Is Value Investing Dead Forever?

It’s not enough to say that growth has beaten value investing this year.

To fully capture the outperformance, you’d have to say that growth kneecapped value and then ran multiple victory laps around the track.

Growth stocks returned 14.92% in the first half of 2020, while value stocks lost 18.53%, according to Morningstar data.

This year broke all molds. But the outperformance of growth over value isn’t a 2020 phenomenon.

The trend was set in 2009, and it’s been gaining strength. Over the five years leading up to June 30, growth stocks returned 15.78% every year on average, better than doubling in that stretch. Value stocks returned a measly 6.2% per year. Small-cap value stocks lost money.

It still looks bad for value stocks out there.

Here are three examples:

Energy is cheap because the industry faces structural oversupply and green energy is gaining ground.
Banks are cheap because interest rates are effectively at zero and the economy is in the toilet.
Retail is cheap because Amazon.com (Nasdaq: AMZN) is remaking the world in its image, and virus lockdowns kept consumers out of the stores.

Meanwhile, growth stocks are outperforming for obvious reasons:

Many — like Alphabet (Nasdaq: GOOGL) and Facebook (Nasdaq: FB) — enjoy de facto monopoly status and the profits that come with it.
Tech — and particularly productivity boosters — have kept the world moving during the lockdowns.

But the outperformance of growth over value can’t last forever, can it?

Or is value investing just dead forever?

Value Investing Isn’t Gone Yet

Before you start digging its grave, consider the experience of Julian Robertson, one of the greatest money managers in history and the godfather of the modern hedge fund industry.

Robertson managed the Tiger Fund and produced an amazing track record of 32% compounded annual returns for almost two decades in the 1980s and 1990s.

He crushed the S&P 500 and virtually all of his competitors. But the late 1990s tech bubble tripped him up, and he had two disappointing years in 1998 and 1999.

That did him in. His clients left, and he shut down his fund.

His last letter to investors, dated March 30, 2000, is a treasure because it captures the angst and despair of one of the greatest managers in history. He threw in the towel and gave up.

As Robertson wrote:

As you have heard me say on many occasions, the key to Tiger’s success over the years has been a steady commitment to buying the best stocks and shorting the worst. In a rational environment, this strategy functions well. But in an irrational market, where earnings and price considerations take a back seat to mouse clicks and momentum, such logic, as we have learned, does not count for much.

The current technology, Internet and telecom craze, fueled by the performance desires of investors, money managers and even financial buyers, is unwittingly creating a Ponzi pyramid destined for collapse. The tragedy is, however, that the only way to generate short-term performance in the current environment is to buy these stocks. That makes the process self-perpetuating until the pyramid eventually collapses under its own excess.

Sound familiar? We call it fear of missing out (FOMO) today — and it’s alive and well.

There is no rational explanation for Tesla (Nasdaq: TSLA) becoming the most valuable car company in the world. That’s madness. But if you don’t buy Tesla, you risk missing out on one of the biggest growth stories of the past decade.

Meanwhile, Enterprise Products Partners (NYSE: EPD) can’t catch a bid to save its life. It’s one of the most stable and profitable pipeline companies in the world. Shares yield nearly 10%, and the payout is safe for the foreseeable future.

Yet investors aren’t interested. They’d rather buy Tesla.

Something will break this cycle.

Ironically, Robertson’s last letter to investors coincided almost to the day with the top of the tech bubble. Had he just held on a little longer, he would have killed it. Value stocks beat the pants off growth stocks for eight years after he published it.

We shouldn’t expect the same this time around. Only time will tell. But don’t give up on value investing just yet. Cheap stocks will have their day in the sun again.

• Money & Markets contributor Charles Sizemore specializes in income and retirement topics, and co-host on our podcast, The Bull & The Bear. He is also a frequent guest on CNBC, Bloomberg and Fox Business.