“Price is what you pay. Value is what you get.”
- Warren Buffett
Common Projects. Maybe we are out of the loop but they were/are all the rage. They are a pricey acquisition at US$400 to US$500 for a pair of sneakers, but they are good looking and a statement.
Let’s forget for a moment that they are overpriced. What if I told you that you could buy them discounted for US$174 on MATCHESFASHION.COM. Given the typical price elsewhere, this offer is ‘value’. You pay less and extract the same utility from this splurge as if you paid the full price, assuming they have your size and colourpreference.
Value comes in various forms and not just when you are buying sneakers. The same logic can be applied to investing in stocks. One should have greater exposure to companies that are cheaper than their intrinsic value and how the market is pricing them. Having increased exposure to value companies, defined by Nobel-Laureate Professor Fama and his partner Professor Ken French as a relatively low price-to-book ratio, has been proven to outperform across markets and over long time periods.
By how much?
Value minus growth returns in global markets through history
As far back as we can see across all the markets, this phenomenon has existed.
- US market since 1928: Value beat growth 56 of 90 years with an average annual outperformance in returns of 4.9% over the period.
- Developed markets ex-US since 1975: Value beat growth 26 of 43 years with an average annual outperformance in returns of 5.6% over the period.
- Emerging markets since 1989: Value beat growth 15 of 29 years with an average annual outperformance in returns of 4.6% over the period.
The outperformance of value over growth is meaningful and pervasive across markets, but there is no telling when it will come.
As you can see on the graphs, there is no predictable pattern to when the value premium comes and goes, and its magnitude. Anyone who tells you they know when value will outperform or underperform is delusional.
Be humble and patient. Trust an evidence-based approach to investing and know that in the long-run, holding broad exposure to value companies in your portfolio will pay off handsomely.