Vice President, Co-Branch Owner, Senior Financial Planning Advisor
“Portfolio managers that invest in undervalued stocks have lagged funds that hold growth stocks over the past decade — leading market commentators to speculate that value investing is dead.
Not so fast, argues asset manager Dimensional Fund Advisors.
Yes, investors holding U.S. value stocks — those trading at a low price-to-book value — have produced an annualized compound return of 12.9 percent. That compares with a 16.3 percent annualized return for growth stocks, or those with a relatively high price. But Dimensional has published new research showing that it’s not the performance of value stocks that has been out of whack — rather, the performance of growth stocks has been abnormally high relative to historical levels.”
“It feels like people have been worried about the next recession every day since the last one was over. I get it. Recessions aren’t fun. But you can’t constantly remain in the fetal position simply because you know the economy and markets eventually have a downside.”
“Stories about value investing are the equivalent of your kids asking “Are we there yet?” over and over again on a road trip.
The value investing equivalent of “Are we there yet?” is this:
June 23, 2019: Is value investing dead? It might be and here’s what killed it (CNBC)
September 6, 2018: Is value investing dead? (Morningstar)
September 24, 2017: Is value investing dead? It depends on how you measure it (WSJ)”
“The three biggest debts most people take on are their mortgage, student loans, and car loans.
A home isn’t guaranteed to appreciate but historically housing has beat the rate of inflation, it’s a form of forced savings, it’s the roof over your head, and it can provide some level of psychic income.
Student loans can be taken to the extreme but they generally offer the potential for higher earnings over the course of a career and better job prospects.
A car loan is the only one of the three that gives you a depreciating asset. It’s estimated a new car depreciates around 20% in the first year and 10% per year after that.”
“In his book The Ages of the Investor, William Bernstein describes a mythical employer named Uncle Fred who offers investors a retirement savings scheme determined by the flip of the coin. One side of the coin results in a +30% annual gain while the other side gives you a -10% loss in a given year.
Since the coin toss gives you a 50/50 shot at each outcome, this would give investors a compounded annual return stream of around 8.2% with a 20% standard deviation, not too far from the actual long-term results in the stock market.
Now let’s say you decide to contribute $1,000 each year for the next 40 years into Uncle Fred’s scheme. And let’s further assume the coin flip works out to give you 20 positive return years in a row followed by 20 negative return years in a row. In this scenario, you would end up with a little more than $100,000. Not bad, but you barely kept up with the long-term inflation numbers. ”
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“One of the reasons it’s so difficult to outperform the market is because so many individual stocks themselves underperform the market. It’s not a symmetrical distribution where half the stocks outperform and half underperform.
A few years ago Michael Cembalest at JP Morgan performed an extensive study on the Russell 3000 Index, which is a good proxy for the overall U.S. stock market. He found:
- The excess return on the median stock since its inception versus an investment in the Russell 3000 Index was negative 54%.
- Two-thirds of all stocks underperformed versus the Russell 3000 Index from the time they were added to the index. And 40% of all stocks had negative absolute returns, suffering a permanent 70% or more decline from their peak value.
- The percentage of extreme winners in the index was in the single digits, meaning a very small percentage of stocks carried most of the weight for the remaining underperforming stocks.”
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