As discussed in our last newsletter, value stocks have roared back strongly to outperform struggling momentum stocks over the last two weeks.  This is only two weeks, but it is worth discussing, because it augurs to how we see the market in the future.  How can we generate the returns we are targeting of double-digit, if the S&P is likely to only go up by 2-4% per annum over the next decade, which is what many long-term valuation models would indicate?  Surely no model is perfect, but over the longer term, metrics such as the Schiller P/E have done reasonably well in projecting future returns.

The way that we intend to do that is by buying the securities of businesses that are trading at very large discounts to intrinsic value, usually due to being out of favor temporarily, based on some short-term concerns.  That is the very definition of investing and just about anything else, including momentum investing, is speculation, as it isn’t driven by the importance of intrinsic value.   That isn’t to say speculation can’t be successful, as it most certainly can be.  But over the long-term, the evidence has shown value to be the far more successful strategy.

At the recent financial adviser conference I attended, there were about 700 advisers.  Probably about 10-20 of them would refer to themselves as being value-oriented, as the style has been out of favor for a decade.  Many value funds have struggled dramatically.  We have thankfully avoided that meltdown for a variety of reasons.

Firstly, we have had better stock selection than overly-diversified “value funds.”

Not only do you need to be able to find the right stocks, you also need to be able to allocate enough money to them for it to make a difference.  The beauty in investing is that in only takes a few really successful investments, to generate massive wealth, but few are willing to invest with conviction when the odds are stacked in their favor.  Sometimes you need to tread water a bit until you have that huge opportunity that can really change things dramatically.

If you are only using funds, you are usually just going to do a little worse than the benchmark index.  There isn’t any protection when things go bad, and it is tough to really create excess wealth.  In a bull market it isn’t as big of a deal because you are still making money, but 10-year bull markets aren’t the norm either.  When the market turns into a bear with huge losses, many find they don’t have the conviction to hold or invest more, because they don’t have the confidence that understanding intrinsic value can provide.

Secondly, we utilize the entire tool set, as opposed to simply walking around to every problem with a hammer.  This means that we don’t restrict our investments to only funds, stocks, or bonds.  Instead we make the effort to sell cash-secured puts, covered calls, and employ distressed debt investing techniques that formerly were pretty much restricted to hedge funds or other institutional investors. These strategies aren’t utilized by about 95-99% of investors, but can lead to substantial profits when used intelligently.

The WSJ article has a paywall so some people might not be able to read it, but below are a few of the salient quotes.


“In one of the sharpest swings in years, cheap “value” stocks outperformed fast-moving” momentum shares by up to 8% in a single day this week.”


“Over two days this week, momentum strategies lost about 6% even as value gained roughly 8%”


“In March and April 2009, a momentum portfolio that held the biggest recent winners and sold the worst recent losers suffered a cumulative 69% loss —–even as an epic bull market was already underway.”