A quick article from the WSJ reminding us that the patient investor will be rewarded eventually.
Timing Isn’t Everything for Value Investors
By SPENCER JAKAB
They say good things come to those who wait. Trouble is, most people can’t, or won’t, stick around for long—at least not when it comes to their money.
That helps explain a great mystery of investing—why, despite the hundreds of millions of dollars spent each year on advice and management fees, a free lunch of sorts has persisted in the form of value investing.
For example, Brandes Institute sliced U.S. stocks into 10 deciles by value characteristics. From 1980 to 2010, the cheapest outperformed the dearest by 575%.
Such an opportunity shouldn’t persist, but it does. That is probably because there are bad periods for value stocks of three or more years interspersed among the good ones. Those are long enough for fickle fund investors to dump their managers, often forcing them to sell holdings.
The bipolar years since the financial crisis have been one of those dry stretches with either everything languishing or “risk-on” rallies mainly lifting growth stocks. With Greece coming to a boil with a crucial election next month, value stocks may once again get the attention they deserve. The years after long periods of poor relative performance are some of the best for patient value managers.
Value investors have dubbed this opportunity “time arbitrage,” and it is high time for it to work its magic. Russell Investment ranks the relative performance of its five main growth and value indexes each year. The last time a value index ranked on top and a growth index on bottom was the awful year of 2008. From 2009 through 2011, and so far this year, a growth index was the best performer and a value index came in last.
Consider value investor Warren Buffett’s Berkshire Hathaway Inc. Its three worst years of investment performance relative to the broad market came in 1967, 1980 and 1999. Its cumulative outperformance relative to the S&P 500 over the following three-year periods was 49%, 102% and 48%, respectively.
In times like these, with value in the doghouse, it isn’t only the likes of Mr. Buffett who can rack up gaudy numbers. Individuals with no impatient investment committee to answer to also have an edge over fund managers. Time is on their side.