after 21 years you would have $10,380, ouch!
Or $10,000 invested in Oracle.
You wouldn’t see the value of your investment come back to $10,000 for 10 years.
Although almost all stocks fall during recessions, those that didn’t have absurd valuations, naturally will recover much quicker. Buffett had something to say about that as well.
For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments.
Value is a function of price. Always will be.
Does value investing still work?
Now we know that value investing works over the long term but is it worth it then?
Finding and holding on to good businesses will always make you money. If you are consistent and patient.
Consider the following returns of some of the most famous value investors.
- Starting with the obvious, Warren Buffett.
Annual return of around 19% for 50 years. Total return of 2,737,200%. In other words, a $10,000 investment in 1965, would give you over $273,000,000 today. Check out this article.
- Peter Lynch
Over the 12 years that he was running the Magellan Fund at Fidelity investments, he made over 29% per year.
- Dan Loeb
20% per year for over 20 years.
- Seth Klarman
Close to 17% annual return for over 30 years.
- Mohnish Pabrai
Over 25% over the last 18 years.
These are all abnormal results, outperforming not only benchmarks but also doing it with lower risk.
Value investing over time
There is no greater feeling in the world than finding a great business to invest in that sells cheaper than peers and is overlooked for the unfounded reason. What’s great is that you don’t have to be smarter than anybody, you just have to be willing to look in places that other people won’t look.
In today’s world of Reddit investors pumping the most popular stocks and Stocktwits discussing the latest technology trend, it is easy to get lost in the noise. Sticking to buying great businesses at fair valuations will never go out of style.