Making the case for long-term value investing — again

A new book by Jim Cullen, founder of New York-based Schafer Cullen Capital Management, restates the case for classic value investment principles

Value wins in the end

The book’s most essential chapters set out Graham’s case in plain language, and back it up with potent facts of figures. To cut to the chase, over the past 50 years, from 1968–2020, stocks in all three of Graham’s categories outperformed the S&P 500. Against an annual average rise in the market index of 10.3%, the bottom 20pc by P/E rose by 14.6%, the bottom 20% by P/Bk by 13.9%, and the top 20% by dividend yield by 12.4pc.

The siren’s call of market timing

Cullen also makes a forceful case for Graham’s other rule: to avoid the temptation to time the market by adopting other strategies or shifting to cash when the going gets tough. The book includes a brief history of securities dating back to the 1929 crash intended to make clear the nature of beast investors are dealing with, a market in which the long term trend is inexorably up, but which is continually disrupted by bear markets, recessions, speculative bubbles, record debt levels, collapses in consumer confidence, interest rates hikes, foreign currency runs, and wars. If investors can look at the big picture they will see that, turbulence not withstanding, the market actually rises about 75% of the time, and the bounce back from down periods tends to be very swift.

Stock selection

Having set out the fundamental case for picking value stocks Cullen offers a few pointers for selecting them. He suggests an adequately diversified portfolio should have around 30 to 35 equally weighted securities, with no more than 15% allocated to any one industry. Investors should look for shares selling at a 20% to 50% discount to the P/E of the overall market, and offering a dividend yield of 3% or higher. He also keeps faith with the third of Graham’s screening disciplines, price-to-book value, though concedes it is more difficult to assess promising shares in this category, and getting harder. Companies principally based on brand have always been hard to evaluate, and are much more common today — perhaps the majority of stocks. But he still thinks book value is the best discipline for assessing companies in sectors like airlines, metals, and energy. Investors should look out for securities selling at no more than two times book value.

Must the future follow the past?

Cullen’s book is written from Olympian heights from which the fierce debate that has raged over the continued worth of the value strategy over the past few years is scarcely visible. The performance of the Russell 3000 Value index over the past decade, for example, the broadest measure of value stocks in the US, has solely tested the resolve of even true believers, returning 80% against more than 150% for the S&P 500 index. Growth stocks returned more than 240% over the same period.

Here to stay — in some form

But the faith among true believers that value will come good again has been at least partly vindicated since economies began to move past the pandemic, rehabilitating sectors that had been hammered during lockdowns. And tech stocks have continued to fall back as economic conditions have become tougher, with inflation persisting, commodity prices surging, and the threat of meaningfully higher interest rates.

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