Over the last week, value stocks have poised very impressive gains, while many of the momentum names have really struggled. This is obviously very good for our deep value investment portfolios. I want to emphasize, we should never get too excited or upset by short-term performance metrics. With that said, value stocks are as cheap relative to growth as they have been at any time in history, other than arguably the Tech bubble. I expect mean reversion to occur in a big way over the next 10 years.
When the Tech bubble burst the Nasdaq dropped 75% from peak to trough. Think of how devastating that would be. During that same period, value investing had some of its best years ever. It is very possible that you could see the S&P 500 return less than 3% per annum over the next decade, but a reversion to the mean could lead many value stocks to perform far better than that, helping us meet our investment and retirement objectives.
Many people chase hot stocks, only to bail out after a big selloff. They do this because they don’t have strong conviction on the merits behind the investment. The beauty of value is that our fundamental research and analysis provides us with a firm understanding of why we own an investment. Many times stocks drop as we start buying them, allowing us to increase our position size. Even when we sell puts we are happy to be exercised, as it allows us a very attractive entry price into the stocks.
This week I attended an investment conference in Scottsdale, Arizona filled with investment advisers and certified financial planners. It was an interesting environment to be in. The herd culture is all about price agnostic investing, with the belief/hope that past returns will predict future returns. To me that is utterly ridiculous. When these people create financial plans for clients they do so modeling historical fixed income returns, of say 5-7% annually, and stock returns higher than that. Well the 10-year Treasury yields 1.7% and the main bond index AGG yields just over 2%. Over time, returns on bonds are almost always directly correlated to the initial interest rate. How on earth can they justify using those numbers? They do it because they can’t figure out another way, and it helps them in their marketing.
The problem is that the vast majority of financial advisers outsource their investments to mutual funds and ETFs. Mostly these investments are limited to stocks and bonds, and are overly-diversified. If the markets go up, they will be okay, but if not, there is no recourse. They don’t have the ability to hand-select the undervalued stocks in the market, and they certainly don’t have the flexibility to utilize dynamic strategies like cash-secured puts, covered calls, or distressed debt investing. We will see how things play out, but I wouldn’t invest a penny into an S&P index fund at current prices, because we have way better alternatives!
T&T Capital Management is a unique company in the industry. We have clients all over the country, and I’d say over 60% I’ve never met in person. That is incredibly different than most firms. When I talk to other advisers about this, it is hard for them to grasp how we do that and have been able to grow every year since we started 8 years ago. The main key to why we have been able to do this is that we invest money for clients in the same exact way that we invest our own money, and we are able to communicate the rationale behind the decision making on the investments in a fairly understandable way. We aren’t trying to sell anything, other than providing the best investment management process that we are aware of, which is why we do it with our own money.
Having been in the industry for about 17 years now, I’ve seen the difference between smart investing and following the herd. I’ve seen people gamble and lose everything. I’ve seen multiple ponzi schemes, massive bear markets, and charlatans celebrated as geniuses. Investing intelligently via buying securities at large discounts to what they are worth is what is going to protect us as we face future crises. We are all-in on you obtaining your investment and retirement goals. We are extremely grateful and appreciative of the trust you put in us and we will never take that for granted!