How much you pay for your stocks has a giant impact on how well they perform. Chase a hot etf for mutual fund that's run up and you might come to regret it. I'm Barry Ridolfs, and on today's edition of At the Money, we're going to discuss whether value
investing should be part of your strategy. To help us unpack all of this and what it means for your portfolio, let's bring in Jeremy Schwartz, global chief investment officer at Wisdom Tree Asset Management and longtime collaborator with Wharton professor Jeremy Siegel. Both Jeremies are co authors of the investing Classic Stocks for the Long Run. Let's start with a simple question, what is value investing?
Value investing we define as really looking at price versus some fundamental metric of value. Are our favorite ones are dividings and earnings. You say, why do you buy a stock present value of future cash flows? Any asset is present value future cashlows, and stocks those cash flows are dividends. Dividends come from earnings, and so those are sort of anchors to valuation, and you know, so it's a critical component judging his stock based on what it produces to you as an investor.
So last time we had you on, we discussed stocks for the long term. What advantages do you get from investing with a value tails over the long term.
You know, I think one of the big risks to the market are these major bubbles. It sort of tech bubble in two thousand is the classic example. And you know, Siegel had long been just a Vanguard buy and hold in stocks are long when he gave Vanguard a lot of free publicity just saying buy the market, buy cheaply with index funds until the tech bubble where he started talking about this massive overvaluation in sort of these big cat tech stocks.
He had a very famous Wall Street journal piece in like large fourteen two thousand so days before the bubble popped.
And basically said, there's huge tech stocks, triple digitpeasy. You can never justify the valuations no matter what the growth. So his own portfolio started selling the S and P five hundred and buying value. And his second book, The Future for Investors, was all about these strategies to protect from bubbles and be a valuation sensitive investor, and that's
where he focused a lot on dividends. A lot on earnings and strategies that sort of the market buy those factors to try to find the cheapest stocks on those factors.
So Professor Siegel very specifically said, don't focus on the short term price movements. Instead, focus on the underlying fundamentals of the business.
Yeah, And we tell a story in the Book of Future for investors, and even now in the new stocks are long run of IBM versus Xon, and they are two very interesting stories beause they've been around for decades. So we look back seventy years of returns, and you look at the growth rates of IBM versus x ON over the last seventy years, and you say IBM beat Xon by three percentage points ZRE on sales growth, three
percent on earning growth, dividend growth, book value. With any growth metric, it wins over all long term time periods. But then why was Xon the better return for the last seventy years? And it's interesting like Exon sold at a twelve pe, IBM sold at a twenty two pe on average, one sold at a two percent diven yield, one sold at a five percent of yield. Right, so you had Exon being the classic value stock IBM the
classic growth stock. I think of that largely like the market versus high dividend or value investing to stay, the s and P is around twenty times like IBM was, it's below a two percent yield. High dimmerent stocks are like a five percent yield and ten pes. So it's really this sort of valuation sensitive approach. But people get too optimistic on the more expensive parts and two pessimistic on the value segments.
So how should we measure value as an investor, whether it's picking out individual stocks or buying broad indexes, what's the best way to think about value?
I mean the real risk to value? Are you buying these value traps where the price is low for good reason? Right, they're forecasting that fundamentals aren't sustainable, and you never know that with a single stock. And so that is we talked about diversification and buying index funds for the whole market is a very sensible way to do it. Even for these value strategies, you can get rules based discipline strategies of hundreds of stocks that get you that type
of value discipline. Whether you're looking at things like high divins that we do at with some tree, other factors that you can sort by ideas getting a broad doors fire portfolio, not trying to buy a single cheap stock.
So for people who are trying to wrap their head around the typical value investor, give us some examples of famous value fund managers who put this into practice.
It was interesting when we first I talked about the future for investors and we started working on that, Siegel suggested I go read everything Wren Buffett had ever and the time Buffett was coming out against the tech stocks too, back twenty years ago and saying these.
I recall people saying, oh, this guy's past his prime. He's done. You could put a fork and.
War on Buffett exactly. And so we were reading every letter he had written. And you know, it's interesting. Buffett's own evol been from being a Ben Graham style buying just cheap price to bookstocks. What he called cigar butt investing later on is getting last puffs of these cigars that were through cheap stocks at their very last moments, towards actually morpheing towards a quality investor and buying Apples,
one of his flagship companies now. And I do think over time they've found buying these high quality businesses at fair prices is also part of the value investing framework. But he's definitely one that we looked up to and tried to model a lot of our thinking of what is value investing off of this high quality franchise businesses too, you could.
Do worse than were on Buffett and I recall when he was first buying Apple, it was trading at a pee of like twelve or thirteen, very reasonable for what the company later became.
Yeah, now it's around thirty times, not having the same growth rates as that used to, but it still has these huge valuable franchises and they consistently grow their dimons. They do buybacks, they're doing the types of returning cash or shareholders approach that he likes.
So we're recording this towards the end of twenty twenty three. Both has done really well. What makes value more attractive? Then let's call it growth investor.
