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Value investing added more than 100 years to its winning streak after the recent unearthing of data from before the great crash of 1929. All told, value outperformed in the United States since 1825 with many ups and downs along the way. Alas, it is currently in its most dramatic down period on record.

The history of value investing was recently extended by money manager Mikhail Samonov, the founder of U.S.-based Two Centuries Investments. He combined three historical data sets to reach back to 1825 using a patchwork approach that admittedly isn’t without its issues. Most prominently, value was measured differently in the three periods.

The modern period spans from 1927 to 2020. It uses data from Professor Kenneth French of Dartmouth College, which are the most robust of the three data sets. Here value is measured using the price-to-book-value ratio (P/B). In this case, the cheapest 30 per cent of stocks (lowest P/B) are put into the value portfolio and the most expensive (highest P/B) go into the “glamour” portfolio, which attracts market darlings with bright prospects trading at luxurious prices.

Stepping back in time, Mr. Samonov uses industry data collected by the Cowles Commission for Research in Economics for the period from 1871 to 1927. Price-to-earnings ratios (P/E) for 68 U.S. industries are used to form industry portfolios instead of stock portfolios. The cheapest third of industries by P/E are put in the value portfolio and the most expensive go into the glamour portfolio.

The earliest data set spans the years 1825 to 1871 and uses data from the Yale School of Management’s International Center for Finance. Here the data are relatively sparse with only 256 securities and value is measured using dividend yield. The top third of stocks (highest yields) are put in the value portfolio and the bottom third go into the glamour portfolio.

The long-short value factor is then tracked by taking the returns of the value portfolio and subtracting the returns of the glamour portfolio.

That is, it effectively follows a portfolio that buys value and short sells glamour. For instance, these days the long-short value factor falls when stocks with high P/Bs outperform those with low P/Bs.

I’ll start with the good news for value investors. Value outperformed glamour by an average of 3.3 percentage points annually from 1825 to 2020. Roughly similar results were seen in the three sub-periods used to stitch the history together. Overall the effort shows that value fared well in the century before the period covered by Prof. French.

But the long-short value factor suffered from many drawdowns along the way. Mr. Samonov highlights five of the biggest of them. The factor gave up 50 per cent in 1841, 49 per cent in 1862, 59 per cent in 1904, and 54 per cent in 1932. Flash forward to March, 2020, and it was down 59 per cent. (Keep in mind these drawdowns do not reflect the experience of long-only investors who simply buy low-P/B stocks.)

The accompanying chart shows long-short value factor drawdowns using Prof. French’s value-weighted P/B data, which spans the period from June, 1926, through June, 2020. The graph departs slightly from Mr. Samonov’s work in that it uses U.S. data that sorts stocks both by size and by P/B. The graph shows the results for the largest half of stocks, which represent the most easily purchasable part of the market.

The largest stocks are then split into value and glamour groups by P/B as previously described.

The recent value slump started back in March, 2007, and the crash of 2008 walloped value stocks such as banks and other financials. This year’s COVID-19 crash clubbed value stocks again while many glamorous high-tech companies benefited as commerce moved online. As a result, the long-short value factor for large stocks fell 62 per cent from its 2007 peak by the end of June, 2020. That’s a couple of percentage points worse than its level of March, 2020, which makes it arguably the worst downturn for value on record. Ouch!

At the same time, long-only value investors saw their low-P/B portfolios gain just 3.4 per cent annually from March, 2007, through June, 2020.

High-P/B glamour portfolios shot up 11.8 per cent annually over the same period.

Value trailed far behind glamour in the relative return race in recent years, but it’s hard to imagine the trend continuing for too much longer. Mind you, the market is now firmly in uncharted territory for value investors.

Norman Rothery, PhD, CFA, is the founder of

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