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Why the 2020s Should Be a Great Decade for Value Investing

Written by Samuel Taube
Posted January 5, 2020

Legendary value investor John Templeton once famously said, “The time of maximum pessimism is the best time to buy.” 

Investors haven’t been very pessimistic about the stock market as a whole lately; the S&P 500 gained almost 30% last year. 

But they have been rather pessimistic about the effectiveness of Templeton’s main investing strategy — and that could soon change. 

The 2010s was an inauspicious decade for value investors. They lagged behind their growth investor rivals as the market steadily rose. 

But as we’ll discuss below, the conditions that made value investing underperform in the 2010s aren’t likely to persist into the 2020s — and thus now might be a good time to brush up on the strategy. 

The Growth-Value Rotation

Value investing and growth investing are both seen as fairly reliable ways to beat the market. But they almost never outperform at the same time; one strategy usually leads the major indices while the other lags them. 

What’s more, the outperforming strategy tends to flip once every decade or so. 

It’s strange to consider this today, but over the course of the 2000s, value giant Berkshire Hathaway (NYSE: BRK-B) outperformed growth investor darling Amazon.com (NASDAQ: AMZN). 

value investing, 2000s

But then, in the 2010s, Amazon smashed Berkshire...

value investing, 2010s

Today, that paradigm seems poised to flip again. After all, big tech companies like Amazon that propelled the 2010s growth boom are under regulatory scrutiny today amid strongly negative public opinion of them from both sides of the aisle. 

Meanwhile, reasonably valued stocks like Berkshire could get a boost from another set of broad-market conditions...

High Valuations

Some analysts are predicting an average annualized S&P 500 return as low as 3% over the next decade. Why? 

Two words: high valuations

The index’s price-to-earnings (P/E) ratio sits at 24.31 at the time of writing after gradually working its way up from its Great Recession lows.

value investing, peSource: Multipl.com

That’s not catastrophically high, but it's well above its long-term mean of 15.77. And many of the growth stock superstars of the last decade — like Amazon and Netflix (NASDAQ: NFLX) — have P/E ratios over 80!

Common sense says that in an environment where valuations are high, stocks with low valuations will have more room to run. 

In summary, history and current broad-market conditions both point to a big comeback in value stocks over the next decade. 

But after 10 years of ignoring these equities, many investors may have forgotten where to find them...

How to Get Back into Value Investing 

Investors who aren’t yet ready to try their hand at individual value stock picking should look into value ETFs. Several of them are perfectly positioned for current market conditions. 

You can get easy exposure to large-cap value stocks through an S&P 500 value fund like the SPDR Portfolio S&P 500 Value ETF (NYSE: SPYV). 

Domestic small-cap value stocks are another type of equity that investors should consider owning — especially as the world turns away from globalization. To that end, an ETF like the Vanguard Russell 2000 Value ETF (NASDAQ: VTWV) might also be a good fund to buy.

value investing, performance

As you can see, both funds have slightly lagged the S&P 500 over the last year, but thanks to the many tailwinds facing value stocks today, that should soon change. 

Today, value stocks are a somewhat-neglected class of equities — one that much of Wall Street has turned its back on after a decade of underperformance. 

This is Templeton’s “point of maximum pessimism” for the discipline, and smart investors should heed his words and buy in now. 

Until next time,

Monica Savaglia

Samuel Taube

Samuel Taube brings years of experience researching ETFs, cryptocurrencies, muni bonds, value stocks, and more to Wealth Daily. He has been writing for investment newsletters since 2013 and has penned articles accurately predicting financial market reactions to Brexit, the election of Donald Trump, and more. Samuel holds a degree in economics from the University of Maryland, and his investment approach focuses on finding undervalued assets at every point in the business cycle and then reaping big returns when they recover. To learn more about Samuel, click here.

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