Since starting my career in Financial Planning I have heard many investment analysts proclaiming that this asset class or that asset class will be the next winner. "Technology - its the future." "Resources - demand is inexhaustible." Gold, Euros, and on and on.
Until I read the book "The Intelligent Investor" by Benjamin Graham I often put a lot of weight on what these analysts were saying. What I realized is that the analysts don't have a clue a lot of the time and very few investment managers, securities analysts or fortune tellers actually beat the market consistently. Only one investment style has consistently beat the market and made people like Warren Buffett among the richest people in the world.
What am I talking about? Value Investing.
Value investing has beat the broader market consistently over the past 75 years with lower volitility than the broader market. This chart shows the past 12 years and the comparison between the broader index, growth stocks, and value stock. Clearly value wins. Over 10 years the broader index returned 8.42% (not bad), the growth stock index returned 5.2%, and value returned 10.8% for a wide margin of outperformance. Even over longer periods of time (40 years +) value outperforms growth by approximately 4% and the broader index by approximately 2%.
A Value investor follows a few simple guidelines for picking investments and then has the convictions to follow through on his or her analysis.
Real estate and other investments can flow through this same decision making process to assist the investor in making rational decisions about his or her investments. For example, good questions to ask are: What is the P/E ratio? P/B ratio? Stability? Realistic growth prospects? I'll post more about this investment style next week and I'm thinking of having a regular Wednesday posting generally about investing. What do you think?