In his Q1 2022 Earnings Call, Rich Pzena explained why value investing continues to work. Here’s an excerpt from the call:
I’ve been saying the same thing about value investing for my entire life. It just works. It works because people are emotional and not analytical. It works because people blindly project recent events indefinitely into the future. It works because people tend to shy away from considering investments that have known problems.
As for me, I’m comforted by the predictability that value investing works because of these very human tendencies. My favorite chart these days is one that shows a 70-year history of the Price to Earnings ratios for the most expensive quintile of stocks along with the cheapest quintile of stocks in the broad U.S. market.
While the expensive stocks PE are fluctuated between 12 times and 85 times and today it’s very near their high point, cheap stocks have barely budged for 70 years ranging between 5 and 10 for the entire period.
In other words, as we sit here today, I see an environment that is very normal for a value investor. Until it seems to me perfectly reasonable to expect that the return opportunity for value strategies should be similar to what has been earned over the long term.
At the same time, given the valuations spreads seems very difficult to imagine that growth strategies or the broad market for that matter are likely to earn returns similar to their long-term histories.
And so we stay the course building concentrated portfolios of deeply undervalued companies, which have gone through a rigorous research process combined into a portfolio that offers attractive long-term return potential, along with a diverse set of risk exposures. Just like we always have.
You can read the entire earnings call here:
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