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Speaker 1: How much you pay for your stocks has a giant

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Speaker 1: impact on how well they perform. Chase a hot etf

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Speaker 1: for mutual fund that's run up and you might come

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Speaker 1: to regret it. I'm Barry Ridolfs, and on today's edition

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Speaker 1: of At the Money, we're going to discuss whether value

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Speaker 1: investing should be part of your strategy. To help us

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Speaker 1: unpack all of this and what it means for your portfolio,

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Speaker 1: let's bring in Jeremy Schwartz, global chief investment officer at

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Speaker 1: Wisdom Tree Asset Management and longtime collaborator with Wharton professor

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Speaker 1: Jeremy Siegel. Both Jeremies are co authors of the investing

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Speaker 1: Classic Stocks for the Long Run. Let's start with a

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Speaker 1: simple question, what is value investing?

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Speaker 2: Value investing we define as really looking at price versus

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Speaker 2: some fundamental metric of value. Are our favorite ones are

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Speaker 2: dividings and earnings. You say, why do you buy a

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Speaker 2: stock present value of future cash flows? Any asset is

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Speaker 2: present value future cashlows, and stocks those cash flows are dividends.

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Speaker 2: Dividends come from earnings, and so those are sort of

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Speaker 2: anchors to valuation, and you know, so it's a critical

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Speaker 2: component judging his stock based on what it produces to

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Speaker 2: you as an investor.

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Speaker 1: So last time we had you on, we discussed stocks

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Speaker 1: for the long term. What advantages do you get from

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Speaker 1: investing with a value tails over the long term.

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Speaker 2: You know, I think one of the big risks to

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Speaker 2: the market are these major bubbles. It sort of tech

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Speaker 2: bubble in two thousand is the classic example. And you know,

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Speaker 2: Siegel had long been just a Vanguard buy and hold

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Speaker 2: in stocks are long when he gave Vanguard a lot

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Speaker 2: of free publicity just saying buy the market, buy cheaply

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Speaker 2: with index funds until the tech bubble where he started

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Speaker 2: talking about this massive overvaluation in sort of these big

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Speaker 2: cat tech stocks.

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Speaker 1: He had a very famous Wall Street journal piece in

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Speaker 1: like large fourteen two thousand so days before the bubble popped.

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Speaker 2: And basically said, there's huge tech stocks, triple digitpeasy. You

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Speaker 2: can never justify the valuations no matter what the growth.

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Speaker 2: So his own portfolio started selling the S and P

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Speaker 2: five hundred and buying value. And his second book, The

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Speaker 2: Future for Investors, was all about these strategies to protect

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Speaker 2: from bubbles and be a valuation sensitive investor, and that's

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Speaker 2: where he focused a lot on dividends. A lot on

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Speaker 2: earnings and strategies that sort of the market buy those

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Speaker 2: factors to try to find the cheapest stocks on those factors.

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Speaker 1: So Professor Siegel very specifically said, don't focus on the

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Speaker 1: short term price movements. Instead, focus on the underlying fundamentals

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Speaker 1: of the business.

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Speaker 2: Yeah, And we tell a story in the Book of

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Speaker 2: Future for investors, and even now in the new stocks

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Speaker 2: are long run of IBM versus Xon, and they are

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Speaker 2: two very interesting stories beause they've been around for decades.

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Speaker 2: So we look back seventy years of returns, and you

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Speaker 2: look at the growth rates of IBM versus x ON

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Speaker 2: over the last seventy years, and you say IBM beat

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Speaker 2: Xon by three percentage points ZRE on sales growth, three

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Speaker 2: percent on earning growth, dividend growth, book value. With any

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Speaker 2: growth metric, it wins over all long term time periods.

