The Value In Value

“One damned thing after another” was Churchill’s concise (though perhaps misattributed) definition of history. These days, it seems more than apt.

Whether it’s $6 gas, 8.6% inflation, 6% mortgage rates, supply chain shortages, labor shortages, or other financial miseries, it’s easy to look at the economy this way too. The new tight-money era has crushed nearly every asset class. But the speculative ones have been truly decimated:

Bitcoin (BTC): – 71%

Ethereum (ETH): – 78%

TerraUSD (UST): – 93%

Meme Stocks (MEME): – 61%

Speculative Tech (ARKK): – 70%

Even quality stocks and bonds have been hammered hard. The S&P 500 is down 21% from its highs. The QQQ which owns a well-diversified tech portfolio including blue chips like Amazon, Meta, and Alphabet, is down 31%.

Value stocks have held up better but have been pummeled as well. The Schwab Value ETF (SCHV) is down 16%. Unfortunately, bonds have suffered too. The TLT basket of long-term treasuries is down more than 25%. Investment-grade intermediate-term corporate bonds (VCIT) are down 16%.

The damage is wide and deep. There’s not much in the entire investment universe that is up year-to-date. Two exceptions are energy stocks and Japanese stocks with hedged Yen exposure (DXJ). It’s indeed the worst first half for markets in fifty years. It looks a lot like the dotcom bust of 2000–2002 and it’s likely to get worse before it gets better.

Here’s the good news: while many of the meme stocks and speculative nonsense of the past few years will disappear permanently, quality value stocks with strong balance sheets and healthy cash flows (as represented by the SCHV) should eventually recover and reach greater heights. The important thing is to own high-quality assets whose price is justified by the underlying cash flows. That, in essence, is what value investing is all about. Unlike growth investing, which typically tracks momentum stocks (stocks that have been going higher and higher but have little intrinsic value to justify further price gains), value investing is the only method based on the laws of economic reality: no stock can trade forever on a trend divorced from its financial underpinnings.

The other good news is that value cycles typically take over once the growth cycle goes bust. For example, after the mega-growth outperformance of the decade ending in the dotcom crash of 2000, value stocks outperformed by nearly 60% over the next 8 years. And similar patterns have repeated nearly every time growth sputters.

One damned thing after another has made investing seem hopeless over the past six months, but growth cycles are followed by value cycles–no differently than bear markets are followed by bulls.

Full disclosure: James Berman owns value stocks and ETFs (such as the SCHV), both for himself and for his clients.