Jan 26, 2017
We wanted to quickly highlight some cool research from StarCapital, a German investment firm, showing how well global value investing worked in 2016.

What the folks at StarCapital did was to sort 40 countries by their beginning-of-2016 stock market valuation, and then to average out how the cheapest and most expensive markets went on to perform for the year. We recommend checking out their report, which has some great visualizations, but here’s a summary.

Source StarCapital (returns measured in US dollars)

So the least expensive stuff, despite being generally hated and shunned at the beginning of the year, went on to consistently and significantly outperform the much more beloved expensive markets. (read more)
Jan 18, 2017
We've often argued that trying to invest based on economic and political current events what we call "headline investing" — is unlikely to work well. (The reasons are many; a good refresher can be found here).

2016 was a disaster for headline investing. Here are some of the more prominent examples... (read more)
Sep 19, 2016
Does value investing still work? It's a reasonable question, given the tough stretch that value-based asset allocators have faced over the past several years (at least up until this year, which has so far been quite a good one for Team Value).

GMO's Ben Inker examined the question of value's viability in depth in an article published earlier this year. While excellent, Inker's article1 is fairly long and technical, so we thought we'd try to summarize some key points here.

S&P500 price vs. clairvoyant fair

(read more)
Jul 29, 2016
Our view on "headline" news events is that while they can certainly have an impact on markets, that impact is impossible to reliably predict, and is often short-lived in any case. Presidential elections seem to fit right into this pattern, and as unusual as this election is, there are reasons to believe that the same may happen here. Either way, we have limited exposure to US stock markets — but that's because of valuations, not concerns about the election. (read more)
Jul 14, 2016
The post-"Brexit" panic seems to have fizzled out almost as quickly as it came on: global stock markets are now higher than the day before the UK voted to leave the European Union.1

In our last letter, sent the day after the Brexit vote, we discussed the futility of trying to time markets based on economic or political events. The behavior of the markets over these last two weeks — a steep decline on a geopolitical news event, followed almost immediately by a full recovery — could hardly have provided better support for this view.

It's entirely possible (though far from certain!) there will be more Brexit-related market shocks to come. If there are, we will act as we did during this most recent episode: staying focused on the long-term value of what we own, and trying to take advantage of the opportunities afforded by market panics and volatility.

With that said, here are some brief thoughts on Brexit's impact. (read more)
Jan 6, 2016
Our emerging markets investments were the main cause of our portfolio pain this year, and that follows a multi-year string of disappointments for EMs. At the end of 2015, EM stocks had returned -16% over one year, -25% over the past 5 years, and -31% since the 2007 peak. 2 After that stretch, some investors are wondering why invest in EM's at all.

The answer, in brief, is that past returns are in the rear-view mirror. What we care about are prospective future returns. For EM's, these look quite promising, because years of bad returns have left EM valuations at very attractive levels.

For instance, the institutional investment firm Research Affiliates uses valuations to estimate 10-year forward returns for a wide variety of asset classes. Out of all the investments Research Affiliates provides forecasts for, EM stocks have the highest forecast at 7.9% per year plus inflation over the next 10 years. (Compare this to an estimate of just 1.1% per year for US large cap stocks). 3

This isn't based on an expectation of blazing EM economy growth; it's just a function of starting valuations. The cyclically-adjusted price to earnings ratio for US stocks is an unusually high 24.6, while for EM stocks it's an unusually low 10.6.3 We are the first to agree that US stocks "deserve" to trade at somewhat of a premium to EM stocks, but the current 132% premium is way out of line with historical valuations.

The below chart from another institutional investment firm, GMO, shows that the last time EM stocks went through a really rough 5-year period and were declared dead, they went on to deliver outstanding returns:
(read more)
May 22, 2015

In our prior article, we suggested that investors can benefit from doing the following:

  • Tuning out popular narratives and rationalizations, and staying focused on reliable measures of long-term value
  • Avoiding the temptation to buy overpriced investments
  • Investing in the rising tide of economic growth, as long as the price is reasonable
Below, we will use this framework to drill down into the three major areas of global stock markets: US, international developed, and international emerging. For each one, we'll provide some background, discuss long-term prospects, and address some popular viewpoints that have had investors overly focused on the short term or thinking it's "different this time."

(read more)
Feb 12, 2015
It seems like many people think of stocks simply in terms of their prices, as if stocks are just numbers on a screen that go up or down. Perhaps that's a useful simplification for day traders, but for long-term investors the reality is different: a stock represents fractional ownership of a real-world business, including a share of all earnings generated by that business in the future.

Those long-term earnings are the biggest component of the stock market's value, so it's obviously critical to have a good estimate of what they might be. Fortunately, this is pretty straightforward at the economy-wide level, because earnings tend to grow at a remarkably consistent pace over the long run. And yet, stock prices vary much more wildly than those long-term fundamental prospects would suggest they should.

Below, we will discuss why this is, the implications of these facts, the tremendous advantage they can confer to patient and level-headed investors, and why it's very unlikely that "this time is different."

Global GDP

(read more)
Aug 28, 2014
We recently came across a great chart showing valuations for the stock markets of the US, developed international countries, and emerging market countries. This chart provides an excellent snapshot of global stock markets.

Global stock valuations

(read more)
May 23, 2014
Our prior article presented evidence that valuations have had a huge impact on returns and risk when investing in the US stock market. In this article we look at a study that takes a simple approach to testing the importance of valuations for global investors, and shows that buying the countries with the lowest valuations has performed far better than the "buy and hold everything" approach.

Cheap markets return more than buy and
hold, which returns more than expensive markets.

(read more)