Explaining the Value Premium

Planning FallacyValue 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.

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Invest Like Buffett

Worth ReadingLarry Swedroe thought he was done writing books.  After having written a bunch of them, he was comfortable that he had said what he wanted to say.  Moreover, he still had his blog at CBS News MarketWatch as an outlet.  However, as he explained to me yesterday, he came to see that while he had pretty much said what he wanted to say, he hadn’t always been heard and hadn’t always said what he wanted to get across in such a way as to ensure a maximum hearing.  That realization led to the writing of his newest book, Think, Act, and Invest Like Warren Buffett: The Winning Strategy to Help You Achieve Your Financial and Life Goals. Continue reading

Warren Buffett’s Investment Checklist

While I hold Warren Buffett in high esteem, I think that his general deification tends to be a bit much.  But even so, this list of his investment criteria is simple, more than a bit obvious, and terrific.  It’s a classic back to basics review.  I suggest you read it.  It even made The New Yorker‘s The Hundred Best Lists of All Time at #24.  It was behind the periodic table, the Bill of Rights and the Ten Commandments though.

Warren Buffett’s Investment Checklist

Worth Watching

 

In this short video, Warren Buffett offers his best personal financial advice.  It’s two-pronged: to get and stay out of debt, especially credit card debt; and to buy index funds and keep doing so regularly over the long-term. The first part is absolutely spot on.  Indeed, much of the financial crisis which began in earnest in 2008 is the result of the overuse and misuse of debt.  However, the second part has truthiness, but isn’t necessarily quite right.  To be sure, the vast majority of people would be much better off than they are now if they would regularly buy and hold index funds.  But that isn’t necessarily the best alternative, as I explain here and here.  Moreover, at the risk of being too cynical, Buffett has an interest in maintaining his “Oracle of Omaha” image intact.  If he allows that ordinary Joes and Janes might outperform index funds with good advice and proper management, his mythic status as the exception to the rule might be diminished.  Even so, enjoy….