In a recent interview with Advisor Perspectives the team at Tweedy Browne discussed why they believe value investing will continue to thrive. Here’s some excerpts from the interview:
It’s been a tough stretch for value investing, particularly for those who take a statistical or a factor-based approach. The value factor has underperformed for a very, very long period of time. There are different ways to think about value. We use enterprise value multiples much more than book value, when calculating intrinsic values.
We still use book value when we look at cyclical-based businesses.
But book value still plays a considerable role in the definition of value indexes and the like. As a performance metric, book value has been very difficult for a long time, going all the way back to 2007. It’s been a long, difficult stretch for book value.
Using enterprise multiples in a value-based approach has worked better over the last 13 years. But the last five to six years have been particularly tough, as the FAANGs have ascended and claimed some dominance in the marketplace. As a result, value relative to growth investing is at a pretty extreme spread today.
Quants like Rob Arnott, Cliff Asness and others have noted that value has rarely if ever been cheaper than it is today relative to growth. This has come up of late because, during the downward leg of the crisis in March, the technology stocks continued to do well and the more economically sensitive, so-called value stocks performed poorly. There was a big differential between growth and value even during the downdraft. Value has typically outperformed during a downdraft. But stay tuned. A bomb has gone off. We’ve been at this for only eight weeks.
We had a dramatic cliff drop in the market in March. As the pundits on television say, we’ve been in an incredible bull market in the month of April and into May.
We’ll have to see where it goes from here. Looking at previous tough environments, the dot-com bubble began to burst in March of 2000. The carnage was not undone until late 2002 in terms of the impact that it had on stock market indexes.
When you think back to the crisis in 2008, the first cracks began to develop when those Bear Stearns funds started breaking down in late summer of 2007. We began to learn that we might be in a subprime, housing crisis. Sure enough, we didn’t see the bottom until March of 2009.
We’ve been in this pandemic-affected market for about eight weeks. Everybody has an opinion.
Have we seen the new lows? Have we not? My advice to investors is to stay tuned to value investing. As Frank said, this recession is likely to be very deep and Warren Buffett’s skepticism is real. We could be in for a grind, and if that happens, we believe value investing is likely to prove its mettle during and coming out of the grind.
My understanding of the history of America, is that it’s a story of resilience. Value investing capitalizes on that resilience. As value investors, we’re ultimately optimists.
As a firm we had the incredible good fortune way back in our early days to have relationships with people like Benjamin Graham, Warren Buffett, Charlie Munger and Walter Schloss. We basically adopted a framework – with all credit to Ben Graham – that allows for great resilience over time.
It was a risk-management framework, going back to Warren Buffett’s comment, “To finish first, you first must finish.” That lies at the heart of our value framework. If there’s one thing we’ve learned over 100 years, it’s that price matters in investing.
Assuming we live to see another day, and we are in an uncertain period, we expect value investing to continue to thrive. I have great hope for Tweedy as well. We are 48 people. We were a lot smaller in the old days. But if a small firm like Tweedy can make it 100 years, it speaks a great deal about our framework that has served us so incredibly well during that period.
You can read the entire interview here:
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