Who We Are
I want us both to become better investors. It’s why each week I post my thoughts on various businesses and value investing principles, some stock you also might want to look at and lessons from some of the greats.
Not only does this crystalise the idea in my own mind, but I hope that it would be of value to you as well. If you’re new to Margin of Value and what to learn the basics behind value investing, click the start here button above. Or if you’re already confident a value strategy is for you then you might want to check out the library or read some of my latest posts here.
Why Value Matters
Valuation matters. Whether you’re looking at earnings, assets or cash flow, we believe the price you pay will ultimately dictate your returns.
Check out our quarterly portfolio updates here.
That’s why we like stocks that are out of favour (value). And we dislike stocks which are in favour (glamour).
The reason why is because of irrational investors. The market often exaggerates, whether news is bad or good.
As a result, glamour stocks (high growth) climb higher and value stocks (low growth) trade lower over the short-term.
But over the long-term the opposite happens. The glamour stocks trade down while value stocks climb higher.
And it’s because investors exaggerate. They exaggerate growth for the glamour stocks. And they exaggerate headwinds value stocks face. Therefore, glamour stocks tend to underperform lofty expectations and value stocks exceed their low expectations.
Father of value investing, Benjamin Graham summed it up thusly:
“In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
What The Research Says
Value trumps growth. This is not just our opinion. It’s the findings of dozens of research papers and studies. One such paper was Louis K.C. Chan and Josef Lakonishok 2012 paper, ‘Value and Growth Investing: A Review and Update‘.
Their paper, the two provide an overview of multiple research papers looking at value vs. growth investing.
In the abstract of their paper, the two said that even taking the late period of the 1990s into account, value investing still generate superior returns.
What happened in the 1990s? Investors got a little too excited about new technologies and groundbreaking new industry.
The reason why value outperforms? Behavioural considerations, according to Chan and Lakonsihok. This is just another way of saying irrational investors lead to superior returns from value stocks.
The paper concluded stating:
“As in the case of numerous past episodes in financial history, investors will continue to extrapolate from the past and get excessively excited about promising new technologies.
“They will overbid the prices of growth stocks, and conversely, beat down value stocks too low. As a result, patient investing in value stocks will continue to be a rewarding long-term investment strategy.“
In 2012, The Brandes Institute’s research paper, ‘Value Vs. Glamour: A Global Phenomenon’ came to the same finding.
The paper attempted to look at different situations where value outperformed glamour. They defined value as the unpopular stocks. They were companies experiencing hard times, low growth or facing adverse circumstances.
To quantify value and glamour, the paper looks at price-to-book (P/B), price-to-cash flow (P/CF), price-to-earnings (P/E) and sales growth over the preceding five years.
Value stocks were those with lower metrics. And glamour stocks were those with higher metrics.
So in which situations did value outperform? It outperformed almost all the time. It didn’t matter whether they looked at market cap, geography or price metric.
Take a look at the graphs below. On the X axis you’ll see numbers from 1 to 10. Think of these as portfolios, where portfolio 1 holds pure growth stocks and portfolio 10 holds pure value stocks.
What’s even more compelling is how returns increase as you move toward a value portfolio.
The paper concluded with an observations Graham made more than 50-years ago.
“If we assume that it is the habit of the market to overvalue common stocks which have been showing excellent growth or are glamorous for some other reason, it is logical to expect that it will undervalue – relatively, at least – companies that are out of favour because of unsatisfactory developments of a temporary nature. This may be set down as a fundamental law of the stock market and it suggests an investment approach [value investing] that should prove both conservative and promising.”