Unlike how 2018 ended, 2019 is off to a great start.
YTD, the S&P500 is up 6.3% as I write this. Compare that to December of 2018 when the market dropped 10% and ended the year close to -7%.
2018 Value Performances
So how did the value strategies posted on Old School Value do?
Sad to say, but not good. In fact, the free stock screeners were horrific.
Not going to sugar coat it. It was shameful.
Only one strategy “beat” the market and that was the Piotroski F score. It’s why we put heavy emphasis on the Piotroski F score as part of our core Action Score strategy. It has proven its merit over and over again.
When looking at the last 20 year results, this is what it looks like.
It’s been rough for nearly all value strategies we follow. Outside of the Piotroski Score, which is under-performing in the short term, all other value strategies have been duds for the past decade.
Think Microsoft of the early 2000’s type of dud.
Makes you wonder, is value investing dead?
Is Value Investing Dead?
The answer I get from this is that, over the past decade, “basic” value strategies no longer work on their own. The results you see above are simply screens we created over 10 years ago and have been running once a year.
Value investing isn’t dead. Buy and Ignore is dead.
For 10 years, it’s been pretty much the same thing.
E.g., look at the Low Expectations performance. The screen is based on looking for companies with a projected PE between 6 and 8.5 with ROE greater than 13%. A list of 20 stocks are entered at the beginning of the year and at the end of the year, the returns are tallied. Super simple.
But it has been a failure.
If we had done things differently like calculating
- over different starting times
- holding different number of stocks
- rebalancing more often instead of yearly?
The results could be different. Right? Who knows?
The Context of Value vs. Growth
The first thing to keep in mind when evaluating these returns is that we’re talking about a very short period of time in the grand scheme of things.
The last 10 years, growth has generally been outperforming value, which is another reason why pretty much any passive value strategy is not looking as good as holding the S&P500.
But over longer timeframes, this has reverted back to the mean, and that average shows value outperforms over the long run:
Source: Euclidean Technologies
I think it’s highly likely that we’ll revert again, but it’s impossible to know if and when that will happen.
Active Value Investing
So, given that, how can a value investor navigate this environment?
What I see from the decade of tabulating and following these results using the basic method I mention above is that:
- if you are not an active investor, buy the index and leave it at that
- regardless of market conditions, active value investing is required
- active value investing still beats the market
Active investing is not trading. It’s monitoring your positions, keeping up with what the company is doing, cutting back if it is getting dangerously overvalued and adding more if deeply undervalued.
It’s the same principle with the 2018 Action Score portfolio I created last year.
If you read the title of the post I wrote, I actually called it the “2018 Active Value Portfolio” and ended it saying:
Active value portfolio management will take place with the 2018 version so this one won’t be a buy and hold for 1 year.
However, it did end up being a one time thing. With other projects and tasks going on, the 2018 portfolio got put on the backburner and was ignored.
The Action Score portfolio under-performed, ending the year (Feb ’18 – Jan ’19) down roughly -11% overall, a couple points worse than the S&P500.
Here’s what the portfolio looked like, from Feb 2018 to the end of Jan 2019:
Now contrast this to my own portfolio that was in 100% Action Score stocks throughout all of 2018.
I ended the year down -1.5%. December I was down -5.7% vs -10% for the S&P. Having been up 15% at one point, ending the year in negative territory was a disappointment.
However, the main difference between how my portfolio ended up higher than the 2018 Action Score portfolio was that:
- My portfolio was actively managed
- I sold or cut back on overvalued stocks
- Put more into stocks I really liked
My top contributor to the portfolio was HCA Holdings (HCA), which is still a B ranked stock and a hold in my books.
My worst contributor was EBIX which I have held for 5 years, and recently experienced a massive drop due to disclosure issues. Lost a good chunk of the gains I had made over the years.
No 2019 Portfolio
This is why there is no 2019 portfolio.
If you want a passive investing strategy, the recent results show that the buy and ignore strategy belongs to VOO. You can add VTV for a Value tilt.
The Action Scores are there to help and guide you, but with a portfolio that holds a good number of small companies in a mixed market, buying and ignoring isn’t going to work out well. Small positions move quickly and therefore need to be managed differently than big companies.
I know this is a disappointment to some, but the upside is we’ll be able to focus on improving Old School Value to be a better stock ranking and analysis tool. There is still no other tool on the market that helps you value stocks like we do.
And now that you know you need to check more often, having a tool like OSV that helps you do this very quickly should be even more valuable.
We are also working on updating the backtests for the Action Score so keep your eyes out for that. Where there are weaknesses with the Action Score, we’ll look into improving it.
2019 and Beyond
You may have noticed something different with Old School Value the past couple of months.
We have a new person spearheading Old School Value – Mike Errecart.
Mike has been doing a phenomenal job of taking the lead and his fresh pair of eyes are going to benefit you – especially OSV members. So if you are still on the fence, make sure to sign up and take advantage of all the improvements he is making.
There are new writers for the blog too. Old School Value needs some more content related to stocks and it will be good to get back to what you guys want.
If you enjoy writing about stocks and want to become a regular contributor, contact mike at oldschoolvalue.com
We are looking for good authors!
As for me, I’ll be taking a step back, lurking in the shadows and working on some other projects that is requiring more and more of my attention.
Monthly Membership is Back!
As requested, it is back.
If you are not an Old School Value members and have been hesitant about joining because of the upfront payment, it’s now easier than ever.
We brought back our monthly subscription plan about a month ago. Now you don’t have to commit to a full year or more when signing up.
We also added a 7-day trial for just $7, so your risk is even lower. You can cancel anytime during the trial and you won’t be charged again. Pretty sweet, eh?
Check it out and let us know what you think.