The Forgotten History of Value Investing
Given the dramatic underperformance of value stocks since 2017, it’s understandable that many are abandoning the strategy, believing that the premium has vanished. But, studious observers of market history know that value faced similar death sentences previously, only to undergo a rapid reincarnation and deliver spectacular returns.
As the chief research officer for Buckingham Strategic Wealth and Buckingham Strategic Partners, I’ve been getting lots of questions from investors and advisors alike concerned about the “death of value.” Before you become convinced of its death, let’s take a ride with Mr. Peabody’s WABAC machine to see what lessons history can provide.
Traveling back to the end of the last millennium, we can see that the death of value had been declared before. Over just two years, 1998-99, based on terms of total returns, the Russell 3000 Growth Index outperformed the Russell 3000 Value Index by 59.6 percentage points (80.7% vs. 21.1%).
Value was dead, and this was a new era.
Those making that declaration never bothered to check Ken French’s data library. Using that data, we can proxy the U.S. market value series for the Russell 3000 Value Index and the U.S. market growth series for the Russell 3000 Growth Index. Over this same two-year period, the ratio of the price-to-earnings (P/E) of those two indexes had widened by 63%, from 3.2 (10.1 for value vs. 32.3 for growth) to 5.1 (7.8 for value vs. 40.0 for growth). In other words, more than 100% of the outperformance of growth was due to the “speculative return” (valuations) instead of the “fundamental return” (earnings). Today we know that over the next 17 years (2000-16), the Russell 3000 Value Index outperformed the Russell 3000 Index by 147.2 percentage points in terms of total return (207.5% vs. 60.3%).
Markets teach us lessons, but only if we pay attention. And many times it teaches remedial courses, lessons it taught in prior years but have been forgotten.