In their latest 2020 Semi-Annual Report, Tweedy Browne provides some great insights into why if history is any indicator value investing is set to rebound, should active managers ‘chase the puck’ or stick with their disciplines, and signs of speculative excess – Tesla and Day Traders. Here’s some excerpts from the report:
Value Investing Set To Rebound
Seldom have we seen the rise of a phoenix the likes of which we witnessed over the last six months in global equity markets, particularly in capitalization-weighted indexes. For the average stock, it has been somewhat of a different story.
While many, if not most, sectors, industry groups, and stocks participated in the recovery in stock prices, the strongest returns, overwhelmingly, were concentrated in technology stocks, particularly those dominant U.S. companies we have grown to know so well. These enterprises actually benefitted from the pandemic-driven economic lockdowns that were occurring all over the world.
Value stocks, particularly those that are more economically sensitive, took a backseat to their higher-growth brethren, despite a significant pick-up in economic activity off of a bottom that some would argue at least temporarily rivaled the initial declines of the Great Depression.
This has led to a bifurcated market where the spread between growth and value indexes has rarely if ever been wider. For example, the MSCI World Value Index in local currency trailed its growth counterpart over the last six months ending September 30, 2020 by over 2,297 basis points; and, year-to-date as of September 30, 2020, the Value Index remains behind the MSCI World Growth Index by over 3,324 basis points.
If the past is indeed prologue, the factors which have weighed value down relative to growth will eventually recede, allowing this investment teeter-totter to shift back in favor of the more value-oriented components of the market. We just don’t know when.
Should Active Managers ‘Chase The Puck’ or Stick To Their Disciplines
The quandary of course, rightly pointed out by Kaissar, is where active investment managers go from here – chase the “puck,” or stick to their respective disciplines patiently waiting for the equity market to correct?
The last time money managers had to face such an anxious choice was in 1999-2000, at the height of the tech bubble. The choice was particularly stark for professional value investors, many of whom were thought to be on their very last breaths, with clients abandoning them in droves.
Many of you probably remember the aftermath of that period, which is often referred to as the “dot-com era.” The technology bubble burst in March of 2000, sending technology stocks and indexes crashing down while value regained ascendency.
Signs Of Speculative Excess – Tesla And Day Traders
One of the poster children of this group that has developed almost a cult following, of course, is the electric automobile company, Tesla, which was up 413% year to date and 791% for the one-year period ending September 30, 2020.
In comparison, older-economy auto companies such as BMW, Daimler, Porsche, GM, and Toyota produced returns of 1.1%, 3.4%, -14.7%, -19.2%, and -0.8%, respectively, for the one-year period ending September 30. Tesla is now the eighth largest company in the United States, and as of September 30, 2020, traded at a price earnings multiple according to Bloomberg of 680 times trailing and 137 times estimated 2021 earnings.
For purposes of comparison, using the roughly $400 billion market cap that Tesla enjoys today (as of September 30, 2020), one could own all of BMW, Daimler, Toyota, GM, and Porsche, earn 25 times the 2020 estimated earnings of Tesla, and have $20 billion left over for walking around money. And up until the last five quarters, Tesla had not made a dime in reported earnings.
Perhaps the most troubling sign of speculative excess in our equity markets today is the reappearance of the day trader. One cannot help but harken back to the late days of the 1999-2000 tech bubble when New York cab drivers were reportedly day trading equities on laptops in the front passenger seats of their cabs.
Such was the confidence of investors in these new innovative companies that provided the spark for a new industrial revolution in which the normal rules of finance seemed to no longer apply.
Fast forwarding to this year, investors, bored out of their minds, stuck at home, unable to bet on sports in the early days of the pandemic, took to their computers and flocked to internet trading platforms such as E*trade and the more recent start-up, Robinhood. It has been reported that E*trade opened 260,500 new accounts in the month of March, which was more accounts than the company had ever opened in a single year since its inception.
Robinhood, the popular new commission free trading app, reportedly logged three million new customers in the first quarter of this year, and now has over 13 million accounts directed by investors whose median age is 31. According to Bloomberg, the no-fee trading app logged daily average revenue trades (DARTs) of 4.3 million in June, higher than all of its publicly-traded rivals, including the likes of Charles Schwab.
Once you complete a trade, celebratory confetti flashes on the trader’s computer screen, with effects similar to a videogame. This gets the endorphins flowing, and increasingly, day trading investors have even been utilizing options to effectively leverage their online bets on stocks. Sound familiar?
You can read the entire semi-annual report here:
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