The dot.com bubble seems pretty far away, especially given how much has gone on since 9/11, the financial crisis, the election of Donald Trump to name just a few of momentous events.
Nevertheless, there is much to learn for today’s investors from the late 90s mania that sent Internet stocks rocketing to the stratosphere.
Back then, investors were dumping their boring “old economy” value stocks and buying dot.com companies that were backed by little more than a good story and high hopes. As share prices came uncoupled from traditional measures of value, euphoric pundits declared that this time truly was different.
It wasn’t. The dot-com mania ended in tears when the market crashed in 2000. In the recovery that followed, it was old-fashioned value stocks—those that are inexpensive on the basis of various metrics—that led the way until a new generation of tech stocks captured investors imaginations once again.
Fast forward to today and the promise of the Internet has become reality. The so-called FAANG companies (Facebook, Apple, Amazon, Netflix and Google) have built enormous businesses and been rewarded by equally enormous stock prices.
On their coattails, companies across a broad swath of technology sectors have also attracted the favour of investors even though the businesses still haven’t produced profits in most cases. These growth stocks have led the US stock market to record heights and once again left unglamorous value stocks lagging in the past few years.
That’s been tough for investors who have favoured value stocks based on long-term stock market history: Between 1928 and 2018, U.S. value stocks outperformed growth stocks by a whopping 3.3% on a compound annual basis, according to research by Dimensional Fund Advisors.
Based on that kind of longer-term evidence, we at PWL tilt the portfolios we manage toward value stocks. Now, you may ask: Is it time to throw in the towel after such a long stretch of underperformance?
I think that would be a mistake. You risk being like those impatient shoppers who see the line-up for the next cashier move faster than theirs and jump over, only to watch their original line-up zoom ahead.
For one thing, writing on this topic last year, our colleague Ben Felix noted that, in contrast to the U.S. market, Canadian value stocks had handily beat growth stocks over the previous decade.
Second, U.S. growth have climbed to historically unprecedented valuations while value stocks are cheap by historical standards. Indeed, a recent article in Advisor Perspectives says the gulf between the price/earnings ratios of value and growth stocks has never been this wide. Dumping value stocks now in favour of growth stock really would be a case of buying high and selling low.
Are things different this time? We don’t think so. There are good and logical reasons why value stocks have performed better than growth stock over the long run. A discussion of what those reasons are will have to wait for another column. But we’re confident value stocks will have their day in the sun once again.
In this case, as in all the others, patience and a commitment to an evidence-based approach to investing is the best way to build wealth over the long term.