Top Investment Stories of 2015 and 2016 Expectations 2: Oh Value Where Art Thou!
This post is a continuation of the key events of 2015 and what they mean for 2016. We covered FANG and the market's poor "breadth" in the last post here.
2015 was a bad year in general for small cap value investing. How bad? Here is the chart for the S&P 500 (SPY) vs. the small cap value index (IWN)
That's about a 9% under-performance for 2015. Going back the last two years shows an even worse result:
Over the last two years that about 18% underperformance for the small cap value stocks against the S&P 500. It is also the first time in 15 years (since the small cap value ETF was launched) IWN underperformed SPY two years in a row. 15 years is not a significant amount of time statistically but it is curious. Here are the last 15 years for the SPY and IWN adjusted for dividends:
A couple of points:
- The IWN outperformed the SPY in nine out of 15 years with a total outperformance of 109%
- In every year except 2015 the IWN outperformed the SPY the year after it underperformed. The average outperformance was 7%
Understanding the outperformance is important and goes to show how much of investing is just "being in the game". The IWN outperformed the SPY from 2001-2005 by 111%. That is the entire outperformance over the 15 year period. The question of course is why the IWN outperformed over this time period. That requires a bit of a walk back in time.
2000 was the year the tech bubble finally burst. In the years leading up to 2000 everyone was convinced value investing was dead...growth investing (especially tech) was the be all and end all. Value investing is typically associated with Warren Buffett and in December 1999 Barrons ran an article entitled "What's Wrong Warren". A few quotes may help:
“After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch.”
And:
“Yet Buffett hasn’t been able to make the next leap forward and adapt to the current technology-driven bull market. The reason: Technology isn’t in Buffett’s “circle of competence,” and thus he doesn’t feel comfortable seeking long-term winners in the sector.”
This article was on December 27, 1999. Here is Berkshire's returns vs. the S&P500 since then:
So, Buffett did not lose his touch and his brand of value investing certainly worked out just fine. We never expect to earn the returns that Buffett has (almost 20%/year over 50 years), nobody has over that time frame, but we have and continue to learn from his behavior.
What did he do specifically in the run up in the late nineties when technology growth stocks were going crazy?
- He stuck to his discipline and bought only the things he understood
- He accepted the underperformance knowing eventually it would turn
- He probably steamed inside knowing people were saying he was over the hill
And of course, eventually it turned and he and his shareholders did extremely well.
As he was patient, so will we be as we wait for value to "come back in style". A century of stock market returns show how value outperforms growth over long periods of time and we believe that will not change in the century ahead. Therefore, we believe this underperformance sets up value investors well on a relative performance basis going forward as value strategies should move back into their position of outperformance in years to come.