A Brief Defense of History & Arithmetic
- Introduction: Buying Low & Selling High
- How Cheap is Value vs. Growth Today?
- December 2016 – Today: The Anti-Gravity Anomaly
Introduction: Buying Low & Selling High
Buying low and selling high is “out.” Buying high and selling higher is “in.” The dichotomy strikes us as counterintuitive considering the macroeconomic backdrop. Had Kailash known a global health pandemic and economic crisis putting 40 million Americans out of work was coming we might have made numerous predictions. Not one of them would have included: “Record levels of retail brokerage accounts will be opened by inexperienced investors piling into some of the market’s most expensive firms sending markets soaring.”[i],[ii],[iii],[iv],[v] But that is precisely what has happened.
This has pressed value’s poor performance relative to growth into its fourth year – a horizon longer than most allocators can stomach. Similar to the internet bubble and the GFC, the merits of investing in cheap stocks is again being challenged. Industry luminaries like AQR have successfully (IMHO) taken up the task of defending the merits of value investing as a result of value’s dismal performance over the last few years.[vi]
In the interests of making the same point very simply, Kailash refers readers to Fig. 1 below. Kailash uses our All-But-Micro universe to document the following about Value and Growth as defined by the top and bottom decile of Price to Sales[vii]:
- With $1 invested in 1964 buyers of Value stocks would now have $894 while buyers of Growth would have $27
- Since December 31, 2016 Value stocks have fallen nearly -20%, our All-But-Micro Universe has risen 14% and Growth stocks have risen nearly 80%
- While value stocks do suffer intermittent multi-year drawdowns, investors that buy low and sell high historically end up with a lot more money
Kailash understands the shock that may accompany the abysmal returns to growth over a long history but this is at the essence of the “value anomaly.” While uncomfortable, owning what is out of favor pays off immensely over longer horizons.
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