For us, value is getting something more than what it cost you.  It could be a sale on eggs at your local grocery store or finding your favorite brand in the bargain bin.  The same is true for value investing.  Here, the goal is to identify a security that is being mispriced or underestimated by the market that will eventually be sold at “fair value” over time.  Not only is this discount supposed to provide future outperformance as the mispricing eventually gets corrected but also less downside risk since the security is already cheap and has a “margin of safety”.  Such an opportunity is supposed to be temporary – not permanent. 

What happens when “value” is persistent?  If the eggs at the grocery store are always on sale, don’t they just become permanently cheap?  This is what we find when we look at the top components of the Russell 1000 Value Index.  They don’t change much.  In fact, when we look at the current top components, only UnitedHealth has ever fallen out of the “value” categorization over the past 10 years.  Berkshire Hathaway was always a top 3 holding over each period in the chart below.  The rest appear to be stuck in this “value” categorization.  This leaves us questioning how much value they truly offer.

Source: HFS, YCharts

We think it’s hard to deny that “growth” stocks have offered more value than “value” stocks over the past several decades.  Most investors expect that a stock’s price will appreciate over time.  The more that price rises, the more value can be recognized.  Since 1990, the Russell 1000 Growth Index has generated 11.29% annual returns versus 10.29% for the Russell 1000 Value Index.  To put it into dollar terms, a $10,000 investment would have generated nearly $96,000 of more value over the past 30-plus years.

Our point is that all equity investors are searching for value, whether that’s Warren Buffett or someone buying the latest hot tech stock.  Wall Street hijacked the definition decades ago.  Now there’s a distinction between “growth” and “value”.  Companies fall out of the “growth” bucket frequently.  Not so much in value land.  It’s rare to see a company escape.  We would call these “value traps”.

We think a better term for the Russell 1000 Value components is “old”.  The one commonality among many of these companies is how long they’ve been around.  JPMorgan was founded in 1871.  Chevron began in 1879.  Proctor & Gamble was started in 1837.  Bank of America began in 1904.  These are mature firms whose best days are likely behind them.  Today, many are being targeted by numerous disruptive forces that threaten their longevity.  According to McKinsey, the average life span of an S&P 500 company was 61 years in 1958.  Today it is less than 18 years.  Change is afoot. 

Don’t get us wrong.  We love value investing.  It just needs to evolve from what it was decades ago due to the massive secular trends that are impacting our lives.

The opinions expressed are those of Harrison Financial Services as of September 6, 2024, are subject to change and do not constitute investment advice. There is no guarantee that any forecasts made will come to pass. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Any returns referenced represent past performance and are not a guarantee of future performance. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. No investment strategy can assure profit or protect against loss.