The stock market’s steep ascent these past two years — last week it doubled from its March 2009 low — hasn’t given rise to too great a fear of heights. Most of the chatter is about new highs ahead.
M&As are breaking out everywhere, indicating public companies see takeover candidates as attractively priced in comparison to their future earnings potential. Even staid Standard & Poor’s predicts its 500 index, now at 1328, will reach 1,400 over the next 12 months. Many other market strategists have affirmed similarly bullish outlooks.
Amid all this euphoria, old-fashioned value investing seems, well, old and out of fashion. And that is why I spoke with a young Eric Nelson of Equius Partners, a Northern California wealth management firm dedicated to an “evidence-based approach” to investing.
To Nelson and the other principals of Equius, market history foretells that what is currently viewed as the wisdom of crowds will soon give way to a view of the madness of crowds. Value will win out, as it always does, says Nelson.
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“Looking at all 5-year periods [calendar years] since 1928, 2006 to 2010 was one of only nine periods where value underperformed growth in the U.S,” he says.
“Looking at the first eight [periods], over the [subsequent] five years value beat growth by more than 9% per year (and never once was it negative) on average — approximately double its long-term outperformance,” Nelson explains.
Nelson drills down with his data: “More specifically, over these subsequent 5-year periods, the S&P 500 averaged +11.3%, large-value did +15.7% and small-value did +24.2%.”
Indeed, the wonkish, quantish advisor concludes it would not be out of line historically for value to lead growth by 5 to 7% over the next five years.
Just in case any of the subtleties were missed in all the data, Nelson’s argument is that value trumps growth over the long-term, always — but there’s no better time to be in value than when it’s been so out of favor.
Equius Partners, with $600 million in assets, manages its 450 clients’ portfolios using DFA’s structured mutual funds to develop globally diversified “all value” portfolios.