Value Investing and Manias - Kailash Concepts

Introduction: Buying Low & Selling High
How Cheap is Value vs. Growth Today?
December 2016 – Today: The Anti-Gravity Anomaly
Conclusion

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.”^1,2,3,4,5 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.⁶

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 Sales⁷:

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.

Introduction: Buying Low & Selling High

Figure 2 puts Value’s underperformance vs. Growth since the end of 2016, a 41-month period, into perspective. The vertical axis shows the rolling return spread of Value minus Growth since 1964. The horizontal axis displays the percentile rank of these rolling 41m return spreads. Growth gets the upper hand on value only 25% of the time, but when it does the consequences for Value investors are severe. As of the end of May 2020 Value has lost to Growth by 95%, an amount seen in only ~1% of all other rolling periods.

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As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade. If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you. KCR also offers a wide range of easy-to-use but sophisticated tools. Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias. L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.

ADDITIONAL READING

The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

Click the following to read more about fastest growth stocks

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

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