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Speaker 2: But then why was Xon the better return for the

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Speaker 2: last seventy years? And it's interesting like Exon sold at

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Speaker 2: a twelve pe, IBM sold at a twenty two pe

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Speaker 2: on average, one sold at a two percent diven yield,

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Speaker 2: one sold at a five percent of yield. Right, so

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Speaker 2: you had Exon being the classic value stock IBM the

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Speaker 2: classic growth stock. I think of that largely like the

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Speaker 2: market versus high dividend or value investing to stay, the

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Speaker 2: s and P is around twenty times like IBM was,

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Speaker 2: it's below a two percent yield. High dimmerent stocks are

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Speaker 2: like a five percent yield and ten pes. So it's

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Speaker 2: really this sort of valuation sensitive approach. But people get

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Speaker 2: too optimistic on the more expensive parts and two pessimistic

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Speaker 2: on the value segments.

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Speaker 1: So how should we measure value as an investor, whether

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Speaker 1: it's picking out individual stocks or buying broad indexes, what's

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Speaker 1: the best way to think about value?

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Speaker 2: I mean the real risk to value? Are you buying

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Speaker 2: these value traps where the price is low for good reason? Right,

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Speaker 2: they're forecasting that fundamentals aren't sustainable, and you never know

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Speaker 2: that with a single stock. And so that is we

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Speaker 2: talked about diversification and buying index funds for the whole

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Speaker 2: market is a very sensible way to do it. Even

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Speaker 2: for these value strategies, you can get rules based discipline

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Speaker 2: strategies of hundreds of stocks that get you that type

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Speaker 2: of value discipline. Whether you're looking at things like high

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Speaker 2: divins that we do at with some tree, other factors

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Speaker 2: that you can sort by ideas getting a broad doors

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Speaker 2: fire portfolio, not trying to buy a single cheap stock.

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Speaker 1: So for people who are trying to wrap their head

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Speaker 1: around the typical value investor, give us some examples of

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Speaker 1: famous value fund managers who put this into practice.

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Speaker 2: It was interesting when we first I talked about the

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Speaker 2: future for investors and we started working on that, Siegel

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Speaker 2: suggested I go read everything Wren Buffett had ever and

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Speaker 2: the time Buffett was coming out against the tech stocks too,

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Speaker 2: back twenty years ago and saying these.

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Speaker 1: I recall people saying, oh, this guy's past his prime.

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Speaker 1: He's done. You could put a fork and.

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Speaker 2: War on Buffett exactly. And so we were reading every

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Speaker 2: letter he had written. And you know, it's interesting. Buffett's

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Speaker 2: own evol been from being a Ben Graham style buying

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Speaker 2: just cheap price to bookstocks. What he called cigar butt

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Speaker 2: investing later on is getting last puffs of these cigars

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Speaker 2: that were through cheap stocks at their very last moments,

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Speaker 2: towards actually morpheing towards a quality investor and buying Apples,

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Speaker 2: one of his flagship companies now. And I do think

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Speaker 2: over time they've found buying these high quality businesses at

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Speaker 2: fair prices is also part of the value investing framework.

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Speaker 2: But he's definitely one that we looked up to and

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Speaker 2: tried to model a lot of our thinking of what

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Speaker 2: is value investing off of this high quality franchise businesses too,

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Speaker 2: you could.

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Speaker 1: Do worse than were on Buffett and I recall when

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Speaker 1: he was first buying Apple, it was trading at a

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Speaker 1: pee of like twelve or thirteen, very reasonable for what

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Speaker 1: the company later became.

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Speaker 2: Yeah, now it's around thirty times, not having the same

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Speaker 2: growth rates as that used to, but it still has

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Speaker 2: these huge valuable franchises and they consistently grow their dimons.

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Speaker 2: They do buybacks, they're doing the types of returning cash

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Speaker 2: or shareholders approach that he likes.

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Speaker 1: So we're recording this towards the end of twenty twenty three.

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Speaker 1: Both has done really well. What makes value more attractive?

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Speaker 1: Then let's call it growth investor.

