Thread by @jsmian

1) There are some truths that are so obvious that we never question them. The virtues of value investing is one of them.

Time to renovate demonstrably false old truths. 🤓stray-reflections.com/article/166

2) Value investing has held a structural advantage when considered over multiple market cycles.

From 1927 through 2019, value stocks outperformed growth stocks 93 percent of the time over rolling 15-year time periods.

3) Value's worst-ever performance when compared to growth stocks last decade is vexing.

Should investors adjust to the changing landscape or side with a truism that has stood the test of time?

4) The reason for value’s persistent outperformance is widely misunderstood.

Rather than cheap valuations, the biggest driver of value returns was sector composition.

5) Value outperformed growth for most decades since the 1930’s because of overweighting in energy, materials, and finance, the dominant industries of the past century.

6) Oil boomed, automobiles and planes took off, and the materials sector answered tireless demand for road systems, electricity grids, factory upgrades and the non-stop construction of warehouses, offices, and homes.

7) From 1930 through 1980, energy and materials represented as much as 20 percent of the stock market—each.

Oil tycoon J. Paul Getty became the world’s wealthiest man in the 1960s.

8) The financialization of the US economy from 1980 onwards boosted the financial sector, which had the largest weighting in the stock market by 2007.

Warren Buffett was now the world’s richest man, earning a fortune investing in America’s biggest banks and insurance companies.

9) Over the past decade, these important sectors have faded from their former glory.

Fallout from the global financial crisis and a commodity bear market put an end to value’s outperformance.

10) At the same time, technological advancements underpinned the rise of wholly new sectors such as information technology and healthcare, reflecting a new economic reality based on intangibles: IP, data and software.

11) According to @mjmauboussinsin, earnings and book value no longer mean what they used to.

Tangible assets, such as factories, were the foundation of business value and recorded as assets on the balance sheet when Benjamin Graham pioneered value investing in the 1930s.

12) Yet intangible spending, such as research and development, has been driving innovation in recent decades and is treated as an expense on the income statement.

Earnings and book value are thus losing their ability to represent economic value.

13) The point is it doesn’t matter if value stocks are historically cheap versus growth stocks.

As the global economy becomes more knowledge-based and reliant on new technologies, growth indices will outperform because of an overweight in the dominant industries of our time.

14) The Russell 3000 Growth Index has an 18 percent overweight in technology sector and a 21 percent underweight in financial services against its value counterpart.

That’s what’s driving overall outperformance more than anything.

15) What matters over the long run are the sectors you invest in. Investing style is less important.

It’s not that value investing is suddenly out of favor; rather, it’s that the sectors composing value indices are in secular decline.

16) Investors are most astonished when someone suddenly discovers what everyone really ought to know.

I believe the rotation from value to growth is the start of a secular trend that will persist over many decades. stray-reflections.com/article/166