Where’s the Value in Value Investing?

When Its Value Vs Growth History Is On Values Side Us

Excellent question, especially in light of the last 20 years in the US. The basis of a long-term investing plan is to buy today diversified assets at low prices that offer cash flows and that have the possibility of appreciation over time. Alternatively, an investor could buy headline grabbing high priced assets that do not have cash flows in the hope that future buyers will pay more for the asset because of their ability to use free cash flows to grow the business, unique technology/innovation, or market position. The goal of value investing is to buy assets that offer attractive cash flows but have low prices relative to other assets.

CHART I: Annual Observations of the Premiums

Source: Dimensional Fund Advisors: When Its Value vs Growth History is on Value’s Side

At the end of January 2024, the data in Chart I recorded the first 20 year period in history where small cap value stocks did not deliver a better result than large cap stocks in the United States. This may seem alarming to long-term investors who may be questioning whether the tenants of investing have changed. 

As advisors, we pursue investment tenants that are historically persistent, globally observable, and pass the test of common sense. Investing in value and smaller companies have offered an advantage over growth and larger companies over long periods of time, in various world markets. It is important to acknowledge the studies that have shown investors home country biases. For example, US investors tend to only think about US stocks. Our aim is to help investors consider data from across the world.

While value and small companies have lagged growth and large companies, Chart II below shows that the value premium did persist in other market environments across the world over the last 20 years. Given the new event of small cap value not beating large cap companies for 20 years in the US, does that make us think everything has changed? Without any guarantees about the future, we do not interpret the data that way. 

We see that the US has been the outlier for this sample period – historically, and globally. Is it disappointing – YES! But, do we think value is dead – no.

CHART II: 20 Year Annualized Differences in Small Cap Value vs. Large Cap Stocks

Source: Dimensional Fund Advisors: Draft Picks and Value Stocks

Branning Wealth Management strive(s) to pursue the academically recognized factors in the historic data that stacks the odds in favor of the investor (a premium). Markets are evolving daily and every market cycle will result in something new. However, the global historical data continues to support the fundamental investment approach we espouse for long-term investors. 

Chart III below shows four of the academically recognized premiums: Stock Market vs. Treasury Bills, Small Cap Stocks vs. Large Cap Stocks, Value vs. Growth, and High Profit vs. Low Profit companies. The chart illustrates these premiums over 1, 5, and 10 year rolling periods. 78% of the time over 10 year rolling periods since the late 1920’s, value beats growth. While 68% of the time small caps beat large companies since 1927. The disappointing 22% and 32% the small and value factor does not exceed its counterpart isn’t fun and investors must beware hindsight bias. We have been living through one of these decades plus time frames in the US where small and value long term historic advantages have not materialized. But will the advantage be reversed permanently? We do not think so, as that view eschews valuation theory (buying low priced, high cash flow stocks). For a premium to exist in the historic data, investors should expect periods where they lag. The discipline of getting through the lagging cycle is key.

CHART III: Historical Performance of Premiums over Rolling Periods

Source: Dimensional Fund Advisors: Performance of the Premiums

Yes, we still believe in the small cap and the value advantage (premiums) because we follow the logic of the valuation theory of the market -> paying less for an expected future stream of cash flows. Therefore, we think these premiums offer reasoned sources of higher expected returns over time. As well, these advantages are also in the data of markets across the world. We encourage investors to key the broad view by not focusing only on the US, but also considering data from the Emerging markets, or Developed International markets. Everywhere, across the world, there is a solid basis for the robust claim that these advantages exist.

CHART IV: Dimensions of Expected Return (Across World Markets)

Source: Dimensional Fund Advisors: Performance of the Premiums

We believe that global markets offer premia to pursue. Small caps and value stocks, as part of a globally diversified investment strategy, are still alive and a reasoned method for long-term goal seeking. 

Please let our team know if you have any questions.

Article Resource List:

By: Jason K. Branning, CFP®, RICP®. Jason is a CERTIFIED FINANCIAL PLANNER™ practitioner and Retirement Income Certified Professional®. He is the founder of Branning Wealth Management, a DBA of Asset Dedication, LLC, and specializes in retirement planning.

Disclaimer: This information does not constitute an offer to sell or a solicitation of an offer to buy any securities or investment strategy and is intended for informational purposes only. Investments are subject to market risk, including the loss of principal, and the investment strategies described may not be suitable for all investors. Equities are subject to market risk meaning that stock prices, in general, may decline over short or extended periods. The information contained does not take into account any investor’s specific individual investment objectives, particular needs, or financial situation. Nothing in this material constitutes investment, legal, accounting, or tax advice, or a representation that any investment or strategy is suitable or appropriate. Information in this report has been obtained from sources deemed to be reliable, and is not guaranteed. The above information is subject to change without notice.

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