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Speaker 2: You know what we talk about the long term benefits

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Speaker 2: to value, But the last fifteen years have been a

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Speaker 2: very painful stretch to be a value investor. It has

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Speaker 2: definitely been a fifteen year stretch hallmarked by growth until

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Speaker 2: twenty twenty two, and then you had things like the

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Speaker 2: Nasdaq down a third and high divins stocks positive. Okay,

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Speaker 2: now it's reverse again entirely this year in twenty twenty three.

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Speaker 2: Going forward, you know what's driven growth? Things like Apple

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Speaker 2: that you said, were you know, twelve pees. Microsoft, they

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Speaker 2: they had very low pees and then they had above

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Speaker 2: average growth and expanding multiple. So we had two tailwinds,

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Speaker 2: better growth, multiple expansion. It's going to be hard for

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Speaker 2: them to have the same multiple expansion ahead. And so

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Speaker 2: then the question all comes down to earnings growth. Can

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Speaker 2: these big tech stocks keep growing earnings much faster than

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Speaker 2: the market, That's the real question. And they're very big,

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Speaker 2: you know, some of them. We'll be able to keep

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Speaker 2: their motes for some time. But often when you get

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Speaker 2: these high multiples, earnings start to disappoint, and that's when

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Speaker 2: the corrections come and value, you know, a high dive

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Speaker 2: in basket a ten pe a ten percent earning yield,

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Speaker 2: you don't need real growth, you're just getting the return.

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Speaker 2: Ten percent is a very good return in real cash flows.

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Speaker 2: And so I think that is a basket that I

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Speaker 2: think I'm very optimistic on over the next ten years.

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Speaker 1: So I hate when people blame bad performance on the Fed.

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Speaker 1: But I can't help but wonder fifteen years of outperformance

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Speaker 1: by growth investors coincided with very very low rates. Suddenly

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Speaker 1: the FED normalizes rates. Maybe it was a little quickly,

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Speaker 1: but rates are back up to over five percent. Seems

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Speaker 1: to be a period where value does better when capital

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Speaker 1: isn't free at any truth to that.

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Speaker 2: It's very interesting, and there's there's some debates back and

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Speaker 2: forth at cliff Astness saying that interest rates haven't been

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Speaker 2: a factor for value as a cycle. Professor Siegel's talked

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Speaker 2: a lot about the duration with these high expensive gross

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Speaker 2: stocks are being more like long duration assets, and that

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Speaker 2: raising rates should impact the valuations of the highest gross stocks.

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Speaker 2: It's fascinating. A lot of the traditional relationships are flipped

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Speaker 2: on their head. I thought of small caps as benefiting

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Speaker 2: from a stronger economy, and you see rising rates good

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Speaker 2: for small caps. But small caps today are trading the

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Speaker 2: opposite of rates, where they have the most lending that's

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Speaker 2: tied to floating rate instruments. They don't have debt, so

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Speaker 2: they're barring from banks and using bank loans, so they're

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Speaker 2: facing they're like the only people facing the cost of

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Speaker 2: these higher rates is they're paying more interest on their

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Speaker 2: bank loans, and so when rays have been falling over

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Speaker 2: the last few weeks, small caps have been out performing

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Speaker 2: or doing much better. So a lot of the traditional

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Speaker 2: relationships have been challenged this year. But I think we

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Speaker 2: come back to valuation drive's return over the very long run.

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Speaker 2: So when we think about small caps and ten to

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Speaker 2: eleven pees, high differnes stocks at ten to eleven pees

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Speaker 2: that we think will really matter over the long termine,

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Speaker 2: not just the FED in the interest rates situation.

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Speaker 1: So let's talk exactly about that basket of stocks with

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Speaker 1: a ten pe versus a growth basket with a thirty pe.

