150 Years Of Evidence Suggests Value Investing Will Survive

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In this episode of The Acquirer’s Podcast, Tobias chats with. Simon Adler. He’s a Fund Manager on the Schroders Global Value Team and he manages two funds, Global Recovery and Global Income. During the interview Simon discussed how 150 years of evidence suggests that value investing will survive:

Tobias Carlisle: There’s been a trend I think over the last five or 10 years for value guys to become more growthy because that’s has been where there have been sources of returns and rather than the more traditional lower multiple nearer term cash flows. Are you adapting to that or are you firmly in the more traditional Value Cap?

Simon Adler: We’re pretty stubborn in a traditional Value Cap. If you look at the very long term evidence, because I’m sure you have. The evidence is clear that buying the cheapest companies gives you the best returns. The evidence is also pretty clear I think that buying high quality companies, you underperform. That’s what the longterm evidence says. So today we’re in a period where many investors have moved from Value to quality.

Simon Adler: We are not those and absolutely not. And I don’t think I ever will be unless there’s 150 years of evidence to say we should be, but I don’t think I’m going to be alive if that happens. So we’ve kept in the cheapest part. And I think it’s quite interesting to look at why Value has underperformed. Value has done well in absolute terms.

Simon Adler: Frankly, if someone had said to me in 2009 or even last year, you could get these returns, I would’ve bitten their hands off. It’s just that we haven’t done nearly well as the relative evaluations between growth and quality versus Value, they’re looking at very, very extreme. And so I’m happy to be patient. I think those valuations are in very dangerous territory and I wouldn’t want to put my clients there. So we keep going with the traditional Value where the academic evidence is, we stick to it and people can call us stubborn when they like.

Tobias Carlisle: I tend to agree with you, but the the US data is… because that’s the data I tend to look at. It’s been an extremely long period of time for Value to underperform. It may not yet be quite as deep as the Dotcom peak, but it’s approaching that level. But in terms of just the sheer number of years, it’s seems to have… I was discussing this with somebody yesterday and they said rather than being turned up to 11 will turned up to 13 or something here. When does it recover? What does it take for it to recover?

Simon Adler: The two million dollar question. I think it’s very dangerous to go down the path of trying to identify the catalyst for why it will cover and trying to say when. The question I continually ask people is, if you go back to the Dotcom, which you mentioned. As you say, the dotcom was very short and sharp for Value to underperform.

Simon Adler: And then, Value had a phenomenal period of out performance. And if you ask everyone you ever meet, what was the catalyst for that period of out performance for Value? I haven’t met a single person yet that can tell me the catalyst despite us all having 2020 hindsight. And so trying to look for the catalyst in the future I think a dangerous game and many people are trying to play it and trying to time it. And, and we both know that the long term evidence of people trying to time markets is not very good.

Simon Adler: So I’m afraid I can’t tell you when and I can’t tell you why, but what I can tell you is that if you invest for the longterm in the cheapest companies, I’m pretty sure you’re significantly out before. I read a book recently, I don’t know if you’ve read Phillip Carret’s book, one of the longest running firm managers.

Simon Adler: He was a real Value man and if you read the book or you speak to anyone that met him towards the end, there’s some interviews on YouTube with them and they say, “What’s the number one lesson you’ve learned?” He managed money for 90 years. That’s not true.

Simon Adler: He died at 101 so he managed money for 70 80 years. He said the number one lesson after all that is patience. That today we’re being asked to exhibit more patience in value investors who probably ever had to ask before, as to do before and I think this is why we’ve just got to hold onto the seats, keep going, keep talking to each other.

Tobias Carlisle: There’s fewer and fewer of us to talk to because we’ve all migrated into quality and growth.

Simon Adler: Yes.

Tobias Carlisle: Buffet has referred to Carret before. What’s the name of the book? Because I haven’t read that book.

Simon Adler: Now that is a good question. I think it’s called A Money Mind at 90.

Tobias Carlisle: That’s great. I’ll check that one out. Thanks very much for that.

Simon Adler: There’s not many people you can read that invested through the periods that he invested in.

Tobias Carlisle: So he’s got a 29 crash and that presumably, and he’s got an 87 crash.

Simon Adler: Yes. And he managed to find, I think it was called the Pioneer Fund for 60 years or something of that nature. Extremely long term. And you had very good returns for a very, very long period of time.

Tobias Carlisle: I’m interested in managers who survived the 29 crash. So I’ve read some of Graham and also John Maynard Keynes who went through that period and pretty famously evolved from being a more macro, using his superior intelligence and his superior understanding of macro moves to blow himself up two times before he became an investor who sounds much more like Buffet than Graham.

Tobias Carlisle: And he was doing that without knowing that Graham was doing something similar on the other side of the pond.

Tobias Carlisle: I like reading the way Keynes was talking to his investors at the time and to the boards of the dam city that he was managing. And one of them, he said, “If you sell out now…” And one of them listened to him and one of them didn’t and he said, “… if you sell out now… We’re in this position where nothing matters at the moment, either you sell out and we recover or we miss the recovery.

Tobias Carlisle: Or we stay invested and we go to zero and then we destroy all of our money anyway. So basically at this time the only sensible thing to do is to be fully invested.” And he was, he was absolutely right. It took some courage to do that.

Simon Adler: Yes. And all the long term evidence says “You just have to be fully invested over the long term in the equity market. Trying to time in and out to make sense and it’s encouraging to hear some of that quality of great brain, though the same.

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