You know what we talk about the long term benefits to value, But the last fifteen years have been a very painful stretch to be a value investor. It has definitely been a fifteen year stretch hallmarked by growth until twenty twenty two, and then you had things like the Nasdaq down a third and high divins stocks positive. Okay, now it's reverse again entirely this year in twenty twenty three. Going forward, you know what's driven growth? Things like Apple
that you said, were you know, twelve pees. Microsoft, they they had very low pees and then they had above average growth and expanding multiple. So we had two tailwinds, better growth, multiple expansion. It's going to be hard for them to have the same multiple expansion ahead. And so then the question all comes down to earnings growth. Can these big tech stocks keep growing earnings much faster than the market, That's the real question. And they're very big,
you know, some of them. We'll be able to keep their motes for some time. But often when you get these high multiples, earnings start to disappoint, and that's when the corrections come and value, you know, a high dive in basket a ten pe a ten percent earning yield, you don't need real growth, you're just getting the return. Ten percent is a very good return in real cash flows. And so I think that is a basket that I think I'm very optimistic on over the next ten years.
So I hate when people blame bad performance on the Fed. But I can't help but wonder fifteen years of outperformance by growth investors coincided with very very low rates. Suddenly the FED normalizes rates. Maybe it was a little quickly, but rates are back up to over five percent. Seems to be a period where value does better when capital isn't free at any truth to that.
It's very interesting, and there's there's some debates back and forth at cliff Astness saying that interest rates haven't been a factor for value as a cycle. Professor Siegel's talked a lot about the duration with these high expensive gross stocks are being more like long duration assets, and that raising rates should impact the valuations of the highest gross stocks. It's fascinating. A lot of the traditional relationships are flipped
on their head. I thought of small caps as benefiting from a stronger economy, and you see rising rates good for small caps. But small caps today are trading the opposite of rates, where they have the most lending that's
tied to floating rate instruments. They don't have debt, so they're barring from banks and using bank loans, so they're facing they're like the only people facing the cost of these higher rates is they're paying more interest on their bank loans, and so when rays have been falling over the last few weeks, small caps have been out performing or doing much better. So a lot of the traditional
relationships have been challenged this year. But I think we come back to valuation drive's return over the very long run. So when we think about small caps and ten to eleven pees, high differnes stocks at ten to eleven pees that we think will really matter over the long termine, not just the FED in the interest rates situation.
So let's talk exactly about that basket of stocks with a ten pe versus a growth basket with a thirty pe. I like the idea of a pretty fat dividend yield and that low pe. Sometimes in the past we've seen high divinend stocks have their yields cut. What sort of risk factor we we're looking at with these low pe high divnend stocks.
Yeah, it's absolutely true. You know, a thirty p was just a three percent earning shield. Those companies are expected and will grow their earnings faster than the high dimon stocks. There's no question they're gonna have faster growth rates. Questions, can they maintain the growth rates that the markets really do expect and so that that's where there's the higher the pe, the more the expectation, the harder they fall
when they disappoint over time. But there is this value trapped sense, you know, are you buying just stocks that may cut the dividends. We try to screen for things that could have sustainable divining growth and negative momentum. Is does a market know something that the fundamentals haven't reflected, is not in the earnings, non the dibvons yet, So
you try to screen for that. But in general, what we found is a very long period of time, the market overly discounts the bad news and sort of they become too cheap over a long period of time.
So what you're really driving towards is expectations matter a lot. High pe stocks, high growth stocks have very high expectations and they can disappoint just by growing fast but not fast enough. And yet we look at these value stocks that are often overlooked and they have very low expectations.
Yeah, I think that's the classic case for like Navidia today, which is one of the highest multiple stocks in the SNP. They've been delivering, they've been one of the best growth stories you've ever heard, you know, continuing the AI revolution, But can they keep delivering this record growth rates? It can be tough for them.
We sold the last quarter they had great numbers, not great.
Enough, and yes they haven't quite broken this new all time high level. It's a classic case of it's just going to be tough for them to keep delivering on these very elevated growth rates.
So if an investor is thinking about managing risk and having a margin of safety, you're obviously saying value is the better bet thing.
Growth value in small caps today both you can get ten to twelve times earnings. Yeah, high diffen stocks I think are one of the cheaper segments of even within the value portfolios. High difms have been especially cheap today.
So we've been talking about risk, we've been talking about volatility, we haven't talked about performance. What are if any, the value advantages over the long term regarding performance?
We found we've done some studies back to the S and P five hundred exception in nineteen fifty seven. When we look back over that, you know, sixty ish years, the most expensive stocks lag the market by one hundred
to two hundred basis points a year. The cheapest stocks outperformed by two hundred bases points a year, and so these are compounding over sixty not quite seventy years, but very long term periods, and so that there is a substantial wealthy caa hmulation that comes with a one to two percent year advantage or a lag.
So to wrap up, investors who concentrate more in value indexes tend to have less volatility and lower risk than stockpickers and other investors do. And long term value investors also have the potential to generate better returns. I'm Barry Retults you're listening to At the Money on Bloomberg Radio.