Twenty Years On...

Hard to believe it has been twenty years since our first newsletter. Back then we were convinced that Value Investing was a profitable strategy. You can read our original thinking on Page2. Why Value? Because people don’t like to be associated with losers and they drive prices of many securities to levels below which they ought to be. Also, regression to the mean is a powerful force. Successful companies are often pulled back to the pack and less successful companies, get fixed. Buying securities when they are cheap relative to earnings and assets just makes perfect sense to us (see below).

When we started the firm, Jeremy Siegel, was just finishing his new book, Stocks For the Long Run, (McGraw Hill Education, 1994). It has since become a classic and has been updated four times, most recently in 2014. Siegel’s point then, and now, remains the same, that common stocks are the asset of choice for long term investors. And if you want a chance of outperforming other investors then Value Investing is a good choice.

Siegel offers a simple example of how buying stock at cheap valuations can work. He compares IBM to Standard Oil of New Jersey (now Exxon) from 1950 to 2012. Over the 60-year period (see above) IBM wins in every category of growth - earnings, dividends, revenues, etc. But when it comes to who made more money, the Exxon investor triumphed. Why? Because Exxon was the cheaper stock. It had a lower PE and a higher dividend yield. You can find very profitable companies but you have to buy them at a Value price.

There have been a lot of changes in the investment arena the past twenty years. We have had major financial and stock market corrections (2000 and 2007-2009), we have seen new investment products (Exchange Traded Funds), new strategies (High Frequency Trading) and whole new opportunities (Emerging Markets).

But some things don’t change. Over the long term, investors will continue to value securities based on their earnings and dividends. And over the long term Value Investing will benefit from investor misbehavior of driving perfectly good, but out of favor companies, to excessively low prices. Value Investing will not work all the time. Twenty years ago we wrote of short term periods of underperformance and we have seen it again today, since 2009. But longer term, Value will win out. This is why we are still believers.