195 Years of Value

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During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed 195 Years of Value. Here’s an excerpt from the episode:

Tobias: For me, it’s helpful to go back and look at those. I like running through backtests and I go through them in pretty granular detail. I look at what’s the mood from day to day, month to month to the extent that you have that data.

It’s shocking. We’ll come to this in a moment. I don’t want to foreshadow too much, but I do many of those things that you’ve listed out there by going back and reliving that data and thinking what would you have done through this period of time. You’d have had this extremely long periods of time where you would have been underperforming, similar to what we’ve gone through now. There’s a lot of people out there who are calling value dead. Who am I to say that it’s not? All I can do is look at that data and say, “I don’t think that it is.”

Jake: Toby, the other– I guess I can wait until your segment, but if we’re already in there, let’s just go for it.

TOBIAS: We can segue.

Jake: What’s your sense of the average period of time of the snapback from severe underperformance? Can you time–

Tobias: It’s very rapid.

Jake: -that at all or is it–?

Tobias: It’s funny that there’s that old stock market [unintelligible [00:18:38] that stocks take the escalator up and they take the elevator down, that they go down much faster than go up.

Jake: Value is the opposite.

Tobias: Yeah, in terms of underperformance– Let me just go through the data. I’ll get through it a little bit of granular form. I’ll link to the charts in the show notes because they’re fascinating. And then, Mikhail Samonov, who’s the gentleman, founder and runs Two Centuries, he’s been a quant for very long time. He kindly sent me the underlying data. I’m thinking about making it into a chart with some annotations on it. There are these enormous events that we’ve just completely lost to the sands of time. But the data starts in 1825. To contextualize that, there was this period of time when Vanderbilt is born in Staten Island, it’s all sailing ships. To go across to New York was a big event. New York was smaller than Philly, I think, at the time. And there’s this industrialization in the States that takes this– New York becomes this financial-industrial center, and the US explodes and Vanderbilt rides that first wave. He gets his first fleet of steamships in 1825. 1827, the railroad mania starts. That goes on for quite a long period of time.

But the first panic occurs in 1837, value factor, this is long-short value. You can go through the data and see which side drives it, but basically, this is driven partly by a similar scenario where you have tech stocks running away, the tech stocks are railroad stocks. At this time, the only data they could get there, 237 issues out of 600, and they were dividend payers, that was how they assessed. That’s the only way you could assess value. So, they’re saying [unintelligible [00:20:18] high dividend payout ratio.

Jake: [crosstalk] accounting of any of- [crosstalk]

Tobias: You don’t know what’s internal. All you can do is construct it from outside. So, the dividend payers get smashed up. The rapidly growing things do very well. That’s the first big drawdowns. Panic of 1837. It bottomed in 1841 down 50%. 1844, three years later, telegraph is invented. I find this fascinating that this stuff happened. That kicks off this next technological revolution again. Then, there’s the Panic of 1857, value is down 49 by 1862. Interesting thing in that period, 1861 to 1865, American Civil War goes on.

Jake: So, when you say value is down, you mean that relative to the top-performing–?

Tobias: I’m talking excess return, long short. What we’re talking about is, if the market’s running away, your long-short return is down 50% relative to where the market is, you’re 50% behind, you’ve got half as much money as if you’ve been in the market long only. Your long short down is 50%.

Fast forward a few years, coming to the end of the railroad mania, which went on for a really long period of time. At the time, they called this The Great Depression, and it subsequently was renamed to The Long Depression, when The Great Depression– it was actually Great Depression 3.0, 1929 was a Great Depression 3.0, but they’d forgotten that there was a Great Depression at the start of the 1800s as well. It’s devastating, when you see it in the chart–

Jake: We’re going to take that back for 2020.

Tobias: Well, I hope not. It’s not out of the question. This is the thing that taught me that many of these things that we viewed as sort of being events that are only one-off, like The Great Depression was a one-off, and it happened so long ago, like nearly 90 something years ago now. They’d been three. Three in the first 100 years of the data, and there’s been none since then. So, they do pop up much more frequently than people realize. The Panic of 1901, bottoms in 1904, value factor down 59%. That’s significant because it’s the same amount that we’re done now, relative to the panic. So, the Panic of 1901, similar kind of scale for value to where it is now.

Then, you get the great crash of 1929 to 1932. Value factor again down 54% and that leads into the Great Depression. Takes a long time to come out of that. Basically, you get out of that in about 1939. And then, Mikhail calls this period, 1940 to 2006 is the golden era for value. It’s basically the fewest drawdowns, the shallowest drawdowns, best performance, and that’s where most of our data is. The Fama-French data often starts in 1950 other than the price to book data, which starts in 1920. So, during this golden era, we have the oil crisis in 1973 and 1974, value factor is down like 25% long short because you’re protected by the shorts in many of these.

Jake: Yawn.

