Latin and Value Investing, Far from Dead
As of August 13, 2020
Brian Collins, CIO, Harbor Capital Advisors, Inc.
Latin is foundational and will help with learning and using other languages
Many years ago as I entered high school, I was “encouraged” to take Latin as my language, despite having had some exposure to French. I knew nothing about Latin other than few people outside of priests had spoken it regularly in the last few centuries. I was told that by studying Latin I would have a great foundation for learning. Studying Latin would help me understand sentence structure, improve my writing style, and think more critically. Latin is the base language for the Romance languages so I would have an advantage if I wanted to learn any of those languages in the future. Finally, studying Latin would help me if I ever wanted to become a lawyer.
After four years of studying Latin with outstanding teachers, the benefits promised were not yet obvious. However, I do believe that the process of learning a language has paid off in helping me think more critically and helped in my writing. Unfortunately, I have not found time to see if it would help me learn a Romance language nor did I become a lawyer. Perhaps one of my children, who were “encouraged” to study Latin, will make greater use of its benefits than I. For now, I am quite pleased to have learned this “dead” language as I continue to apply its disciplined thinking approach instilled in me by my Magisters.
There is still value in value investing
After growing to become the dominant language of the Roman Empire, Latin began to lose out to newer versions of the language that eventually looked less like Latin but still had its roots. Based on the number of recent articles about the demise of value investing, it seems that value may be facing a similar fate. Much has been written about the enduring dominance of growth stocks, particularly a select group of growth stocks that have driven the overall market in 2020. Let’s set Tesla’s 242% return (YTD through July 2020) aside for a moment as its story is an epic tale that would translate well into ancient Latin1. Several other stocks of well-established companies have risen more than 50% YTD including Amazon (71%), PayPal (81%), eBay (54%), and Netflix (51%)1. This list would be longer if it included the small cap biotech, specialty pharma, or work-from-home businesses that have rallied on speculation of COVID therapies. Additionally, I observed that over the trailing 12 months ending July 2020, the gap between Russell 3000® Growth and Russell 3000® Value Indices has grown to 35%, which is more than 2.5 standard deviations above the long-term average gap. Similar wide gaps between Growth and Value indices have grown in MSCI EAFE and MSCI Emerging Markets. This prolonged dominance of growth stocks is adding fuel to the fire in the debate that value investing is dead, and that a new generation of investors should only focus on growth stocks that are momentum rockets. As day trading replaced sports betting during the pandemic, many investors new to the markets may be overestimating their skills. Are any of these new wunderkinds the next Warren Buffett or Peter Lynch?
Maybe they have disciplined investment philosophies that have been tested over multiple market cycles and are only now speaking publicly about how their results are supported by extensive back tests. When the inevitable slowdown in growth investing’s trajectory arrives, I suspect many will be quieter about their investment results.
Of note in my research, this chart shows the last 20+ years of the annual spread of returns between the Russell 1000® Growth and the Russell 1000® Value indices. During this time period, the growth index had only had one period in which it outperformed the value index for three consecutive years, 2009-2011, but the gap was quite small in two of the years. To growth investing proponents, this chart may provide support to the view that growth will continue to dominate value for the foreseeable future and focusing on value stocks is a losing proposition. Looking closer at the chart highlights a couple of interesting points. First, in this period of over 30 years, the outcomes on an annual basis are almost even, with Growth winning only one more period than Value. I recognize calendar year periods are somewhat arbitrary points in time, but the annualized returns of these two indices are within 120 basis points of each other over this period, a level that was much closer just a couple of years ago.
