If you’ve been a value investor for the last few years, it’s been a tough time. The chart below looks at the return difference between high-priced growth stocks and low-priced value stocks every year since 1928. The last few years have been exclusively blue, meaning growth has outperformed. But a look at history finds that while these periods of growth outperformance are not unprecedented, they aren’t the typical outcome. Value beats growth about 67% of the time over one-year periods, and the average annual outperformance for value over growth is 4.5% per year! Clearly, if you want higher expected returns, you need to bias your portfolio towards the lowest-priced stocks, and you need to be able to sit through short periods of disappointment.
What if we look at longer periods? How about 10-year stretches, including every decade from 1930 through 2019? In the graphic below, I’ve listed different indexes that more closely correspond with how we typically invest. In navy is the Vanguard Total Stock Index Fund (CRSP 1-10 Index), a good proxy for the largest growth stocks and the most popular index fund held by investors. The Dimensional Small Value Index in teal is at the opposite end of the market, holding just the smallest 10% of the market with the cheapest 35% of stocks. Finally, the green bars correspond to a diversified stock index mix (“US Market Asset Class Mix”) appropriate for most investors with a solid understanding of how markets work: 30% in the market index, 30% in large value stocks, and 40% in small value stocks.
(US Market Asset Class Index = 30% CRSP 1-10 Index, 30% Dimensional US Large Value Index, 40% Dimensional US Small Value Index, rebalanced annually)
In the 1930s, we see that all stocks did poorly but value stocks did worse, losing -2% to -3% per year. We then went through 50 years of value superiority! Every decade from 1940 through 1989 saw value beat growth. In the well-documented 1990s technology bubble, the large growth-dominated CRSP 1-10 Market Index performed a few percent better than value. But that trend reversed sharply in the 2000s–the market index lost -0.3% per year while value stocks returned +6% to +10% per year. This recent decade, and the beginning of 2020, has seen growth once again outperform value, for just the third decade in 90 years; a pattern that looks very much like the 1990s but with lower overall returns.
Are we in for another 2000-2009 stretch for growth stocks? By every conceivable valuation measure, growth stocks are trading at extremely high valuations. Value stocks on the other hand, especially small cap value stocks, are exceedingly cheap and represent tremendous opportunity. The snippet below is courtesy of Avantis funds–rising trend lines represent increasing valuations for stocks; the large cap growth stocks in blue have clearly gotten to extreme levels. The market index funds that are dominated by these stocks, like the S&P 500 and Vanguard Total Stock Index (not shown), aren’t far behind.
Over the entire period I looked at above, from 1930-2019, we see a significant premium for holding value stocks, especially smaller ones, compared to the overall market that is dominated by growth stocks. Diversifying across growth and value stocks, in large and small cap markets, as the US Market Asset Class Index does, still shows significantly higher-than-market returns without “betting the farm” on just one asset category. Today, these relative results probably serve as the conservative estimate by which value will beat growth going forward. With growth stocks trading at record high valuations, and value still at reasonable levels, a premium for value stocks that’s 2-3 times its historical average isn’t out of the question in future years.
Is it value’s time to shine? All the indicators are pointing in that direction. So if you need help reevaluating your portfolio in the context of your long-term goals, and want a second opinion regarding whether you have the right mix of assets, including sufficient value stock exposure, don’t hesitate to reach out and set up an appointment. I’m happy to help.
Past performance is not a guarantee of future results. Index and mutual fund performance includes reinvestment of dividends and other earnings but does not reflect the deduction of investment advisory fees or other expenses except where noted. This content is provided for informational purposes and should not to be construed as an offer, solicitation, recommendation or endorsement of any particular security, products, or services.