Explaining the Value Premium

Value has persistently outperformed over the long-term.  Why is that? 

In the most general terms, growth stocks are those with growing positive attributes – like price, sales, earnings, profits, and return on equity.  Value stocks, on the other hand, are stocks that are underpriced when compared to some measure of their relative value – like price to earnings, price to book, and dividend yield. Thus growth stocks trade at higher prices relative to various fundamental measures of their value because (at least in theory) the market is pricing in the potential for future earnings growth. Over relatively long periods of time, each of these investing classes can and do outperform the other.  For example, growth investing dominated the 1990s while value investing has outperformed since. But value wins over the long haul.

What’s Next?

Heraclitus is said to have been the first to assert that nothing endures but change.  Yet I doubt that it was original even to him.  In life and in business, a major key to success is anticipating the changes that the future holds and adapting to them. 

Aaron Sorkin gets it, whatever you think of his politics.  In The West Wing (I’m still a big fan – my lovely bride and I just watched a couple of episodes again this week), when President Jed Bartlet asks, often brusquely, “What’s next?,” it means that he has made up his mind and is ready to move on, even if and when his subordinates are not (see below, from Bartlet’s first presidential campaign, as he is getting acquainted with his young staff).

Sunday Sermon

I’m going to preach today.  Don’t say you weren’t warned.

For the love of money is a root of all kinds of evil…. (1 Timothy 6:10)

Most of us are aware of this text, at least conceptually.For those of us in the money business, its warning is particularly poignant.  Is money your motivator or merely a tool?  Why do so many corporate executives pay themselves obscene amounts of money, often to the great detriment of their firms?  Because money is how they keep score.  I suggest keeping score in other ways.  What do your spouse and kids think of you?  What do your employees think of you?  What does your community think of you? Doing good is the best way to do well.

Fuzzy Political and Investment Math

The great scientist E.O. Wilson created a major stink over the week-end via The Wall Street Journal by arguing (or at least seeming to argue, among other things) that math skills are less important to most scientists than imagination, theory, concept and intuition.  It reminded me of the 1976 SNL send-up of the Gerald Ford-Jimmy Carter Presidential Debate.  In the “debate” (shown below — the noted section is about 6 minutes in), Chevy Chase, as Gerald Ford, responded to a difficult economics question as follows.

President Gerald R. Ford: [ sweating ] It was my understanding that there would be no math… during the debates.

The Missing Lead

I’m a big fan of Jake Tapper.  I thought he was terrific at ABC News as the senior White House correspondent and I was disappointed when he wasn’t picked to host This Week both when George Stephanopoulos left in 2010 and when he came back in 2012.  As of 2013, Jake returned to CNN to become Chief Washington Correspondent and anchor of a new weekday television news show, The Lead with Jake Tapper.  The Lead, which debuted this week to generally good reviews, is the first CNN show to launch since Jeff Zucker took over as president of CNN Worldwide to revitalize the franchise.

I agree with the good reviews, but there’s a “big but” coming.

The Price of Safety

The Fed has been using all the tools at its disposal to try to encourage (some would say “force”) equity investment and, by all appearances, has succeeded rather spectacularly.  As Josh Brown pointed out Saturday, the current cyclical rally has now exceeded four years.  Indeed, according to Bespoke Investment Group, the rally has reached 1,460 days, making it the eighth longest of all time and causing to some to question whether we may have entered into a new secular bull market.  Stocks have more than doubled over that period.  Those who have avoided stocks — likely seeking “safety” — have been crushed no less than whose who held on through the March 2009 lows.

Unreasonable Expectations Highly Desired

I spend a significant amount of time talking and working with advisors of various sorts and most of them have a decent working knowledge of the retirement income literature and have a good sense of what the advantages and disadvantages of the various approaches are.  In short, they generally know what ought to be done in most situations.  But they struggle with recalcitrant clients and prospects and how to handle them. For example, their clients and prospects resist annuitized floors.  They don’t delay Social Security.

We Suck at Probabilities

I have often noted (for example, here) that we generally suck at math, to our great detriment.  I have also noted that we are especially poor at dealing with probabilities.  If a weather forecaster says that there is an 80 percent chance of rain and it remains sunny, instead of waiting to see if it rains 80 out of 100 times when his or her forecast called for an 80 percent chance of rain, we race to conclude — perhaps based upon that single instance — that the forecaster isn’t any good. Data trumps our lyin’ eyes, but we don’t routinely see it.

Confirmation Bias Writ Large

Tomorrow evening Duke and North Carolina will renew the best rivalry in sports via a basketball game on the Duke campus (ESPN, 9pm ET).  As a freshman, Jay Bilas (now of ESPN) lined up for a foul shot in his first rivalry game next to then All-American and future NBA All-Star Brad Daugherty (and also a current ESPN-er), who looked over at him and said “I’m going to beat you like a rented mule.”  That comment was astonishingly mild as these things go.

I first sat in Cameron Indoor Stadium as a student in 1978 and didn’t miss a home basketball game while I was enrolled at Duke.  Every game was special – and wild.  NBC came to Cameron to do the first national telecast from the arena on January 28, 1979 for a game against Marquette (I was there, of course) and insisted on a time-delay so the crowd could be censored if necessary. But Duke v. Carolina was and is something else entirely.

Establishing Your Top 10 Investment Default Settings

I pay a lot of attention to the investment process.  In that regard, every investor — personal or professional — ought to have a clear investment plan based upon appropriate personal considerations, goals and outlooks and every investor ought to stick to that plan unless and until something significant changes. But there is a crucial component of the investment process that gets surprisingly little attention:  our investment default settings.  We can use them when we aren’t sure what to do, when we’re deciding what to do, when our circumstances have changed but our plan hasn’t (yet), or when we’re just starting out. 

The idea here is that we all have default settings — known and unknown, acknowledged and unacknowledged — and that those defaults greatly influence how successful we are and become.  Having the right default setting in defined contribution plans make a big difference (more here). I would examine and apply my default settings across and throughout the entire investment process and even suggest that we need to look at our default settings as carefully as we look at anything else.

What follows are my suggested default settings.  Your mileage may vary.