October Update

While I would much rather read headlines proclaiming how great value investing has been performing, I’m equally appreciative of headlines such as the following recently run by Morningstar: “Is Value Investing Broken?”

The reason being, as value investing falls out of favor, value stock valuations become more attractive, setting up the back drop for phenomenal potential returns going forward. The only thing missing now…and it’s a big one…is attractive stock valuations. This is mainly due to historically low interest rates and the trillions of dollars that have been flooded into the market by the FED.

“Value has been crushed,” admitted John Ameriks, head of Vanguard’s quantitative equity group. “There’s no magic strategy that’s always going to work. But if you believe in this flavor of investing, it’s been getting more attractive on a go-forward basis.”

Since inception the Vanguard Growth Index Fund Investor Shares (VIGRX) and Vanguard Large Cap Value Index (VIVAX) have had returns within .01% of each other. Over the last 10 years the Vanguard Growth Index Fund Investor Shares (VIGRX) returned 9.04% compared to only 6.15% for the Vanguard Large Cap Value Index (VIVAX).

The trajectory of the discrepancy has increased since the start of the year. The Vanguard Large Cap Value Index (Ticker VIVAX) has returned 8.67% YTD. The Vanguard Small Cap Value Index (Ticker VISVX) returned only 4.64% YTD. Meanwhile, the Vanguard Growth Index Fund Investor Shares (VIGRX) has surged, returning 19.34% year to date, doubling the returns of the value indexes.

Despite the difficult time for value investors, I’m proud that we’ve been able to outperform the market overall over the past few years and are within a whisker of keeping pace with the S&P 500 this year. This, despite holding historically high amounts of cash in our model stock portfolio.

In the end, I think the majority of the top performing stocks today will see the same fate as the nifty fifty stocks, the dot com bubble stocks and other short-term investing trends that have come and gone.