What caught my eye this week.
Passive investors who dabble with the value factor [1] and wannabe Warren Buffetts alike know that every few years, the ‘value is best’ mantra gets kicked into the long grass.
Value investing – basically buying cheap companies and ideally shorting expensive ones – has a great long-term record. However sometimes it performs like an elephant on LSD [2], crushing your returns.
Indeed, one theory for why value investing works is that these periods of under-performance are so miserable, few people can stick through them.
The years after the financial crisis were not kind to value investors. Slow growth and low inflation among other things made growth stocks the place to be.
But that changed in 2016, particularly in the US as this rather beautiful graph from a new GMO PDF [3] demonstrates:
Value versus growth in US market in 2016. Divergence.
Source: GMO.
The market got giddy about Trump going on a spending spree, it looked like interest rates were headed higher and faster, and outside of Brexit-blighted Britain, growth accelerated.
However it wasn’t to last, as GMO demonstrates in the following graph:
Value versus growth: 2017 edition.
Source: GMO.
Value players might have expected a few years in the sun after their years in the – um – desert, but the market has turned around and undone the progress they made in 2016.
But the authors’ urge value disciples to hang tight:
While underperformance is never pleasant, we believe there are “good” and “bad” ways for a value investor to lose over a short time horizon.
The first 5 months of 2017 likely fit into the “good” category: The valuations for growth stocks are now pricing in earnings levels that are in excess of analysts’ expectations and the market is applying ever-expanding multiples to growth stocks while global profit margins continue to hover around record highs.
This is all classic preamble to value outperforming as an expensive market retreats to lower valuations.
It’s an interesting paper if you’re an active investor [4] like me.
If you’re a passive investor who includes value funds in your portfolio, though, then arguably you shouldn’t be reading stuff like this.
You’ll probably do better to keep plugging money into your lagging value funds year in and year out, and trust in the long-term charts that led you to tilt to value [1] in the first place.
From Monevator
Investing for beginners: The global stock market – Monevator [5]
Dividends for the long run – Monevator [6]
How to stress-test your plans with a Monte Carlo simulation – Monevator [7]
News
Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1 [8]
Three Bank of England members vote for higher interest rates – BBC [9]
UK supermarket shares fall as Amazon buys upmarket US grocer Whole Foods – ThisIsMoney [10]
Student debt tops £100bn for the first time – Guardian [11]
Norfolk is a hot spot for online dating fraud, but investment scammers scam Surrey – Guardian [12]
Only 10% of trading volume today is traditional stock picking, finds JP Morgan – CNBC [13]
Israel’s Mossad spy agency looking to invest in technology start-ups – Haaretz [14]
Actually, most new jobs created have been full-time, says Fraser Nelson and the ONS – Twitter [15]
Products and services
Zopa’s innovative finance ISA is here. Zopa is rebating the cost of moving funds during July – Zopa [16]
Family Building Society’s ‘Brexit Bonds’ pay 1%, plus a 2% bonus if Brexit goes your way – ThisIsMoney [17]
Top cash reward for switching banks jumps to £295 – Telegraph [18]
Eon’s ‘Cap and Track’ energy tariff isn’t the very cheapest, but should stay competitive – ThisIsMoney [19]
Saving rates on fixed-rate cash ‘bonds’ have risen (off the floor) – Telegraph [20]
A simple conversion cable that turns a streetlight into an electric car charger – ThisIsMoney [21]
Got £12m to spare? Here’s what it buys you in the way of luxury Maldive mansions – Guardian [22]
Comment and opinion
A good enough portfolio is the most important thing – The Irrelevant Investor [23]
Keep on investing as the market rises – Of Dollars and Data [24]
Pensions are legal tax havens, use them while they last [Search result] – FT [25]
The old are eating the young – Bloomberg [26]
The all-new standard of living [Podcast] – ThisIsMoney [27]
How to create a retirement policy statement – Morningstar [28]
Evidence-based investor is asked to leave conference after upsetting the sponsors – T.E.B.I. [29]
Merryn: Boring investing – that’s the future [Search result] – FT [30]
If Jim Rogers predicts a crash every year, one day he’ll be right – AWOCS [31]
My journey to a million pound portfolio – UK Value Investor [32]
The seduction of pessimism – Collaborative Fund [33]
Retirement is squishy – White Coat Investor [34]
Off our beat
Those who leave home, and those who stay [US but obvious EU Referendum parallels] – Vox [35]
Guy Verhofstadt wants answers from the British on Brexit – Twitter [36]
Want to have more time? Clear social media apps off your phone – Raptitude [37]
No, Peter Thiel is not harvesting the blood of the young – TechCrunch [38]
The robot apocalypse won’t come tomorrow… – The Value Perspective [39]
…but this bot that describes undiscovered planets is quite a poet – Twitter [40]
And finally…
“However, once technology enables us to re-engineer human minds, Homo sapiens will disappear, human history will come to an end and a completely new kind of process will begin, which people like you and me cannot comprehend. Many scholars try to predict how the world will look in the year 2100 or 2200. This is a waste of time. Any worthwhile prediction must take into account the ability to re-engineer human minds, and this is impossible. There are many wise answers to the question, ‘What would people with minds like ours do with biotechnology?’ Yet there are no good answers to the question, ‘What would beings with a different kind of mind do with biotechnology?’”
― Yuval Noah Harari, Homo Deus: A Brief History of Tomorrow [41]
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- Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. [↩ [46]]