In their latest episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discuss Value Returns 1866 to Date. Here’s an excerpt from the episode:
Tobias: Who wants to kick it off? I’m going to take Jake’s paper away. Either way, it’s you, JT. So, let’s do the paper. JT sent me the Mark Hulbert article. He’s always great. He picked up this paper and he’s done a pretty great job of that. I just tweeted out the relevant chart, it’s kind of interesting.
Jake: Shoutout to my man, Scott, for sending it to me first. So, it’s the network provides.
Tobias: That is good.
Tobias: The paper’s called The Cross-Section of Stock Returns Before 1926 and Beyond. Perhaps referencing the Fama-French.
Bill: We’re talking about history? History.
Tobias: Yeah, well, this is the reason why it’s relevant, because–
Bill: Dang. Someone get Allen Iverson on the phone.
Tobias: [crosstalk] The value research, the original stuff came out, it was 1992. This was the Fama-French article and it ran back to 1963. So, it’s a pretty short window of data that they had. They got this value effect in there using price to book. They said things bought cheaply on the basis of price to book tend to do pretty well relative to the market, relative to things that are expensive.
Bill: [crosstalk] the book. What a loser.
Tobias: I think there are good reasons why they choose it because it’s pretty static from quarter to quarter and from year to year, whereas low earnings don’t necessarily indicate that something is cheap or expensive. They might just be depressed.
Bill: Yeah, I think it made sense back in the day. What is it to recreate a business? What is that? The F score? What am I trying–?
Tobias: The Tobin’s Q?
Jake: Tobin’s Q, yeah.
Bill: What the fuck is it? Tobin’s Q, yeah. [crosstalk] I think Tobin’s Q, if you could figure out how to do that would make sense today. Like Altria has no book, because they bought in all their equity. So, it’s hard now with some of these more [crosstalk] ensure earn high earning businesses.
Tobias: Book doesn’t work. It’s pretty well accepted. The book doesn’t work. Even Cliff Asness pointed out that through that period where value is doing really badly, the value factor that did least worst was book, because it gives you the least value impact.
Jake: [laughs] He was the most far away from value of the values thing. So, it did better.
Tobias: Right. So, it did better, funnily enough.
Jake: Least radioactive.
Tobias: The problem with any in sample testing is what you might see is just complete luck. The gold standard for statistical analysis is to take the same idea and then apply it out of sample. We’ve got three potential sources of out-of-sample testing. We’ve got since that paper got published in 1992 to date. What has happened over that period is that the value factor, the value effect has been less good. It hasn’t been predictive as predicted through that period. It still worked, but it’s not as strong as the effect that they found in that 1963 to 1992 period.
Then, there’s also international data. So, you can take the same idea and apply to any other stock exchange around the world. The criticism there is that they’re too correlated. The global stock markets, even though they’re different, they tend to go up and down roughly together. Then, these guys have dug up– these guys have put all this stuff together by hand. I think this is what Mikhail Samonov 200 years value – Google Search was referring to when he did his 200 years of value post.
These guys have gone back to 1866. Fama and French pushed the ’63 data back to 1926 and then found the same value effect, but also there was a little bit diminish. These guys have pushed it back from 1926 to 1866 and I’ve done it with– The only filings that were made prior to 1932, there was no requirement to file audited financial statements prior to 1932. So, the filings were terrible and you couldn’t– they’re very spotty.
The only way they can do it is using price to dividend. So, they’ve used dividend yields and they found on that basis that period of time 1866 to 1926 was a very good time to be a value investor using price to dividend yield. it outperformed. So, I think it’s an interesting study. I don’t know that it’s necessarily groundbreaking. I’m sure it took a lot of effort and I’m glad they did it. But I think that everybody’s already got that– It just confirmed my price, value works for people who don’t like it. [crosstalk]
Jake: Any hypothesis on the time differences of, why did ’26 to ’64 or whatever it was, ’63, show less value sampling, and then ’64 to ’92 showed yes, since then, no. But pre-1926, why would that have showed yes? Are there any commonalities in these four periods that we can find that would give us some illustration as to why it worked or not?
Tobias: That’s a good question.
Jake: Interest rates–
Tobias: I don’t have a good answer but I can speculate.
Jake: Technological development?
Tobias: Period of ’62, whatever it was, ’63 to ’99, was a period of very rapid growth in the States. I think that does benefit– Vitaly Katsnelson characterizes them as being like this, where Shiller CAPE is peaking, that’s a bull market.
Where Shiller CAPE tends to go sideways for an extended period of time, that’s a sideways market, but that would be characterized by– So, periods of time like 2000 to 2015, and I suspect we’re probably still not out of this sideways market yet, but at the moment, it looks like a new bull market started in 2009 but we’ll see where this all ends up.
Through those periods, I think the last one was ’66 to ’82. That would have been a very good time to be a value guy, and not a good time to be a growth investor. So, it’s caught that in the middle, maybe. I don’t know.
Jake: See, the premium has more to do with actually the other side of the bet, which was maybe growth scuffling.
Tobias: I think value is fairly stable. Value tend to– it does better but I think a lot of performance is relative. Value hasn’t done that–
Jake: Just losses a little bit of money every year and then [laughter]
Tobias: Value hasn’t done badly over the last decade.
Tobias: Just on a relative basis, it’s done terribly.
Bill: ’63 to ’82 is when the boomers came into their own, right? Or, am I [crosstalk] on that?
Tobias: Boomers born in the end of World War II, so it’s ’45 to whatever.
Bill: Yeah. So, they were 23 to 40?
Jake: I think ’60 is the cutoff age or birth year.
Tobias: That’s probably right. That’s the hump going through the snake.
Bill: Yeah, I just wonder how much of that had to do with growth in earnings.
Tobias: Value tends to do better out of the bottom. I don’t know why on a relative basis. But everything I guess– [crosstalk]
Bill: Because it gets shitcanned in the downturn.
Tobias: Well, that’s funny, because it used to be the case that everybody believed that value did better through a downturn. That was based on the 2002 drawdown, I think, where value skated and everything else got smashed up. [crosstalk] the case in 2007, 2009 got smashed [crosstalk]
Jake: Always fighting the last war. [laughs]
Tobias: That is true. Do you think that view that value gets smashed up is a March 2020 view? Like value got smashed and growth skated through that?
Bill: I don’t know. I guess it all depends the reason for the selloff.
Jake: It’s also a little bit of where did you start. If you were expensive relative to normal valuation for your value basket, then you might expect a little bit more damage and vice versa?
Tobias: Right. I think that’s what happened in 2007.
Jake: I think so too. Bad dispersion.
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