An active disciplined approach is critical to both investing and learning a language
As noted above, obituaries for value investing are showing up more frequently. Causes of death include:
- The wide gap in revenues and earnings between growth stocks and value stocks;
- The changing composition of companies’ balance sheets due to the rise of the value of intangible assets above hard assets; and for some
- The opinion that several traditional value industries are full of dying companies
Value investors are perceived as living in the past and not seeing how growth and innovation are driving the future, while cautioning peers to not be left behind holding a bunch of buggy whip manufacturers in their portfolios. It is true that in the current environment, industries and companies viewed as stale or lacking innovation are trailing those filled with new concepts and new products. But this has always been the case as companies constantly need to adapt to changing market forces, new entrants taking market share, or new products threatening the status quo.
What has not changed is the need to have a disciplined approach to figuring out what is a fair price to pay for such stocks. Potentially even more important, knowing what price to sell those shares before they become overvalued.
Successful investing is hard, and it certainly does not come as easily as it appears to many who have recently jumped on the growth investing bandwagon. This is not to say that experienced growth investors are naïve about the risks of a correction or worse in growth stocks. Long-term growth investors must weigh the risks of staying too long with a name rising past expectations versus the risk of getting out too early and missing the next leg of the rally. Fortunately, our growth subadvisers are acutely aware of these risks and have successfully found the right balance so far this year. These subadvisers, who focus on companies that are consistently growing their earnings and beating expectations, have owned a number of these strong performing growth stocks for many years. They are conscious of excessive valuations that may not have fundamental support or are based on wild estimates of future growth. More importantly, they each have an element of value investing within their growth philosophies. In fact, all investing styles must consider valuations, one cannot determine at what price to buy or sell. Our value investors also have a framework and approach that guides their investment decisions. They too think about the growth prospects of companies they invest in but are more focused on the price they are willing to pay for that growth than some momentum riders appear to be these days. We have benefitted over the years from having a diverse line-up of talented subadvisers who have different approaches to growth and value investing. Every one of these talented investors knows that buying and selling at the right price is critical to generating great long-term results.
Buyer beware, research is essential
Value investing has been written off many times only to come back and deliver very attractive returns for those investors who stay committed to the discipline. There is great benefit in having a framework to value a company’s future prospects relative to the current price of the stock. While it may seem to be the “dead language” of investment styles, in this current growth environment value investing has been and will continue to be an important part of the investment world.
Just as I think there is merit to studying Latin, I believe long-term, patient investors have the potential to reap significant rewards from value investing. While I do not recall a lot of Latin, nor do I have many people to speak it with, I do believe I have benefitted from studying it. Hopefully, some of the new growth stock investors who are touting their recent gains pay attention to one of the Latin phrases many people are familiar with – Caveat Emptor – because as history has shown and I believe, eventually the growth ride will end, and value will return to favor.
1 Factset, July 2020
Past performance is no guarantee of future results.
The information shown relates to the past. Past performance is not a guide to the future. The value of an investment can go down as well as up. Investing involves risks including loss of principal.
The views expressed herein are those of Harbor Capital Advisors, Inc. investment professionals at the time the comments were made. They may not be reflective of their current opinions, are subject to change without prior notice, and should not be considered investment advice.
The Russell 1000® Growth Index is an unmanaged index generally representative of the U.S. market for larger capitalization growth stocks. This unmanaged index does not reflect fees and expenses and are not available for direct investment. The Russell 1000® Growth Index and Russell® are trademarks of Frank Russell Company.
The Russell 1000® Value Index is an unmanaged index generally representative of the U.S. market for larger capitalization value stocks. This unmanaged index does not reflect fees and expenses and is not available for direct investment. The Russell 1000® Value Index and Russell® are trademarks of Frank Russell Company.
The Russell 3000® Growth and Value Indices are unmanaged index that measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000® Growth and Value Indices and Russell® are trademarks of Frank Russell Company.
The MSCI EAFE (ND) Index is an unmanaged index generally representative of major overseas stock markets. This unmanaged index does not reflect fees and expenses and is not available for direct investment.
The MSCI Emerging Markets (ND) Index is a market capitalization weighted index of equity securities in more than 20 emerging market economies. This unmanaged index does not reflect fees and expenses and is not available for direct investment.