Déjà Vu All Over Again for Value Investors?
I’m not sure Yogi Berra is big source of investment knowledge for most investors. But, that doesn’t mean his words of wisdom, “déjà vu all over again,” don’t apply.
Today’s Wall Street Journal included an article titled, “Value Investors Face Existential Crisis After Long Market Rally.” It discussed the “rut” that value investing has experienced since 2009. No arguments there. Value stocks are down about 1% year-to-date while growth stocks are up nearly 8%. The tech-heavy NASDAQ Composite Index, which holds many of the favorite tech names among growth investors, is at its all-time high.
A Familiar Scenario
But as I sipped my morning coffee and read further, I didn’t ask myself how we should change our current value approach (for the portion of our portfolios dedicated to value investing) to match the current environment. Instead, I found myself thinking about earlier in my career, the late 1990s. Tech ruled the day from 1995 through 1999, and value investors lagged back then too.
Plenty of articles talked about how value investors had to evolve in the new paradigm or go the way of the dodo bird. In December of 1999, Forbes examined Warren Buffett’s performance in an article titled, “Buffett: What Went Wrong?” The article states, “While Buffett has enjoyed great success as an investor, the fall-off demonstrates the painful limitations of his philosophy: Buy good companies he understands and hold on to them forever.”
Another Wall Street Journal article published in 2001 (after the tech bubble burst) began, “Value investing is back.” The article went on to discuss the cycle of growth and value investing:
“The euphoria that swirled around Internet stocks fueled the technology-heavy Nasdaq Composite Index’s 85.6% rise in 1999, even as many worried that the lofty valuations being put on those presumed growth stocks weren’t justified.
Part of what skewed conventional wisdom in favor of growth stocks was the decade-long bull market, combined with new online investing technologies that fostered a quick-hit mentality among investors. That environment made value investors, who make long-term bets that often take years to pay off, seem obsolete in a new age of day traders. “I know that there are very few people my age interested in value investing, especially where I live in Silicon Valley,” says Michael J. Burry, 29 years old. Last June, Mr. Burry left a career as a physician to found Scion Capital LLC, a San Jose, Calif., investment firm.”
As students of the markets, we recognize that economies, businesses, and investment styles move through cycles. It’s human nature to want to gain from the upside and sidestep the downturns. However, history and research both show a better way to invest. First, we must recognize one thing more inevitable than market cycles: the ups and downs of investor emotion.
Buffett turned out just fine. He purchased Berkshire Hathaway stock at the height of the tech bubble. That stock beat the market by 11% per year for the following 8 years. It’s performance through last week was over 4%. Does the name Michael Burry sound familiar? (He is quoted in the 2001 article above.) It’s because this then 29-year old, 10 years later, made $1 billion in what is now widely known as The Big Short.
The takeaway is that value investing has been declared dead before. None of those obituaries proved to be real. Reading the paper these days may fool some into thinking, “This time is different.” But evidence-based investors recognize déjà vu when they see it.