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Speaker 1: I like the idea of a pretty fat dividend yield

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Speaker 1: and that low pe. Sometimes in the past we've seen

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Speaker 1: high divinend stocks have their yields cut. What sort of

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Speaker 1: risk factor we we're looking at with these low pe

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Speaker 1: high divnend stocks.

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Speaker 2: Yeah, it's absolutely true. You know, a thirty p was

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Speaker 2: just a three percent earning shield. Those companies are expected

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Speaker 2: and will grow their earnings faster than the high dimon stocks.

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Speaker 2: There's no question they're gonna have faster growth rates. Questions,

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Speaker 2: can they maintain the growth rates that the markets really

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Speaker 2: do expect and so that that's where there's the higher

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Speaker 2: the pe, the more the expectation, the harder they fall

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Speaker 2: when they disappoint over time. But there is this value

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Speaker 2: trapped sense, you know, are you buying just stocks that

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Speaker 2: may cut the dividends. We try to screen for things

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Speaker 2: that could have sustainable divining growth and negative momentum. Is

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Speaker 2: does a market know something that the fundamentals haven't reflected,

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Speaker 2: is not in the earnings, non the dibvons yet, So

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Speaker 2: you try to screen for that. But in general, what

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Speaker 2: we found is a very long period of time, the

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Speaker 2: market overly discounts the bad news and sort of they

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Speaker 2: become too cheap over a long period of time.

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Speaker 1: So what you're really driving towards is expectations matter a lot.

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Speaker 1: High pe stocks, high growth stocks have very high expectations

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Speaker 1: and they can disappoint just by growing fast but not

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Speaker 1: fast enough. And yet we look at these value stocks

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Speaker 1: that are often overlooked and they have very low expectations.

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Speaker 2: Yeah, I think that's the classic case for like Navidia today,

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Speaker 2: which is one of the highest multiple stocks in the SNP.

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Speaker 2: They've been delivering, they've been one of the best growth

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Speaker 2: stories you've ever heard, you know, continuing the AI revolution,

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Speaker 2: But can they keep delivering this record growth rates? It

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Speaker 2: can be tough for them.

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Speaker 1: We sold the last quarter they had great numbers, not great.

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Speaker 2: Enough, and yes they haven't quite broken this new all

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Speaker 2: time high level. It's a classic case of it's just

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Speaker 2: going to be tough for them to keep delivering on

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Speaker 2: these very elevated growth rates.

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Speaker 1: So if an investor is thinking about managing risk and

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Speaker 1: having a margin of safety, you're obviously saying value is

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Speaker 1: the better bet thing.

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Speaker 2: Growth value in small caps today both you can get

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Speaker 2: ten to twelve times earnings. Yeah, high diffen stocks I

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Speaker 2: think are one of the cheaper segments of even within

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Speaker 2: the value portfolios. High difms have been especially cheap today.

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Speaker 1: So we've been talking about risk, we've been talking about volatility,

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Speaker 1: we haven't talked about performance. What are if any, the

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Speaker 1: value advantages over the long term regarding performance?

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Speaker 2: We found we've done some studies back to the S

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Speaker 2: and P five hundred exception in nineteen fifty seven. When

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Speaker 2: we look back over that, you know, sixty ish years,

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Speaker 2: the most expensive stocks lag the market by one hundred

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Speaker 2: to two hundred basis points a year. The cheapest stocks

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Speaker 2: outperformed by two hundred bases points a year, and so

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Speaker 2: these are compounding over sixty not quite seventy years, but

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Speaker 2: very long term periods, and so that there is a

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Speaker 2: substantial wealthy caa hmulation that comes with a one to

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Speaker 2: two percent year advantage or a lag.

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Speaker 1: So to wrap up, investors who concentrate more in value

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Speaker 1: indexes tend to have less volatility and lower risk than

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Speaker 1: stockpickers and other investors do. And long term value investors

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Speaker 1: also have the potential to generate better returns. I'm Barry

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Speaker 1: Retults you're listening to At the Money on Bloomberg Radio.