Passive Strategies Are Speculation, Not Investing

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Value investing is an active management strategy that considers company fundamentals and the valuation of securities to acquire that which is undervalued. But as Graham and Dodd defined it, passive strategies are not investing; they are speculating.

The time-proven value investment style was most clearly defined by Ben Graham and David Dodd in their book, Security Analysis. In the book they state, “An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”

There are countless articles and textbooks written about, and accolades showered upon, the Mount Rushmore of value investors (Graham, Dodd, Berkowitz, Klarman, Buffett, et al.). Yet, present-day “investors” have shifted away from the value proposition those greats profess as the time-tested secret to successful investing and compounding wealth.

The graph below shows running 10-year return differentials between value and growth.Investors are chasing growth at the expense of value in a manner that is unprecedented over the last 90 years.

Data Courtesy French, Fama, and Dartmouth

In the 83 10-year periods starting in 1936, growth outperformed value only eight times. Five of those 10-year periods ended in each of the last five years.