For value investors, the past 10 years have been outright depressing.
Since bottoming out in 2009, the S&P 500 is up over 330%. That compares to 235% returns in the S&P 500 Value Index. That’s nearly a 100% difference in returns over the past decade; enough to shake the confidence of even the most steadfast believers. Even lifetime proponents of value investing seem to be throwing in the towel.
Warren Buffett is considered by many to be the godfather of value investing. Yet Buffett’s Berkshire Hathaway has been accumulating shares of growth darlings Apple (Nasdaq: AAPL) and Amazon.com (Nasdaq: AMZN) as of late.
It’s tempting to declare that value investing dead. But I see things a bit differently…
If value investing were a person, it would be tempting to blindfold and kidnap said person, drive them out into the Nevada desert, have them dig his own grave under the moonlight, then… well, I think you get the picture.
Such is the level of frustration for value investors these days. It’s maddening. And this isn’t the first time that value investing has underperformed growth for a long stretch. It certainly won’t be the last stretch…
To illustrate, I graphed the Russell 1000 Value Index divided by the Russell 1000 Growth Index over the last 40 years. When the line is trending downward, value stocks are underperforming growth stocks. When the line is trending upward, value stocks are outperforming growth stocks.
From 1988 to 2000 — the period corresponding to the great 1990s tech bubble — growth absolutely mopped the floor with value. If you were investing back then, you remember what it was like.
The tech-heavy Nasdaq crushed all other indexes, and no one could be bothered with old-economy stocks. This was a period that saw value investors like Warren Buffett massively underperform the market, and it effectively killed the career of hedge fund legend Julian Robertson.
But then, something changed. Investors started to question the sky-high valuations of tech stocks, the tech bubble burst, and value investing came back with a vengeance. Between 2000 and 2007, value investing utterly destroyed growth investing.
Before long, the pendulum swung again. stocks were hit hard in the 2008 meltdown, and a new generation of tech companies assumed leadership.
So, What Happens Now?
After 10 years of a growth market regime, is it time for value to take the lead again?
This isn’t something you can precisely time to the day. If you could, you probably wouldn’t be reading this. Instead, you’d likely be a reclusive billionaire living on an island somewhere. But I think it’s safe to say that value is well-positioned to outperform growth over the next decade.
J.P. Morgan reported earlier this month that, by their calculations, value stocks were trading at the largest discount to growth stocks in history and offered the fattest premium in 30 years.
Of course, as every value investor knows, cheap stocks can remain cheap forever in the absence of a catalyst to shake them out of their stupor.
Back in 2000, that catalyst was the dot-com bubble crash that forced money out of growth stocks and into value stocks. Alan Greenspan’s aggressive lowering of interest rates helped to push this. Yield-starved investors were pulled out of bonds and into higher-yielding dividend value stocks
History never repeats itself to a tee. But I believe a similar scenario could be unfolding today.
The business models of some of the biggest large-cap tech leaders — Alphabet (GOOGL), Amazon (AMZN), and Facebook (FB) — are under attack from regulators and all may be facing antitrust action from the federal government. Whether the government is successful in breaking up these tech monopolies remains to be seen, but the threat of a prolonged and expensive legal battle should be enough to make investors nervous.
At the same time, a wobbling economy has bond yields sinking again and the Fed openly contemplating cutting rates.
We’ll see how this shakes out. But my money is on value investing making an epic comeback in the years ahead.