Podcast Summary
Historical importance of informed decisions, avoiding emotions, and long-term focus in investing: Throughout history, successful investing has relied on making informed decisions, avoiding emotional reactions, and focusing on long-term returns.
Throughout history, financial advice has consistently emphasized the importance of making informed decisions, avoiding emotional reactions, and focusing on long-term returns when it comes to investing. From the earliest guides like "Every Man His Own Broker" published in 1721, to modern-day books and podcasts, the message remains the same. Despite the vast number of resources available, the fundamentals of successful investing have remained consistent. Understanding this historical context can help us navigate the complex world of markets and make more informed decisions today.
Obvious opportunities require personal connection and readiness: Self-help and finance require a personal connection and readiness to act, despite the obviousness of the advice or opportunity.
Self-help books and advice, despite being obvious and widely available, do not guarantee change due to the individual's unique readiness and connection to the message. The market follows a similar pattern, with obvious opportunities often overlooked due to various factors. Self-help books, like diet books or business advice, offer solutions to perceived problems but may require the right messaging and timing to resonate with individuals. The financial market, such as UK equities, can be cheap and obvious, but consistent outflows prevent them from being attractive investments for many. Both self-help and finance require a personal connection and readiness to act, despite the obviousness of the advice or opportunity.
COVID-19 'Everything Bubble': Monetary policies can create unexpected market conditions, emphasizing the importance of considering price in investment decisions
The COVID-19 pandemic led to an unprecedented "everything bubble" where all asset classes surged at the same time, despite the economy not being in great shape. This was largely due to vast amounts of money being printed and directly injected into people's pockets, leading to widespread speculation. The focus on value investing, which emphasizes the importance of buying at a reasonable price for future returns, was largely ignored during this period. The oddity of this situation was that economic conditions were not particularly good, unlike in previous bubbles. The lesson learned is that monetary policies can significantly impact financial markets, leading to unexpected market conditions. It's crucial for investors to remember the importance of price when making investment decisions, regardless of the economic climate.
Growth investing: Disappointments Matter: Overlooking disappointment risks in growth investing can lead to significant negative returns
The rules of investing, particularly in the context of growth investing, are being challenged with the belief that fundamentals don't matter as much as they used to. This perspective, held by both individual investors on platforms like Wall Street Bets and big investment houses, asserts that high-quality companies, even if they come with high valuations, will deliver returns in the long term. However, as a value manager points out, this perspective overlooks an essential aspect of investing: the risk of disappointment. When growth companies fail to meet expectations, the returns can be significantly negative due to the lower valuation of the stock and the absence of the anticipated earnings growth. This risk is more pronounced in the growth universe than in the value universe, where disappointing companies underperform the average value stock by fewer points. It's important to remember that the success stories in growth investing are just that – stories of success – and the disappointments are often overlooked.
Growth Trap: Challenging Economic Landscape for Growth Companies: The current economic climate presents challenges for growth companies, causing significant losses for investors. Adaptability and diversification are crucial for successful investment strategies.
The last few years have been challenging for growth companies that disappointed investors, with 2022 being a particularly shocking year for growth investors. The economic landscape, shaped by events in Western nations and China, has caused concern for many market observers. While some may view the current situation as resilient, others, like Solea Mohsen of The Big Take DC, see a lack of political will to change course. This "growth trap" phenomenon, where expectations for continued growth are not met, can result in significant losses for investors. Last year, these losses were felt across the board, with few exceptions in the liquid alternative space. Despite the challenges, value stocks, such as those in the energy sector, provided some protection against the market downturn. Overall, the current economic climate underscores the importance of adaptability and diversification in investment strategies.
Unexpected market conditions create opportunities for value investors: Despite the S&P 500's expense, market downturn and inflation make deeply discounted stocks relatively cheaper, offering value investors potential gains.
