January 8, 2020
Are you ready for the 2020 decade?
If you aren’t sure how your portfolio stacks up to the volatility that is likely to come in the next 10 years, you can hear three American Consequences feature contributors each give their No. 1 favorite stock for 2020 for free, live, next week. Learn more here.
And today, we bring you a prediction from former hedge-fund manager and author Whitney Tilson.
You’ve likely seen him on CNBC, Bloomberg, and Fox Business Network. And here, he brings some news on where we’re at in the current cycle between growth and value stocks… and what is likely to happen next.
The Coming Renaissance of Value Stocks
By Whitney Tilson, founder of Empire Financial Research
Big investing trends tend to move in cycles, often a decade or longer. Wise, experienced investors know this and take advantage.
My investing career began in the late 1990s, at the tail end of a 17-year bull market that ended with one of the great melt-ups of all time – the Internet bubble. I’ve never seen anything like it, before or since.
It was hard to be a value investor back then. When I launched my first hedge fund on January 1, 1999, I made legendary investor Warren Buffett’s Berkshire Hathaway my largest position. The stock was then trading just above $60,000 per A-class share. I continued adding to the position as my fund grew, at prices that rose to more than $70,000 by midyear. At that point, tech stocks were doing well, with the Nasdaq up 22% for the year… But other stocks were also doing fine: the S&P 500 Index was up 12% and the Dow Jones Industrial Average had risen 20%.
But then investors truly lost their minds and drove tech – especially Internet stocks – through the roof. The Nasdaq rose 54% in the fourth quarter alone and another 15% in the first two months of 2000, ultimately peaking on March 10. As investors chased performance, money poured out of “old economy” stocks and funds – so much so that, over those five months, the S&P rose only 7% and the Dow was actually down almost 2%.
Berkshire, a prototypical “old economy” stock run by the most famous value investor in the world, declined seemingly every day. It sunk below $70,000, then $60,000, then $50,000, and finally approached $40,000 in early March.
It was a sickening slide for my largest position. Day after day, the market told me I was wrong. But I knew I wasn’t, so I kept buying the stock all the way down, finally making it a massive 30% position on the very day it bottomed – and, not coincidentally, the day the Nasdaq peaked (though I didn’t know it at the time).
This story, of course, has a happy ending… Berkshire’s stock rose by more than 50% within a few months and is up more than 700% since then. March 10, 2000, marked not only the bottom for Berkshire, but also the start of an extended period in which value stocks, after many years in the wilderness, outperformed growth stocks.
From that day until the market peak on October 11, 2007, the iShares S&P 500 Value Fund (IVE) outperformed the iShares S&P 500 Growth Fund (IVW) by more than 50 percentage points, as you can see in the chart…
It was a glorious time to be a value investor.
Then, pretty much all stocks got killed over the next 17 months until the market bottomed on March 9, 2009. And in the six years after, both value and growth stocks did equally well – moving roughly in lockstep.
Since 2015, however, value stocks have gained only half what growth stocks have…
As you can see, these cycles tend to last six to seven years. The current one is now approaching five years.
Led by the tech sector, the market has had a huge year in 2019… despite numerous headwinds such as a slowing economy and the ongoing trade war.
It feels to me like we’re close to another inflection point, where value is set to outperform growth for many years.
Thus, I suggest overweighting stocks like Berkshire (BRK-B), tobacco giant Altria (MO), and financial-services company Goldman Sachs (GS) in your portfolio.
Now here are some of the stories we’re reading…
“The market just did something it has never done before,” my aunt told me over the holiday. “I heard about it on the radio. It sounded important.”
It cannot be stressed enough that for the most part those who presume to regulate are the ones who couldn’t get jobs in the industries regulated. Imagine then, what the above means to chief executives? While the businesses they run aim to achieve greatness by hiring the best of the best, they’re suddenly being “advised” on how to run their businesses, and most often being told how to run their businesses by individuals who could never hope to work for them in a normal world.
Cash is gradually dying out. Will we ever have a digital alternative that offers the same mix of convenience and freedom?
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
January 8, 2020