And most importantly, in 2020 value looks cheap again - on par with the Dot-com and only surpassed in recent history by the Great Depression decade.Īnother similarity between now and 1904 is their shared “industrial revolution” growth regimes, which OSAM identifies as the turning points in Value’s performance. The Dot-com period also shows value’s cross-sectional cheapness. For example, 1904 was the year that value reached its cheapest cross-sectional and time-series levels. Nevertheless, the cross-sectional value spread results align with time-series ones from Part 1. In this graph, we measure how cheap the bottom third of industries are relative to the top third. It then continued to rally for another 7 years, earning 17.8% per year above the risk free rate. After reaching the bottom in 1904, value earned 9.99% per year above the risk free rate for the next 9 years, recovering its losses. But looking at history, it appears that a golden decade for value investing might be ahead. (+) We are not into calling bottoms or factor timing. And of course, there is no assurance that the historical lows cannot be breached. If value’s drawdown is to reach the historic bottom, then another -22% loss is possible. (-) On the other hand, it could get worse before it gets better. Conversely, it was the best time to get into it. It’s likely that in 1904, similar to 2020, investors might have questioned whether value investing was dead. Knowing that value generated a loss worse than the current one in the past, then recovered it, and then proceeded to earn positive returns for another century is reassuring. Interestingly, it also lasted 14 years - exactly the same time as the current drawdown. It occurred at the turn of the last century and bottomed in 1904 with a -59% loss. (+) Extended history reveals an earlier drawdown, similar in magnitude and duration to the one occurring now. In fact, the current loss is the worst we have seen in recent history - which is the only history that most investors have been looking at - leading them to question if value is indeed dead. From the peak in 2006, Industry Value lost -47%, which is worse than the famous Dot-com loss of -42%. ![]() (-) The drawdown graph re-confirms how painful the current environment is. (+) Value returns are positive in the ‘previously untested’ 54 years of history, delivering 7.1% of total return per year. We use Cowles data for the 1871-1927 period and French’s data from 1927 to March 31 of 2020. We construct a monthly long-short value portfolio that goes long the top third of the cheapest industries and short the bottom third (the most expensive ones). Professor French provides monthly total returns and annual Book-to-Market ratios for 49 U.S. Cowles provides monthly total returns and annual Earning-to-Price ratios for 68 U.S. We are able to go back in time thanks to the data collected by Cowles at Yale and Professor French at Dartmouth. To answer this question, we extend the value factor back to 1871, adding 54 years to value’s history, which typically starts in 1926 with the Fama-French data. Part I: DID VALUE EVER CRASH like that BEFORE?
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