• Introduction: The Historical Context of the Pain Trade for Value Oriented Investors
  • Trouble Comes in Threes
  • Could the Glamour in Growth Lose its Glow?
  • Conclusion
  • Exhibits

Introduction: The Historical Context of the Pain Trade for Value Oriented Investors

Kailash takes some comfort that press articles have begun to emerge questioning if value investing is dead. For our organization the relief comes from the very anecdotal observation that consensus views on nearly anything tend to be healthy markers that the consensus view is soon to be wrong. As long-time readers know, Kailash embraces a core investment philosophy that embraces both reasonably priced growth but readily admits to a value bias.

Since our inception in 2010 this predisposition was largely a modest headwind that we successfully overcame. More recently however, the headwind has felt more like a gale of irrational exuberance and left us feeling quite foolish. Our view is that growth has become the beneficiary of investor herding. As we documented in our white papers on Amazon, Buffett’s Valuation Measure and Private Equity Kailash believes many investors have abandoned basic arithmetic and are stampeding into names and investment products based on the crushing career pressure faced by allocators.

Figure 1 below shows the cumulative excess return for investors in the Russell 1000 Growth Index compared to the Russell 1000 Value index since the end of 1989. In the first decade of the data you can see that growth trounced value by a stunning 319% through August of 2000 with virtually all of that outperformance occurring in the last two years (Stage 1). From growth’s relative peak in August of 2000 until it troughed against value in May of 2007, value took its revenge, outperforming growth by 280% (Stage 2). What is remarkable about this is that in the first 6 months of Stage 2 growth was cut in half while value stocks stood still. In just these first six months growth investors lost the entire advantage that had accrued to them over the prior decade. Since May of 2007 through today (Stage 3), growth has gone on to utterly trounce value by over 120% with an incredible 35% of that excess return coming in just under the last three years. In an advancing tape the actual impact of this is worth noting: since December 2016 the value index has advanced at just over 8% annually while the growth index has risen by 21%, each year. Annual performance spreads of this magnitude were last approximated in growth’s run over value from the end of 1998 until its peak in 2000.

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