The value premium

[urn2bfree]

A lot of smart people are on these boards. Maybe my thoughts are nonsensical musings, but I wonder-
Are Value stocks of the 21st century really like Value stocks of the past?


I have long held a portfolio tilted to value based on the "value premium" described by Fama and French, and touted by many successful investors. The long-term track record for Value has indeed been better than Growth though not for the last 15 years, and barely for the last 20. Many believe the tide will turn, the mean will regress, and Value will again emerge superior to Growth either based on the reward for the risk or as a correction of the behavioral biases that lead to Value stocks being temporarily unfavored.


BUT-
in the past stocks became Value stocks based on being worth more than investors thought they were, thoughts based on research methods of old and investor behavior much more driven by individuals than today's information overload, algorithms and the institutional dominance in the market.


Maybe the number of stocks that lose favor with investors in the market nowadays "deserve" their devaluation more than they did in the old days? Is that possible? Or am I just talking myself into jumping from a decided upon strategy because it has underperformed for 15 years?

 

[pb4uski]

I avoid such vexing conundrums by buying the whole market.

 

[OldShooter]

... BUT- in the past stocks became Value stocks based on being worth more than investors thought they were, thoughts based on research methods of old and investor behavior much more driven by individuals than today's information overload, algorithms and the institutional dominance in the market. ...

Charles Ellis, in "Winning the Loser's Game" basically supports your thesis here. I have slowly come to believe that he is right.

In Olden Times, Ben Graham times, the market was inefficient and in an inefficient market the person with the most information wins. Graham and his understudy, Warren Buffet, could constantly pore over printed stock reports looking for their "cigar butts." (the Buffett bios, "Snowball" and "Buffett," are fun to read, as is Ellis). Today, everybody has all the company information at their fingertips, SEC rules on handling insider information have pretty much killed off the "favorite analysts" lists, etc. We have about 10,000 mutual funds, most of which are chasing the 3,600 or so stocks in the US market -- so how many analysts per stock? Lots. Market inefficiencies are probably spotted and corrected in minutes or seconds instead of the weeks or months of Graham's world.

Fama claims that the small and value factors will persist. He has the Nobel. But with people piling in on the three factor model I don't understand why these factors wouldn't be arbitraged away.

So maybe the answer to your speculation is to observe that in 15 years things do change, but no one knows why or how in a way that is useful for investment decisions. So DW and I have long since left the loser's game and follow Fama's dictum: " ... buy the market portfolio." IOW, everything. 90% of our equities are in VTWAX or similar proportions of a pair of US and international total market funds.

 

[FIRE'd@51]

Typically, "value stocks" tend to have a lower PE. Since low PE stocks tend to have higher expected returns, I believe that they are more risky, and hence, have tended to outperform over time. That is to say, investors have gotten paid for taking on this extra risk. I believe the only source of alpha is the result of these stocks overshooting their "fair" price on the downside due to short-term market sentiment, and I'm not sure of any systematic way to take advantage of this.

 

[OldShooter]

Here's a 37 minute video interview with Eugene Fama. He specifically discusses value stocks and statistical uncertainty. It's not only educational it is very enjoyable. He can be quite a funny guy. https://www.top1000funds.com/2015/12/investors-from-the-moon-fama/

Spoiler: @urn2bfree, he has no definitive answer to your puzzlement. @FIRE'd@51, you won't get agreement from him that the value premium is a short-term thing.

 

[samclem]

Since value stocks have a lower PE than growth stocks, they provide higher dividend payouts for each dollar invested. So, it's a form of "mild" dividend investing (which can reduce some of the pitfalls of "aggressive" dividend investing, including very high sector concentrations).

When comparing the relative total return of value vs growth stocks, the dividends are (or should be) included in the math, so this higher dividend return of value stocks doesn't necessarily put them ahead. But dividends are less volatile than price appreciation, so they can be especially welcome when the market takes a dive. And if they come from equities held in a Roth or tIRA, there's no difference in their tax status compared to cap gains.

So, even if the total expected return from value stocks were the same as growth stocks, the steadiness of the returns they provide (in the form of dividends) make them worth slightly more to me. And it is nice that low-cost value index funds and ETFs are readily available so I don't need to pay much (to an active stock picker) to tilt toward them.

I've got a slight small/value tilt in our equity holdings, but it's not very aggressive.

 

[triangle]

IMO Value vs Growth vs anything else shouldn't differ all that much over the long term, at least assuming that there are rational investors. But lately the trend has favored large cap companies which do seem have some inherit advantages; whether that is due to a mix of branding, regulatory capture, economies of scale, oligopoly, etc.

I tried to find a recent article that I read which highlighted how much of 2019 returns were due to the 5 largest companies. I did not find it, but this one may be more interesting. One could infer from this run up in large cap that some of the smaller and more value oriented stocks should do relatively better in comparison at some point in the coming years. But how much and when?
https://www.zerohedge.com/markets/just-two-companies-accounted-nearly-20-markets-entire-2019-return

Some interesting quotes from the above article:

• Two weeks ago, when looking back at 2019, Morgan Stanley concluded that the observed market action was indicative of one of the most bizarre years ever, because while the S&P ended up returning a whopping 29% in 2019, just shy of 2013's 29.3% and the second best year for the market since 1997, earnings actually dropped, which means that all the market upside came from multiple expansion
• just one sector, Information Technology, posted a 50% total return and accounted for 32% of the S&P 500 index return
• "superstar" firms AAPL (+89%) and MSFT (+58%) were the top two contributors to the S&P 500 index gain. In fact, combined the two firms accounted for nearly a fifth of the entire S&P 500 return, or 17% to be exact, in 2019. Extending that list, just the top 10 companies contributed over 10%, or exactly a third, of the S&P's total 31% return.

 

[audreyh1]

Yes, I noticed that S&P500 monthly earnings have been contracting since February. I haven’t seen earnings numbers past September yet.
https://www.multpl.com/s-p-500-earnings/table/by-month

 

[Montecfo]

I think value will still do better over time. The problem us we have been in market conditions strongly favoring growth for over a decade.

This will change eventually. My investments have a clear value tilt and this has worked over the long term.

 

[Navigator]

Here's a 37 minute video interview with Eugene Fama. He specifically discusses value stocks and statistical uncertainty. It's not only educational it is very enjoyable. He can be quite a funny guy. https://www.top1000funds.com/2015/12/investors-from-the-moon-fama/

Spoiler: @urn2bfree, he has no definitive answer to your puzzlement. @FIRE'd@51, you won't get agreement from him that the value premium is a short-term thing.

That is an excellent video. If I understand correctly, Fama seems to say that if everyone became a value investor, the value premium would disappear, but that we are not there yet. One thing he emphasized was that there is tremendous noise in the market. I take that to mean 15 years is not long enough to give up on the value premium in the market.

 

[OldShooter]

... One thing he emphasized was that there is tremendous noise in the market. I take that to mean 15 years is not long enough to give up on the value premium in the market.

Yes, I have seen another video where he bemoans the fact that he has only 100 years of data. He would like another hundred, please.

Re betting on value, any sector bet by definition reduces diversification and any prediction of the future is a guess. To each his own.