Patience and the Value Premium Part III: A Virtue Worth Holding

So far in our five-part series on value investing, we’ve explored the factor’s origins, and proposed that evidence-based investors would be well-advised to keep the faith on value investing (relative to their personal financial goals and risk tolerances).

Still, we understand. A decade is a long time to tolerate disappointing numbers, while awaiting an expected reward. For many of us, our children are about the only other misbehaving “investment” we’re willing to put up with for that long.

However, as is the case for any other source of expected investment returns (including the equity premium itself), we prefer to consider value stock performance over a decade or more, since the expected outperformance can go into hiding for years on end – and often has.

According to data provided by Dimensional Fund Advisors LP, 19% of all rolling 10-year periods since July 1926 through 2020 have seen a negative value premium. For context, during that same time period 14% of the time U.S. stocks underperformed one-month T-Bills. In both cases, we expect long-term outperformance with an understanding that there will be periods where it does not appear. The flipside of both of these numbers is that 81% of 10-year periods saw value outperform growth and 86% of the time stocks outperformed T-bills.

These seem like pretty good odds. However, when a source of expected return does resurface after a hiatus, it’s often in the form of an exuberant leap nobody saw coming, except in hindsight. For example, after underperforming growth stocks for the past few years, large cap value stocks (as defined by the Russell 1000 Value Index) outperformed growth stocks (as defined by the Russell 1000 Growth Index) by 9.01% during the first quarter of 2021.

In short, only those who can tolerate the doldrums tend to still be around to reap the unpredictably timed windfalls that often dramatically impact your end returns. As Vitaliy Katsenelson of Contrarian Edge has suggested more recently, “value investing is not dead; it is just waiting until all value managers lose their hair and capitulate.”

In the next blog post in our series on value investing, we’ll offer additional evidence-based insights contributing to our patient approach to value investing.

Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.   Investments involve risk and, unless otherwise stated, are not guaranteed.  Multnomah Group does not provide legal or tax advice.  Any views expressed herein are those of the author(s) and not necessarily those of Multnomah Group or Multnomah Group’s clients.

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