Ph.D. In Used To Be

“Those who don’t know history are doomed to repeat it.”

— Edmund Burke

A popular song and a recent article in The Wall Street Journal reminded us of Edmund Burke’s quote and how important history is to the long-term success of common stock ownership. At Smead Capital Management, we pride ourselves in learning whatever we can glean from the history of the stock market because we seek to avoid the mistakes from the past. Let’s use today’s media to learn more about defending our capital and how to seek long-duration equity returns.

Matt Nathanson has a very popular song out, titled “Used to Be,” where he invites an old girlfriend back into his life. His refrain is “I’ve got a king-sized bed and a Ph.D. in the way it used to be.” In most of life, being stuck in the way things used to be isn’t always an asset. In investing, it is very helpful to avoid participating in a mean-reversion, which damages capital permanently.

Mark Hulbert, who for four decades has tracked the psychology of the stock market primarily through the examination of investment newsletter writers, wrote an article for The Wall Street Journal.1 He explained how much benefit was gained by using value as a strategy or factor. Here is what Hulbert shared:

I’m referring to stocks that trade for the lowest ratios of price to book value. Groundbreaking research by University of Chicago finance professor (and Nobel laureate) Eugene Fama and Dartmouth professor Ken French found that such stocks over the long term have significantly outperformed so-called growth stocks—those with the highest such ratios. They report that, from 1926 through 2018, the 20% of stocks at the value end of the spectrum have beaten the quintile at the growth end by 3.6 annualized percentage points.

Hulbert goes on to explain that numerous value factors like low price-to-book value (P/B), low price-to-earnings (P/E) and low price-to-cash-flow have provided significant long-term results versus the S&P 500 Index over long-term time periods. This is backed up by research from Francis Nicholson, Bauman, Conover and Miller, and more recently by David Dreman. It has been “the way things used to be.”

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Disclosure: This article contains information and opinions based on data obtained from reliable sources, which is current as of the publication date, and does not constitute a recommendation ...

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