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Frequent Contributor

Is value investing coming back? or maybe value is a myth :-)

For years now value investing is trailing growth and for years I have been hearing that one day it will be back.

But according to this (article) "Value stocks in particular have become very expensive, based on their forward price-to-earnings (P/E) ratio. Both the S&P 500 Value Index and Russell 2000 Value Index forward P/E have reached their highest levels since the 2000s."

(chart) VFIAX beat VOOV IVE (this one has longer history) for 1-3-5-10-15 but wait, VFIAX also beat IVE for volatility...mmm...so, remind me, why value is better?

BTW, in every major decline (2008,2018,2020) the SP500 loss was smaller than IVE.

PV (link) for 15 years(see the table below). 

PortfolioCAGRStdevBest YearWorst YearMax. DrawdownSharpe RatioSortino Ratio
VFIAX(SP500)8.38% 14.66%32.33%-36.97%-50.92% 0.540.77
IVE(SP500 value)6.27% 15.78%31.63%-38.86%-56.75% 0.390.53

 

You can change the starting dates to see 5-10 years but for 5 years(link) (see table below) SP500 beat IVE at 3.84% annually and that is striking.

PortfolioCAGRStdevBest YearWorst YearMax. DrawdownSharpe RatioSortino Ratio
VFIAX9.14% 14.58%31.46%-9.31%-19.61% 0.60.88
IVE5.30% 15.40%31.63%-17.41%-25.35% 0.340.47
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Re: Is value investing coming back? or maybe value is a myth :-)

Why compare a mutual fund with an ETF?  Use VVIAX and VFIAX and from January 2019 to present, no way value has made a comeback.

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Re: Is value investing coming back? or maybe value is a myth :-)


@FatKat wrote:

Why compare a mutual fund with an ETF?  Use VVIAX and VFIAX and from January 2019 to present, no way value has made a comeback.


VFIAX is an index fund and IVE is an index ETF.   

I can sub VFIAX for VOO and get the same results but many time M* charts work better when you start with a fund and the add ETF later

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Re: Is value investing coming back? or maybe value is a myth :-)

There's an old addage that value investing does better when real interest rates are higher and growth investing better with lower.

The CAGR of BRK vs SPY illustrates this.

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Re: Is value investing coming back? or maybe value is a myth :-)

Growth vs value is a very old debate. From 2002 to 2011, which covers two crashes none of the styles; growth, value, or index did especially better or worse than the others. Winning streaks were limited to between 2-4 years in any of the cap sizes (large, medium, small). However, growth logically does better in the latter stages of an economic cycle and value does better in a recession. Index funds (normally a blend of growth and value) are neither the best performer, not the worst performer. Value pays a dividend so is associated with less volatility whereas growth doesn't so can move up or down more. I realize this is a bit out-of-date, but we can't know the outcome of the latest turbulence until the dust settles.

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Re: Is value investing coming back? or maybe value is a myth :-)


@FD1001 wrote:


VFIAX is an index fund and IVE is an index ETF.   

I can sub VFIAX for VOO and get the same results but many time M* charts work better when you start with a fund and the add ETF later


I am suggesting doing it that way, compare IVE and VOO; be consistent. It makes for a more harmonious post.

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Re: Is value investing coming back? or maybe value is a myth :-)


@FatKat wrote:

@FD1001 wrote:


VFIAX is an index fund and IVE is an index ETF.   

I can sub VFIAX for VOO and get the same results but many time M* charts work better when you start with a fund and the add ETF later


I am suggesting doing it that way, compare IVE and VOO; be consistent. It makes for a more harmonious post.


Already explained to you why not use IVE and VOO.

This chart (link) started with VFIAX.  For 3 years the total return was 26.46% which is the correct number

This chart(link) started with VOO. For 3 years the total return was 19.3% which is the wrong number

I prefer to show the correct numbers and not being harmonious.  Let me guess, did you teach at school/university?

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Re: Is value investing coming back? or maybe value is a myth :-)

I think Galeno hit the nail on the head.  Wellesley at around 2.6% yield is less attractive than Wellesley at 5% yield.  The entire concept of value stocks is that they are beaten down, very mature companies with good to high yields.  The second issue is we are on a close to 30 year tech bull that shows no sign of stopping.  As value investors saw their growth counterparts doing well year after year, they have migrated to what is perceived to be more attractive.  Demand drives prices.  Most of the data that theorized the value premium was pre-tech and during much higher bond and dividend yields.  Like the data that showed that the lowest P/E quintile had the highest return, those low P/Es came with high dividends.

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Re: Is value investing coming back? or maybe value is a myth :-)

A graphic from an article by Brett Arends: 

temp pic 14.png

There has been an oscillating cycle between growth and value, probably as long as there have been investments. I don't see any good argument for why this pattern is going to change.

