Patience you must have my young padawan.
– Yoda From Starwars
I rarely start a post off with a quote but the time has never been so right to elaborate on a quality many investors lack and that is : Patience
Whether you are a seasoned investor or not, sometimes, it is just a good reminder to remain patient amidst the market conditions that currently persist. Hence, I would like to think that the sagely advice from Yoda is apt for today’s stock market participants and this piece of advice goes out to all value investors out there.
And for value investors mostly, value as a group has gone through a painful period of under performance relative to growth investing. An example that I can bring up is perhaps that of David Einhorn, the founder and manager of Greenlight Capital that has suffered his worse performance since the tech bubble in 2000. Then, while loss making, insanely overvalued tech companies were the rage, and today’s markets seem to be a repeat of history, with FANG stocks leading the way.
Admittedly, David Einhorn has gone on record to say that this is his one of his worse performances ever. But this is not to say that value investing does not work. It works. But incidentally, it does not beat growth investing all the time.
Apparently, growth outperforms value investing periodically as per the study done by Ken French. Since 1945, there were a total of 6 periods in which growth actually outperformed value stocks. And if you consider 10 year periods of performance of value versus growth, there were only 3 such period in which value underperformed growth investing.
Those 3 10-year periods in which value underperformed growth was :
1) The Great Depression of 1929 to 1940
2) The Tech Bubble of 1989 to 2000
3) 2004 to Present
Hence, if we look at in from a long term perspective, as proven by historical back tests and academic studies time and time again, value trumps growth most of the time. You can see this from the screen captures above.
Case in point. You can’t win all the time. But you can win most of the time with value investing principles in the stock market. So the idea is to stay the course as much as possible and stick to your guns. For value investors seasoned and amateur alike, stand firmly on those principles and you will do well. Because value and logic go hand in hand. After all, you don’t want to overpay for a company at those insane multiples that Netflix and Amazon is trading at.
But it looks like there is some light at the end of the tunnel for value investors who believe the data. For one, if history was anything to go by, there will be some sort of reversion sometime down the road. And the other thing as I have seen in deep value land is that there are some attractive bargains to be purchased internationally as the stock markets have recently shed some of its strength.
This was what David Einhorn had to say regarding his current underperformance.
“While we’ve never underperformed like this, our prior worst underperformance compared to the S&P came in March of 2000, which was a similar environment … While the environment has remained difficult with growth stocks accelerating their outperformance against value stocks this year including February, we think a reversion may finally be coming soon”
Personally, at TheHolyFinancier, I would have to say that the returns were a lot better last year than this year. But this is the game that we play in and we must get used to periods of underperformance. What matters most is that as deep value investors, we should stick the the game plan and not deviate.
Looking to Walter Schloss as an exemplary mentor, he was a stick in the mud when it came to investing and was still able to compound money at double digits percentage wise. That is perhaps something we can all learn and emulate.
So I leave you with these wise words from an unlikely source.
“Patience You Must Have, My Young Padawan.” – Yoda
Thanks for reading. May all be blessed with prosperity, health and happiness!
These books which I have written are case study driven and discuss strategies, mindsets and situational approaches to employing the net current asset value strategy.
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- A database of net net stocks or net current asset value stocks
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