Why the Best-Performing Asset Class of All Time Is “On Sale” Now
Institutional research confirms it. Academic research confirms it. Real-world experience confirms it.
The best-performing asset class of all time is value stocks – publicly traded companies that are exceedingly cheap relative to sales, profits and net asset value.
Not incidentally, they also pay bigger dividends and carry far less risk than growth stocks. (In financial parlance, they offer a higher margin of safety.)
They are the reason Warren Buffett is a household name. He built his $76.9 billion fortune using the approach of his mentor Benjamin Graham.
This is a story worth knowing…
Graham was an economist, professor and money manager, as well as the author of two investment classics: Security Analysis (1934) and The Intelligent Investor (1949).
He made a name for himself in the first half of the 20th century by finding bargain stocks selling for far less than their intrinsic value. In 1948, for instance, Graham invested a quarter of his firm’s capital in Geico. It climbed 1,635% over the next eight years.
Even today it is one of the largest holdings of Berkshire Hathaway.
Graham didn’t just understand a lot about stock values. He almost single-handedly pioneered the field of security analysis – and made a fortune for himself in the stock market.
In 100 Minds That Made the Market, billionaire Ken Fisher writes that Graham “hated technical tools like charts and graphs and equally distrusted growth investors’ blind faith in a company’s management, upcoming products and present reputation – those just couldn’t be measured in cold, hard numbers. Instead, Graham relied on earnings and dividends and felt book value – the physical assets of a company – was the basis for making sound investment decisions.”
Graham believed you should buy a single share of stock the same way you would buy an entire company. Understand the business. Analyze the balance sheet. Do the math.
Forget about the state of the economy or the hot trend of the moment. The only thing that really matters is the health and assets of the business you’re buying, not who’s in the White House or what’s happening at the Fed.
Warren Buffett took Graham’s principles and used them to become the country’s best-known investor and one of the world’s wealthiest men.
Yet because value stocks have lagged growth stocks over the past decade, money is now hemorrhaging out of funds devoted to value investing.
That is making this already dirt-cheap sector cheaper still. And when the wheel turns – as it surely will since all sectors move in cycles – the outperformance of value stocks should be nothing short of extraordinary.
A friend recently asked, “If value stocks offer the highest long-term returns (which they do) with the greatest margin of safety (which they have) and they are trading at an historic discount to growth stocks (which they are) why aren’t investors piling in rather than bailing out?”
Here you have to understand something about human psychology.
Most people don’t feel comfortable unless they’re doing pretty much what everyone else is.
When we had a technology bubble 18 years ago, they bought internet stocks. When commodities spiked a few years later, they bought natural resource stocks and gold. And after home prices doubled and tripled before the financial crisis, they started flipping condos and speculating on land.
This is not how you build a fortune. It’s how you lose one.
Their problem, as hockey great Wayne Gretzky realized, is that they skated to where the puck was rather than where it was going to be.
If you are an independent thinker with even a modest contrarian streak, take note. Because if there is anything investors should be skating furiously toward right now, it’s value stocks.
You can realize this with delight now… or regret later.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position of Wall Street analysts.
About Alexander Green
An expert on momentum investing, value investing and investing based on insider activity, Alex worked as an investment advisor, research analyst and portfolio manager on Wall Street for 16 years. He now runs the wildly successful Oxford Communiqué, ranked as one of the top investment newsletters by Hulbert Digest for more than a decade. He is also the author of four national best-sellers: The Gone Fishin’ Portfolio, The Secret of Shelter Island, Beyond Wealth and An Embarrassment of Riches. He shares his wisdom in his free daily e-letter, Liberty Through Wealth.