Highlights: Gerard O’Reilly on Why Value

The basic principle at work is that if you have an investment that has a low price, relative to the future expected wealth it may generate for you, it has a high expected return. And that basic economic principle is supported by a preponderance of evidence. Lots and lots of evidence. We have evidence from 90 to 100 years of US data, 40, 50 years of non US data in international developed markets. 30, 40 years of emerging market data. It applies to bonds, it applies to stocks, it applies to commodity futures, it applies to a lot of different things. So if you stop believing in value, basically you stop believing in lots of what makes the world go around. So when you go through a time period like, in particular the past three years, where the under performance of deep value has been very, very large relative to growth. It's an exception, it garners an awful lot of attention and it's natural after a time period like that that people wanna ask a lot of different questions, but it's an exception, not the rule. The evidence and the series of evidence is what you should use to form your expectation and understand there'll be volatility and there'll be exceptions to those rules every once in a while, but use the large amount of evidence. A series of evidence is much more compelling than a one off observation. And that at it's heart is, "Why value?". I always expect positive value premiums. I expect them now, I expected them last year. I expected them the year before. I'll expect them next year. I always expect positive value premiums. Now is always a good time for value in my books. And when I'm showing you the evidence, I'm gonna show you all the evidence, so that I'm not just telling you the easy story, I'm telling you what I think is as close to the truth as we can get, and what the evidence really supports.

If you look here, this is Fama/French US Growth in yellow, Fama/French US Value in blue, and these are rolling returns prior one year, two year, three year, four year, and so on, out to 20 years, and this is as of March 30, 2000, right, so that's the date here, and you'll see that everywhere, the blue bar is lower than the yellow bar. You go, "Oh my goodness, I have 20 years worth of data, "I have to go back 20 years to see a positive premium." Let's fast forward a year, fast forward a year to 2001, and in every time period the blue bar is higher than the yellow bar. I'm not telling you that's what we're going to get next year. I don't know. I don't know, nobody knows, but the point being that these premiums are volatile, they can show up really quickly, and therefore, if you want to capture them, you have to remain focused on them and invest it. Now, you may have come through the past two or three years and say, "I can't take that level of deviation "from the market anymore, and therefore, "I'm going to dial back my overweight to value," that's a reasonable thing to say, but if you want the premium, or you wanna try and capture the premium, you have to stay focused on it, and this is kind of a great illustration of that.