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“I leave Sisyphus at the foot of the mountain! One always finds one's burden again. But Sisyphus teaches the higher fidelity that negates the gods and raises rocks. He too concludes that all is well. This universe henceforth without a master seems to him neither sterile nor futile. Each atom of that stone, each mineral flake of that night filled mountain, in itself forms a world. The struggle itself toward the heights is enough to fill a man's heart. One must imagine Sisyphus happy.” —Albert Camus, The Myth of Sisyphus, 1942
The plight of Sisyphus is not wholly unfamiliar to value investors. And so it’s reasonable for these investors to ask themselves: Are we like Sisyphus? The ancient Greek mythical figure doomed to an eternity of futilely carrying a boulder up a mountain, only for it to roll down every time he neared the peak.
Value investors certainly understand the challenges of navigating an uncertain landscape and have developed the requisite discipline needed in the face of volatility. And yet, this is arguably where the similarities between value investors and the Greek mythological figure end. Value investors are likely to install safeguards aimed at ensuring the boulder does not fall too far back down the hill—driven by a cornerstone approach to value investing known as margin of safety.
In recent years, investors have been compensated for their willingness to pay ever-higher multiples for companies that can produce top-line growth—as evidenced by momentum factors’ dominating index returns. Valuations have been driven to extremes merely because companies have demonstrated growth to investors. There’s apparently nothing more valuable—no price too high—for a semblance of top-line growth. What about risks to that growth? Or its sustainability? Or profitability? Also, thanks to exorbitant amounts of stock repurchased using cash flow and/or leverage, growth rates in earnings per share have been strategically boosted, but many investors haven’t seemed to care.
Exhibit 1: Value Performs as Momentum Stalls
Source: Bloomberg. Bloomberg US Pure Momentum Portfolio represents the return of momentum factor from Bloomberg’s US Equity model. This factor separates stocks based on their one-year price performance. Bloomberg US Pure Value Portfolio represents the return of value factor from Bloomberg’s US Equity model. Value factor aims to differentiate “rich” and “cheap” stocks. Bloomberg US Pure Growth Portfolio represents the return of growth factor from Bloomberg’s US Equity model. Growth aims to capture companies’ historical and forward-looking growth.
More cautious investors do seem to care about risks to growth, so they have taken a different approach. While they, too, have clamored for growth in a slow-growth world, they’ve also sought safety of principal and certainty of return. That means they’ve been willing to own securities with bond-like qualities, continually bidding up those types of equities with annuity-like returns. Think of areas of the market like REITs, utilities and consumer staples—aka, bond proxies. The combination of a low interest rate world with investors seeking low volatility and dividends (certainty and stability), can also result in slower-growing areas of the market’s becoming aggressively priced.
It’s also worth noting that value investors are focused on more than just “carrying the boulder up the mountain”: They must also navigate structural headwinds—an important detail that helps contextualize how the last several years of low interest rates, weighty technology valuations and debt-fueled growth have impacted performance for value investors. Exhibit 2 highlights this point by showing much of the recent discrepancy between value’s and growth’s performances has occurred over the last five-year calendar period.
Exhibit 2: Cumulative Returns, Indexed to 10,000 as of Dec 31, 2010
Source: FactSet. As of 31 December 2020.
Value investors have also been fighting the battle against index construction. In particular, the industry weights in the broad Russell 1000® Growth and the Russell 1000® Value Indices (for example) can vary substantially—particularly looking at the information technology sector. As of December 31, 2020, relative to the Russell 1000® Growth Index, the value index carries over 3500 basis points less technology exposure. In a manner of speaking, value investors are massively short technology relative to their growth peers, which helps explain a lot of the recent performance gaps between the styles.
The obstacles facing value investors are not new, and their plight is not always so marred in challenges. In fact, many who identify as such are adept at sifting through noise around a potential investment until the intrinsic value of the investment clearly presents itself (or not). One could take it a step further and argue that the value investor framework is readily practiced in everyday life. From smaller decisions such as weighing the quality and price differential between cereal brands to larger decisions such as what make of car to purchase, value factors will likely always have a role to play.
From extreme valuations and any-growth-at-any-price (AGAAP—might be a new moniker) to benchmark construction and herding into perceived safety, value investing may seem like a Sisyphean task. But that would be the wrong way to understand a value investor’s condition. If there’s a lesson to draw, it’s not how value investors might be doomed to failure like Sisyphus, but how they’re distinctly different. To borrow from Camus, “The struggle itself toward the heights is enough to fill a man's heart. One must imagine Sisyphus happy.”
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