“The Intelligent Investor” by Benjamin Graham? People who follow this philosophy strictly crack me up because they look down on others and accuse people of being speculators for investing in Apple and Tesla while secretly wishing they invested in those companies earlier. In this article, we’ll be taking a look at why value investing is dead.
Now I’m not saying it’s completely dead, but you don’t want to be a “value” investor if you have the following criteria:
- You have dedicated retirement / brokerage accounts where you don’t plan to withdraw money until retirement
- You are currently young and have several decades to go before retirement
- You plan to continuously deposit funds into your retirement / brokerage account every year (or any other frequency) while limiting your withdrawals to an absolute minimum
Additionally, we’ll have to assume that the Federal Reserve will continue supporting the stock market through quantitative easing and will be willing to set rates to negative in the event of a crash which would not be surprising since we’ve previously wrote that the Fed is becoming more interventionist in the markets to prevent another 2007-2008 scenario. If any of these assumptions don’t apply, you should probably incorporate elements of value investing to your portfolio especially if you are nearing retirement or are already retired and need to live off of interest/dividend income.
I’m not going to write how the Federal Reserve is supporting the markets since that was already covered in another article but basically what’s happening is that the Fed is acting as the lender of last resort either by purchasing corporate bonds early last year in 2020 or by lowering interest rates. Because of this dynamic, the stock market continues its bull run similar to how tuition continues to increase because the government subsidizes the industry through federal loans. If you can only take away one thing from this article is to not bet against the Fed!
Now let’s look at the numbers to show why value investing is dead. Assume that we’re rich enough to have 2 portfolios; one solely with growth oriented stocks (Portfolio 1) and the other with only value stocks (Portfolio 2). To keep things simple, we’re not going to add bonds or commodities to these portfolios and both will be 100% equities.
As you can see, in terms of assets Portfolio 1, which is our growth portfolio, achieved the highest balance of $13,723,326 vs $13,606,753 of the value portfolio and about $11MM of the S&P 500 portfolio for benchmark purposes. That is a whopping $116,573 difference between the two and while in the greater scheme of things is not a lot of money in regards to retirement, imagine what a great bonus that is especially if it’s coming out of a Roth account! If you put the entire balance into a bond / dividend oriented portfolio that can get at least 5% yield, you’d be earning roughly ~$700,000 in interest / dividends a year! Not bad for retirement!
Keep in mind that a growth oriented portfolio is not for everyone. If you’re someone who checks their portfolio frequently and are shocked by the heavy losses in a growth portfolio during a downturn, stick to the S&P 500. Otherwise if you’re aiming for the highest balance for retirement regardless of risk, just park your money into growth and let it ride to retirement.