This month in (financial) history:
During the great depression, Charles B. Darrow came up with a board game he thought was pretty cool. In 1934, he presented the game to executives at Parker Brothers and was rejected.
A year later, after he sold 5,000 homemade copies, Parker Brothers snapped it up.
The game was Monopoly. However, after buying the rights from old Charlie, Parker Brothers learned that he was not the sole inventor of the game. They eventually also bought the rights
to the original inventors’ version for an extra $500. It turned out to be not a bad investment.
Since being patented by Parker Brothers 85 years ago in December 1935, Monopoly has been translated into 37 languages and evolved into over 200 licensed and localised editions for 103
countries across the world. Over 250 million sets of Monopoly have been sold since its invention and the game has been played by over half a billion people. The original version of the game was based on the streets of Atlantic City, New Jersey.
By the way, in 1941, the British Secret Intelligence Service had a special edition created. It was distributed to World War II prisoners of war by fake charity organisations. Hidden
inside these games were maps, compasses, real money, and other objects useful for escaping. British historians estimate that the MacGyvered Monopoly boards could have helped thousands of captured soldiers escape from their prison camps. Think about that, next
time you turn over a “Get Out of Jail Free” card.
Quote of the month:
“From 2000 – 2013 MSFT [Microsoft] grew their revenues by 350%, however an investor who bought MSFT in 2000 made 0% from capital appreciation over the period to 2013, despite tremendous
growth in the company. In our view, asymmetric investing does not entail buying growth at any price.”
Kenny Arnott, Arnott Opportunities Fund. It’s fair to say that most growth investors are not thinking this way right now.
Ever since we started Affluence, we’ve been hamstrung by a trend that has gone on a lot longer than many (including us) thought probable. Returns from value investing have lagged those
from growth investing. By a lot. In fact, after more than a decade of disappointing performance, value stocks experienced probably their worst 12-month performance in history to the end of October this year.
The trend finally started to change in November. We firmly believe that over the next few years, value will outperform growth by a substantial amount. And we would encourage everyone
to consider getting some exposure to funds and managers with a value focus.
We’ve had plans for a while now to write a long piece about why value investing is not dead, and why it should be a focus for anyone looking to add some sizzle to their portfolio. But
over the last few weeks, we’ve come across several exceptional articles that explain the value proposition much better than we could. They explore many of the reasons why value investing is currently perceived to be an inferior strategy, and explain why they
are exaggerated, misconstrued or just plain wrong.
Here they are, in no particular order.
Market inefficiency, liquidity flywheels, asset
Lyall Taylor, value investor and author of the excellent LT3000 blog, explains why the efficient market hypothesis doesn’t work (at least not efficiently), and how liquidity flywheels
lead to cyclical distortions in asset prices. This means radically different valuations can emerge for the same assets, depending on how they are packaged. If you are prepared to stomach some volatility, you can profit handsomely from these divergences.
Unravelling value’s decade-long underperformance
(and imminent resurgence)
This follow up article provides insights into what has driven the value vs growth trade, and why that might be about to change.
Tonight we leave the party like its 1999
The first of two articles from the mean reversion experts at GMO. This one, written in early November, discusses the eerie parallels between today’s markets and 1999. Back then, GMO
was looking stupid for still believing that valuations mattered and the gravitational pull of mean reversion would eventually work. They see ominously similar market phenomenon today.
Value. If not now, when?
In the latest quarterly letter, GMO’s Ben Inker explains why value is cheap from a range of different angles. He concludes that if even if value stocks were to continue trading at current
spreads to the market, they would beat the market if they experienced the same relative fundamental performance as they have over the past 14 years. In other words, value stocks don’t even need to mean revert to outperform. He also explains why GMO believe
growth stocks have entered a bubble similar to the one in 2000.
Is value investing really dead?
Nick Kirrage from Schroders compares the value vs growth divergence at end of the dotcom boom in 2000, to now, and explains what happened in 2001.
A video from the master
Finally, if you have an hour to spare, this video featuring our perennial favourite, Howard Marks, is definitely worth watching. Start from about the 6 minute mark. Spoiler alert –
he is not sure where markets are either. He suspects the US economy really is recovering, but equity markets have raced ahead of fundamentals. At around 34:20 he provides his thoughts on growth vs value. His definition of growth and value, we think, are brilliant.
Incidentally, if you are looking to boost your exposure to value, you can access a wide range of value investing funds (along with many other things) through either our Affluence Investment
Fund or, if you’re a whoesale investor, our Affluence Small Company Fund.
Did you know?:
There’s a standard way to understand the relative danger of any activity. A micromort is a unit of risk defined as one-in-a-million chance of death. For example, skydiving is 8 micromorts
per jump but running a marathon is 26 micromorts. From this, you could conclude that exercise is bad for you!
Just being alive averages about 24 micromorts per day (but more when you are very young and as you age). The “safest” age is 10 years old.
Travel micromorts vary depending on the mode. For example, 1 micromort is equal to travelling:
- 10 km by motorbike.
- 16 km by bicycle.
- 27 km by walking.
- 370 km by car.
- 1,600 km by plane.
- 9,656 km by train.
Or looked at another way, motorbikes are about 1,000 times as dangerous as trains.
Video of the month:
Comedic genius is pointing out the absurdity of everyday things you normally take for granted. We give you Jimmy Rees, as the guy who decides packaging. If you like that, there’s loads
more out there from Australia’s new king of comedy.