Rob Arnott: Now Is One Of The Best Times Historically To Buy Value

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In his recent keynote at The Morningstar Investment Conference, Rob Arnott explained why now is one of the best times historically to buy value stocks. Here’s an excerpt from the keynote:

Rob Arnott: We always hear the observation that it’s different this time. It’s always true. Things are always different this time. They’re just not necessarily different enough to matter.

We’ve observed over the course of decades that the spread in valuation between growth and value stocks widens and narrows, widens and narrows. And one of the marvelous things is that when it widens, that’s a good predictor for subsequent performance of value relative to growth. The same holds true when it narrows. It was abnormally narrow in 2007, and that’s when we had the quant crash. Everyone was piling into value, and value cratered.

So yes, I do think they will mean-revert. The most powerful evidence is that over the last 13 years, value—defined in the Fama-French fashion as book/price—has underperformed growth peak to trough—the trough was last August—by 58%. But value got cheaper by 70%. If you have a stock that’s down 58%, and its P/E ratio or price/book is down 70%, that means it’s cheap. If I’m not willing to buy now, I never will.

You can read the entire transcript here:

Rob Arnott: Morningstar Investment Conference

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