Why value investing works

I’m putting the finishing touches on my upcoming presentation at the Irrational Economic Summit in Austin.

The theme for the summit is disruption, and my presentation will be on “Securing a Stable Stream of Income Amidst the Chaos.”

I plan to cover three broad themes: My outlook for bonds, the coming rotation from growth stocks to value stocks and, naturally, my favorite sectors for the coming year.


Value Investing

In my opinion, value investing works. Countless studies (and real-world practitioners) have proven that a strategy of buying cheap stocks beats the market over time.

Dimensional Fund Advisors recently ran the numbers for the 90-year stretch of 1926 to 2016 and found that a disciplined large-cap value portfolio outperformed the S&P 500 by over 2% per year.

That 2% might not sound like much. But compounded over the length of the study, it made a huge difference. A dollar invested in the S&P 500 in 1926 would have grown to a little over $6,000 by 2016. That same dollar invested in the large-cap value portfolio would have grown to over $13,000.


Fallow Periods

The problem with value investing is that it doesn’t outperform every year.

Take a look at the chart below.


This divides the value of the Russell 1000 Value Index by the Russell 100 Growth Index.

When the line is rising, value stocks are outperforming growth stocks. When the line is falling, value stocks are underperforming growth stocks.

History Lesson

Going back to the late 1970s, growth and value have each had three respective stretches of outperformance.

Value outperformed throughout the early to mid-1980s, though growth dominated in the late 1980s. Value enjoyed a nice comeback in the early 1990s… though when the dot-com boom really got underway in the mid-1990s, growth left value in the dust for several years.

Value enjoyed a massive run of outperformance from 2000 to 2007. These were some of the very best years in the careers of long-time value investors like Warren Buffett.

But for the past 10 years, growth has utterly crushed value.

Comeback Story

I believe value is poised to make a major comeback.

In my view, the next five to 10 years could look a lot like the 2000 to 2008 period.

I think that’s bad news if you’re betting heavily on social media stocks. But, in my opinion,it’s fantastic news if you’re a value or income investor like me.

Photo Credit: Wonderlane via Flickr Creative Commons