The disdain for value stocks that we see today does strike me as similar to the disdain back in 2000, so perhaps we are nearing another inflection point. But the relative valuations don't seem nearly so stretched as in 2000, so perhaps not. (But perhaps they are that stretched for international value?)

Unfortunately, I lack the crystal ball that will tell me what this graphic is actually going to look like 20 years from now. 

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Re: Is value investing coming back? or maybe value is a myth :-)


@Academic wrote:

A graphic from an article by Brett Arends: 

temp pic 14.png

There has been an oscillating cycle between growth and value, probably as long as there have been investments. I don't see any good argument for why this pattern is going to change.

The disdain for value stocks that we see today does strike me as similar to the disdain back in 2000, so perhaps we are nearing another inflection point. But the relative valuations don't seem nearly so stretched as in 2000, so perhaps not. (But perhaps they are that stretched for international value?)

Unfortunately, I lack the crystal ball that will tell me what this graphic is actually going to look like 20 years from now. 


+1

You show in graphic form what is my experience re value vs growth.

For instance the 2000 to 2006 period it was easily seen on the Callan Periodic investment Tables of yearly results...that value was beating growth.  So the momentum investor captured this.  Likewise, anyone basing their investing on momentum as a factor, has been in the right place, especially the last decade.

BTW the focus on value comes from the FACT that from about 1920 to 1990's, value beat growth in stock market studies such as E. Fama-K. French studies.

No need to predict value vs growth.  The market will tell you.  There were a couple head-fakes in last five years that value was perhaps going to turn around and lead, and I began a tilt; but never had staying power.  I converted back.  One should have been growth-tilted the entire last decade.

But the retiree investor may want a dividend theme (yield theme) portfolio, which tends to include a lot of value.  Top growth not needed.  Total return not the top priority; safety may be, for instance.

R48

 

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Re: Is value investing coming back? or maybe value is a myth :-)


@Academic wrote:

A graphic from an article by Brett Arends: 

temp pic 14.png

There has been an oscillating cycle between growth and value, probably as long as there have been investments. I don't see any good argument for why this pattern is going to change.

The disdain for value stocks that we see today does strike me as similar to the disdain back in 2000, so perhaps we are nearing another inflection point. But the relative valuations don't seem nearly so stretched as in 2000, so perhaps not. (But perhaps they are that stretched for international value?)

Unfortunately, I lack the crystal ball that will tell me what this graphic is actually going to look like 20 years from now. 


Sorry, I don't see the chart the same way.  I see an era of high bond and stock yields on the left followed by the tech boom, followed by the tech bust (during which value did squat (like 2% per year, basically dividend yield), followed by another tech boom which has continued even through this economic collapse.   Over the last 20 years, growth has produced 132% more return.

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Re: Is value investing coming back? or maybe value is a myth :-)


@bilperk wrote:

@Academic wrote:

A graphic from an article by Brett Arends: 

temp pic 14.png

There has been an oscillating cycle between growth and value, probably as long as there have been investments. I don't see any good argument for why this pattern is going to change.

The disdain for value stocks that we see today does strike me as similar to the disdain back in 2000, so perhaps we are nearing another inflection point. But the relative valuations don't seem nearly so stretched as in 2000, so perhaps not. (But perhaps they are that stretched for international value?)

Unfortunately, I lack the crystal ball that will tell me what this graphic is actually going to look like 20 years from now. 


Sorry, I don't see the chart the same way.  I see an era of high bond and stock yields on the left followed by the tech boom, followed by the tech bust (during which value did squat (like 2% per year, basically dividend yield), followed by another tech boom which has continued even through this economic collapse.   Over the last 20 years, growth has produced 132% more return.


I guess I would view things like a high dividend yield at one part of the cycle, or overvalued tech stocks at another, as just specific examples of how the cycle plays out.  

 

 

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Re: Is value investing coming back? or maybe value is a myth :-)


@bilperk wrote:

@Academic wrote:

A graphic from an article by Brett Arends: 

temp pic 14.png

There has been an oscillating cycle between growth and value, probably as long as there have been investments. I don't see any good argument for why this pattern is going to change.

The disdain for value stocks that we see today does strike me as similar to the disdain back in 2000, so perhaps we are nearing another inflection point. But the relative valuations don't seem nearly so stretched as in 2000, so perhaps not. (But perhaps they are that stretched for international value?)

Unfortunately, I lack the crystal ball that will tell me what this graphic is actually going to look like 20 years from now. 


Sorry, I don't see the chart the same way.  I see an era of high bond and stock yields on the left followed by the tech boom, followed by the tech bust (during which value did squat (like 2% per year, basically dividend yield), followed by another tech boom which has continued even through this economic collapse.   Over the last 20 years, growth has produced 132% more return.


