February Update

Although 2017 was another rough year for value investing, The Worthington Stock Letter returned 24.24% for the year compared to 21.83% for S&P 500 and 16.99% for the Vanguard Value Index Fund– VIVAX. I’m very pleased with these returns as they were achieved in a year when value investing was out of favor, while holding at least 15% in cash reserves.

How bad has it been for Value Investors? Billionaire David Einhorn, president of Greenlight Capital wrote the following to investors in October 2017, “The market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy.” (said tongue in cheek)

“Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value…What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in current and future economic loss?”

“The last time it happened was around 1999 when everyone was talking about eyeballs as the new paradigm for investing… that didn’t end very well for momentum investors”.

While not in the same league as a David Einhorn or Howard Marks, I certainly feel the same way. This a momentum and growth driven market, with the majority of funds being funneled into the top quintile of stocks. The recent tax code changes will continue to fuel that momentum, at least in the short-term.

Eventually that will change as it always does and we’ll be well positioned to take advantage of it.