The market conditions of 2022 were unusual for value investors, as even deeply discounted value stocks underperformed the broader market. This trend, which was unexpected given historical patterns, created an opportunity for value investors to buy deeply discounted stocks at even greater discounts. Furthermore, the market downturn and inflation led to an increase in the fair value of equities, making deeply discounted stocks relatively less overvalued than before. While the S&P 500 is still considered expensive, the broader market decline and inflation have made many other assets cheaper in comparison. Overall, these market conditions present an opportunity for value investors to re-enter the market and potentially find significant gains in deeply discounted stocks.
US large caps overvalued, emerging markets, small caps, and Japanese equities offer value: Investing in emerging markets, small caps, and Japanese equities offers value due to their undervalued status compared to US large caps. Japanese small caps, specifically, have low debt levels, making them less susceptible to economic downturns.
Despite the US large cap market falling due to mild overvaluation and inflation, emerging market equities, small caps, and Japanese equities now offer compelling valuations. The appeal of Japanese small caps, in particular, lies in their low debt levels, making them less vulnerable to economic downturns. Diversified emerging market portfolios also present less risk due to the buffering effect of different countries' challenges not affecting each other. However, China, a significant player in emerging markets, poses additional risks due to its size and policy uncertainties. While every emerging market comes with inherent risks, a diversified portfolio can help mitigate these risks.
Diversify beyond China and US large caps: Consider expanding emerging markets exposure and avoid over-reliance on China and US large caps due to high valuations and potential negative momentum. Explore undervalued currencies and companies in other countries.
Investors should consider diversifying their emerging markets exposure beyond China due to its large representation in the index, while the US large cap market might not be an attractive option due to its high valuation and potential negative momentum. Additionally, the age of mega cap dominance and US market superiority may be coming to an end, with undervalued currencies in other countries providing a tailwind for their companies. Overall, it's essential for investors to stay informed about global economic trends and adapt their portfolios accordingly.
Evolving Economic Landscape and Changing Investment Strategies: As the US market's significant valuation premium may not persist, investors might need to reconsider their approaches, exploring opportunities in emerging markets, smaller caps, and active investing, while calculating discounted cash flows and re-evaluating passive investing strategies.
The economic landscape and investment strategies we have grown accustomed to over the last decade may need to be reevaluated. The US market's significant valuation premium compared to other developed countries is a relatively new phenomenon, and there's no guarantee it will persist. As such, investors might need to reconsider their approaches and explore opportunities in emerging markets, smaller caps in Japan and Europe, and active investing. The idea of calculating discounted cash flows and valuing assets based on earnings and payouts might once again become relevant. Additionally, passive investing, which has gained popularity, may not be as straightforward as it seems, as accessing desired exposures through ETFs can be tricky. Overall, the economic and investment landscape is evolving, and staying informed and adaptable is crucial.
Performance of different value indexes: The definition of value in various indexes impacts performance, with recent trends showing disparities between S&P 500 value and MSCI value indexes.
The definition of value in different indexes can significantly impact investment performance. Last month, the S&P 500 value index outperformed the growth index by a substantial margin, but the MSCI value index underperformed. This disparity is due to the varying ways these indexes define value. For instance, the S&P 500 includes stocks with poor momentum, regardless of their price-to-earnings ratios or other traditional value metrics. However, the uncertainty surrounding which stocks truly represent value and the continued investor interest in previously struggling assets raises questions about the sustainability of recent market trends. It's important to remember that even passive investing requires active decisions and allocations, and the current market environment may not align with traditional value investing strategies.
Value Investing in Crypto-Free Stocks: Despite crypto's hype, investing in crypto-free value stocks offers a more reliable opportunity for long-term growth due to their stable cash flows and lower volatility compared to crypto.
Despite the excitement around crypto and its speculative potential, it lacks the stability and future cash flows that make it a reliable investment. Instead, value investing in crypto-free stocks, which have been trading cheap relative to the market after a long period of underperformance, presents a promising opportunity for the next 5 to 10 years. The podcast emphasizes the importance of value investing and encourages listeners to be cautious about the implementation of value across some index providers. Overall, 2022 was a good year for value investing, and the trend is expected to continue. Listeners are encouraged to sign up to John Steppach's daily newsletter, Money Distilled, for more insights on the economy and markets.
