Value Investing In The 70s

In their latest episode of the VALUE: After Hours Podcast, Brewster, Taylor, and Carlisle discuss Value Investing In The 70s. Here’s an excerpt from the episode:

Tobias: I’ve got also US stock market performance by PE ratio on the 70s. So, there’s a reasonable chance that we’re going to look something like the 70s with inflation and [crosstalk] high asset prices. [laughs] I’m sure they’re going to come back.

Jake: Okay.

Tobias: My nine-year-old updated her jeans to bell bottoms.

Jake: No.

Tobias: I was like, “Oh, God, we are going to [crosstalk], are we?”

Jake: Ah, polyester please. No.

Bill: That’d be sweet, man. Can disco come back?

Jake: I feel you would do well in that 70s outfit. It works for your style.

Bill: Not with this pair body type, no way.

Jake: Ah, you can hide it under a big billowy shirt. [laughs]

Bill: Bro, I need one of those– What do women were sometimes that sucks in their center? That’s what I need.

Jake: Yeah.

Tobias: This was Jeff Weniger, who’s– Sorry, Jeff. Wisdom Tree, head of equities. “US stock market performance by PE ratio in the 70s divided into five buckets. Most expensive PE ratio for 70s delivered a 25.8% performance over the full 10 years.” So, in 1969, there was a historic bear market began and that lasted until 1974. There was a crash, there was a little rally, and there was a second crash, 1973 and 1974 were the ones that broke a lot of hearts. And then, there was a pretty good rally after that, but they performed in rank order. So, the cheapest PE ratios delivered 213% over the full 10 years, but that was from really from 1974, because it was down in 1974. Then everything else, 199% from the second decile, 118% from the third, 97% from the fourth, and 25.8 from the most expensive. So, that would be quite a change from what we’ve seen over the last decade, where it was basically inverted. Kind of interesting. It’s my argument for deep value, but it’s also the ordinary experience of the full period. What do you guys think? Better companies, cheaper companies?

Bill: I don’t know. I’m not smart enough to figure this shit out. Yeah, I don’t know.

Jake: Well, the under– [crosstalk]

Bill: It should work. It should work unless this time it’s different. That’s what I think.

Tobias: [laughs] Yeah, me too.

Bill: [laughs] I don’t know.

Jake: Good point.

Bill: Yeah, you’re welcome.

Jake: I’m always leery of these type of analogs from time periods. There’s always something that’s different between each one that makes it hard to compare, but they rhyme.

Tobias: Yeah.

Jake: 70s, probably with maybe rising rates, high starting valuations-

Tobias: Inflation.

Jake: -inflation, cocktail, mixed all together. Yeah, it’s not the craziest thing I’ve ever heard to think that that might be the next decade.

Tobias: I think the reason that the 70s get brought up is because it was the last really bad decade that we had. 80s was a pretty good decade, 90s was a good decade, early 2000s pretty good decade, and the last, the 2010s have been a good decade.

Jake: You’re flat 2000 to 2010.

Tobias: On the market. But if you value, you are crushing.

Jake: Ah, okay. You’re only talking about value guys. Got it.

Tobias: Well, there were pockets of people who were doing quite well in 2000. I guess that was true in the 70s as well, but it’s mostly remembered as a decade of– When I think of the 70s, it’s like serial killers and-

Jake: [laughs]

Tobias: -lines for people filling up their cars for gas, like stagflation. Sounds pretty awful. Bell bottoms, the whole thing.

Jake: Yeah.

Bill: Shitty cars. The 60s had better cars.

Tobias: Yeah, there you go.

Jake: Yeah, just like really ugly color choices for everything too it seemed, like burnt orange, [laughs] brown.

Tobias: Yeah. There’s a little bit of that now. What’s up with that communist gray that they’re painting on all the cars, like matte gray color [crosstalk] like matte gray?

Jake: Oh, yeah, like cement, I think they all call it. I don’t know. Sometimes, that looks cool.

Tobias: [crosstalk] When I first saw that I thought that’s because there’s some supply chain issue and they haven’t been able to mix the actual– [crosstalk]

Jake: Oh, we don’t have any shiny paint anymore. [laughs]

Tobias: Whatever it is, communist gray is what I started calling it. You thought that was good? There was some– [crosstalk]

Bill: That’s matte’s a pain in the ass.

Jake: Really, why’s that?

Bill: Oh, it’s a pain in the ass to wash.

Tobias: I don’t think it’s actually matte. I think it looks matte. It looks awful, anyway.

Bill: A lot of people now are doing wraps. So, you see their funky paint colors, they’re just wraps instead.

Tobias: Yeah, I got a little bit of expel-

Bill: Yeah.

Tobias: -help on the rep front.

Jake: Yeah.

Bill: It’s not a low PE stock, but I bet it works.

Tobias: High return on invested capital.

Jake: Is that what it is? That’s how it got into your world?

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