- 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.”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.
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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June 11, 2020 |
| Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin
June 11, 2020
Authors: Matthew Malgari, Nathan Przybylo, Dr. Sanjeev Bhojraj and John Durkin