Vanguard Value index (VIVAX) 20 year trailing return as of 5/15/2020: 5.3% annualized ($10,000 grows to $28,179)

Vanguard Growth index (VIGRX) 20 year trailing return as of 5/15/2020:  5.7% annualized ($10,000 grows to $30,181)

Also using the numbers given in the above chart,

Value of $1 investment in value after period 2000-2020  = 1 x 1.15 x 1.54 = 1.77

Value of $1 investment in growth after period 2000-2020 = 1 x 0.6 x 3 = 1.80

Numbers presumably a little different than above due to slightly different period and inflation adjustment. So again, very little difference in overall performance over 20 years. 

 

 

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Re: Is value investing coming back? or maybe value is a myth :-)


@retiredat48 wrote:

@Academic wrote:

A graphic from an article by Brett Arends: 

temp pic 14.png

There has been an oscillating cycle between growth and value, probably as long as there have been investments. I don't see any good argument for why this pattern is going to change.

The disdain for value stocks that we see today does strike me as similar to the disdain back in 2000, so perhaps we are nearing another inflection point. But the relative valuations don't seem nearly so stretched as in 2000, so perhaps not. (But perhaps they are that stretched for international value?)

Unfortunately, I lack the crystal ball that will tell me what this graphic is actually going to look like 20 years from now. 


+1

You show in graphic form what is my experience re value vs growth.

For instance the 2000 to 2006 period it was easily seen on the Callan Periodic investment Tables of yearly results...that value was beating growth.  So the momentum investor captured this.  Likewise, anyone basing their investing on momentum as a factor, has been in the right place, especially the last decade.

BTW the focus on value comes from the FACT that from about 1920 to 1990's, value beat growth in stock market studies such as E. Fama-K. French studies.

No need to predict value vs growth.  The market will tell you.  There were a couple head-fakes in last five years that value was perhaps going to turn around and lead, and I began a tilt; but never had staying power.  I converted back.  One should have been growth-tilted the entire last decade.

But the retiree investor may want a dividend theme (yield theme) portfolio, which tends to include a lot of value.  Top growth not needed.  Total return not the top priority; safety may be, for instance.

R48

 


In my younger days I developed a strong bias towards value investing. But after the experience of the last 25 years, I've come to appreciate the merits of momentum as you suggest, especially on 5-10 year time scales. I think it works because the market is inefficient on those time scales. I view the above chart, with its long stretches of over- and under-performance of growth vs. value, as providing evidence of that inefficiency. I guess the efficient market explanation would be that the "news" that moves the market is somehow lopsided in favor of one investment category over another, year after year after year.  Then it suddenly switches to being favorable to the other category for years. Unlikely, at best. A behavioristic explanation that investors are following fads - along with price momentum - makes more sense. 

If such long-lived inefficiencies exist, then a timing strategy based on signals like a moving average provide a way to take advantage of them. Given my earlier biases, this has been a slow process. But I've started more and more to adopt such a strategy. So far it has done more good than harm. 

 

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Re: Is value investing coming back? or maybe value is a myth :-)

Explanations are irrelevant and when you can't explain the last 1 thru 15 years you go to 20-30-50 years.

Performance is the only thing that matters and if performance + volatility beat YOUR lagging funds it a 2 strike knockout.

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Re: Is value investing coming back? or maybe value is a myth :-)

2007 was the peak, and ever since then, value stocks have been underperforming growth. Perhaps one could argue the downtrend got going in 2010, well either way that is between 9 and 12 years ago. Whichever way you look at it, the downtrend has been brutal. Remember the business cycle runs between 7 and 10 years. This looks extremely pregnant to me. We are well overdue.

S&P 500 Value Relative to Growth ETF

But, do charts like these help us much? If you are a trend follower then it is doubtful they have much meaning because the trend is so noisy. As my friend, Mike Alkin just mentioned to me...

“I want people to learn how to think in a contrarian manner and allow time arbitrage to be their greatest asset when valuation is supportive of asymmetry.”

I think that sums it up really. We have valuation supportive of asymmetry and now all we need is to arbitrage the one thing few else will or can. Time. It’s tough but then if it was easy, everyone would do it right.

If you're interested in learning more about deep value asymmetric investment ideas targeting 5-10x+ returns, I highly recommend Chris MacIntosh’s weekly newsletter.

I think they're having a special promotion right now, but I'm not sure how long it lasts. 

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Re: Is value investing coming back? or maybe value is a myth :-)

Well, for today anyway, it looks like value is coming back. Is it becuase 'value' itself is in favor? I think not. It's because value is well... a better value. Buying good companies at a cheaper price may not be chart driven. But it is a value driven concept. Be well.

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