Tobias: Black Monday, 1987. It’s hard to find it on the chart. It’s a tiny little drop-down, it’s less than 20%. Black Wednesday, 1992, it is a little bit bigger than 30% percent. Dotcom, ’98 to 2000, not in the top five, but down 40%. GSC, 2007-2009, same amount. Current one, I don’t know what you call this, COVID Death of Value, down 59%. So, we’re enduring, it’s a truly historic period that we’re going through. We’re all living the Chinese curse, may you live in interesting times. For me, it’s very much practicing that stoic philosophy of going back and looking at, here are all the worst things, here are all the really bad things that have happened, here’s how frequently they happen. Depressions and recessions and stock market crashes are basically the order of the day. They’re the things that you should expect. You shouldn’t expect bull markets because most of the time the market’s in a drawdown.

Bill: For the values, is that a price to book factor? I’m just trying to get a sense of what the factor is that you’re discussing.

Tobias: They knitted three things together. I’m slightly mispronouncing this name, but Kurtzman is a researcher who’s put together– they went and found every report that they could find from these — they’ve had to reconstruct this data looking at dividends and stock prices to the extent that they could find them. And then, there was the Cowles data, it was famously– he put it on to these punch cards. And that ran– I think, it was 1875 to early 1900s. That was the thing that Graham referred to when he said, I’ve looked at this backtest for value and it’s done 15% a year over the last 25 years, I think he said, so he was talking about the Cowles data.

And then, there is Fama-French and it all gets more granular and better as you go along. But basically, it’s price to book. Kurtzman is price to dividend, patchy to the extent that they could put it together, then Cowles, which was punch card, and I think it’s price to book and then current one is price to book again.

Jake: The underperformance can come from absolute losses versus relative underperformance. Is there a common theme between each value’s underperformance?

Tobias: There’s not. This is not something that Mikhail teased out of the data, but this is something that I ran myself, because I can look at both sides and look at the drawdowns. It’s very hard to knit the data together, it’s not as easy. There are several periods where it’s really quite amazing that the value underperformance is driven by the bubble size. 73-74, pretty reasonable underperformance, but it’s driven by the expensive stocks, I think that was like a nifty-50 period. Same thing, again, in 99-2000, it was a bubble type– and this time, it’s pretty evenly distributed, but if anything, it’s more to the value stocks underperforming than it is to the growth stocks outperforming, but there is growth outperformance through that, pretty significant growth outperformance.

Jake: That makes sense, I guess for ’73, except it was more mild. It probably more has to do with the absolute than the relative, if that makes sense.

Tobias: Yeah. From 1940 to 2006 is really not many– this is drawdown that I had to track down and try and figure out what it was. There was this thing called the Eisenhower Recession in 1957. I bet there’s nobody alive who remembers that or even knows what that was. But there was basically this mild drawdown, and value long-short didn’t work very well, for a very short period of time. Forgotten depression 2021, that is pretty significant on the chart, but again, nowhere near. So, 1857, 1904, 1929, and today are the really significant ones.

Jake: Massive.

Tobias: Dotcom, it’s in there and it’s a significant one, but it’s not in the first four that you look at on that chart. And that would be the most famous one in my lifetime. I think that every value guy who was around then will say that was the toughest period, but this thing is much, much worse. The really scary thing is that often, when you see this sort of underperformance in value driven by the long side of value, it has tended to lead into these really nasty periods. I think even outside the stock market, there’s been these long periods of very, very– American Civil War, World War 1. That period of time, there’s a lot of stuff going on. We haven’t seen much of that for a long period of time. It’s Steven A. Pinker view of the world where everything’s just getting better, or it’s Taleb view of the world where we just don’t have enough data and these big black swan–

Jake: It’s day before Thanksgiving.

Tobias: Yeah, it makes me a little bit– not nervous, it’s the wrong word, but it makes me a little bit more circumspect about the prospects for– it’s all a little bit more fragile, I think, than I originally thought anyway.

Jake: It’s pain that scrubs off high valuations and high multiples. It takes a decade almost of having your ass kicked for them to declare the death of equities that brings an [unintelligible [00:29:13] that then leads to the giant returns later.

Bill: Yeah. I feel I have conflicting thoughts on this because part of me says [crosstalk] yeah, I mean, a little bit, and I guess– ’08 was both a liquidity issue and an earnings issue, and the liquidity issue just isn’t here this time. Sp. not have this totally heart-crushing selloff doesn’t really shock me all that much. I do wonder how long can the disappointment continue before some of the– I don’t want to say like euphoria, but optimism gets deflated out of some of the multiples. And that can have a reflexive– it’s reflexive, I think, to a certain extent. But I don’t know. That’s not a very helpful comment, I don’t think, but it’s why I’m not waiting for ’08 again. I just don’t think that’s the right bet to make.

Jake: I want you guys to handicap right now, what are the chances of value catches up or everything else catches down? What are the odds on those two prospects to close this gap?

Tobias: I think it’s a little bit of column A and a little bit of column B. I think it’s like 80%.

Jake: That’s bullshit.

Tobias: [chuckles] Well, okay, that’s fair.

Jake: 50-50?

Tobias: 40%, that’s my guess. I think it’s mostly the high multiple stuff is going to come down, but I also think that value is going to get dinged up through here too. I think that the long-short value factor telling us that it’s down 59%, in a world where that happens, that long-short value factor is going to do very well because it’s equally weighted long-short, it’s going to be long the stocks that don’t get down as much as the short side goes down.

Jake: [crosstalk] –short book is going to carry the day probably for that period more?

Tobias: I do, and I think that’s what’s happened in the past. Often, these value underperformances have terminated with the bottoms of infamous massive stock market crashes. I’m not predicting a massive stock market crash or anything like that. I’m just saying that the market is expensive. It’s been a long time.

Jake: I can read the Business Insider article already.

Tobias: [laughs]

Jake: Value Manager, Toby Carlisle, declares massive crash imminent.


Tobias: [sighs] I don’t know.

Jake: [crosstalk] -multiple boss declares. [laughs]

Bill: Yeah. I hope it comes out soon because I’m a member for approximately 28 more days. I paid my dollar to see whatever they quoted me and I was like, “Oh, okay.”

Jake: Actually what’s [crosstalk] funny, it’s actually going to say Bill Brewster. [crosstalk] [laughter]

Bill: It was more than that, but that was sort of funny how they– I mean, I didn’t mean to take credit for your Apple’s the greatest trade ever. That was not my intent.

Tobias: Oh, no. I figured that was the journalists picking up the most interesting comment out of the whole thing and then making it the headline.

Bill: The funniest thing is, I didn’t even think that was the most interesting comment that I made. But then, that was– they say Apple, that’s the one is going to get– [crosstalk]

Tobias: Well, you get Apple and Buffett together, and that’s a good headline. When I was writing Greenbackd, I used Golden Buffett in a headline, that’s going to go through the roof.

Bill: Yeah, that makes sense.

Jake: [laughs]

Bill: The clickbait that can’t be ignored.

Tobias: Yeah, it’s still stunning to me that so few people have talked about Buffett’s trade in Apple. If you’re Paulson, someone’ll writes a book about you. If you’re Buffett–

Bill: It’s expected.

Tobias: Your stock price goes down.

Bill: I tell you the thing that sucks though, that’s a legit criticism. And this is, Jake, when we were talking offline about absolute and relative valuations. That stock has not gone. It’s underperformed a lot over the past 10 years. [crosstalk] Yeah. And he’s needed the Apple trade to keep treading water and that’s some of what I think there’s a legit– I don’t want to say criticism because I don’t think that’s really the right way to frame it. But I think that there would be merit to the argument of saying once you get to a point of having so much excess capital, even doing something like running a levered SMP strategy or returning the capital to shareholders faster, I just think sitting on the cash and being so rigid about your hurdle rate. There are multiple paths to the world, then we’re sitting here at all-time highs and maybe this is resulting and I get it, but there’s another view of the world that says you maybe a little bit too big to be sitting on all this cash waiting for that kind of–

Jake: I’m going 100% fading that.

Tobias: Yeah, so am I.

Jake: Did you listen at all to the Markel call yet?

Bill: No, not yet.

Jake: Well, I’m not completely done with it because it was just this morning, but it sounds like insurance pricing is hardening up quite a bit.

Bill: Yeah.

Jake: I love the fact that Warren’s going to have all of that capital be riding against hard prices. I would expect combined ratios over the next couple of years to look pretty attractive.

Tobias: Happy to hear that. I own a lot of insurance.

Bill: Yeah, so do I. I’m just saying, you think he’s going to be able to put $100 billion to work? That’s a lot of money.

Tobias: I think he gets his chance.

Bill: I hope so.

Jake: I’m doing the Jack Nicholson nod.

Tobias: We’ve got to do your topic, Bill, or we’re going to run out of time.

Jake: Yeah. Let’s go, Bill, Starbucks.

Bill: I’ll knock that out in no time. But that’s what I said to the Business Insider people. I said it’s time to press the advantage. He spent all this time getting all this capital like– fuck it, man, go ham all these competitors. Invest like crazy in these businesses that can’t go– anyone that’s over-indebted, go kill them. This is what we’ve all waited for. I just don’t know that he can put that much capital out the door.

Tobias: The thing that makes Blake the best investor in the world, is that he doesn’t listen to– The reason that Blake’s got $100 billion stacked up is because he’s the most patient investor in the world, and he’s just sitting there waiting with his $100 billion stacked up.

Bill: I get it. If you listen to him over the years, he acknowledges that size is a problem. It is a problem. I think he’s done some good deals. I think the Dominion deal–

Tobias: Let him do one more.

Bill: No, no, that’s not–

Tobias: Give him one more. He’s earned it.

Jake: Hey, he’s okay at this game.

Bill: That’s not what I’m saying. I’m saying the Dominion deal appears to be a good deal from what I understand. I like the Bank of America buys. I like that he’s buying in shares. I’m sure he’s underwriting insurance. I’m not trying to have him drag $100 billion of cash around for the next decade. It’s too much. We’ll see. The market, I think, recognizes some of it and I think the market is stupid on some of it. Like most good things in life, there’s no clear answer.

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