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INVESTOR LETTER - OCTOBER 2019

INVESTOR LETTER - OCTOBER 2019

October 09, 2019
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Good things come to those who wait. It is an expression that is used at both the most auspicious and inauspicious times. Consider, for example, a job promotion. You’d likely say the expression after you’ve worked hard, added a lot of value to the company and earned the promotion and raise. You’d also say the expression if you didn’t get the expected promotion or raise but wanted to encourage yourself to keep putting in the energy and effort to get the “good things.”

We could also apply the expression to investing, and we could use it in both favorable and unfavorable times. Consider the part of our investment philosophy that has us invest more in small value companies than in large growth companies. This preference for small value companies has been out of favor since at least the beginning of 2018.

Our investment philosophy is based on a review of historical returns and common sense. Historically, over the long-term, small value companies have generated superior returns versus large growth companies. And, it makes sense that the return from small value companies would be greater than the return from large growth companies since small companies are generally riskier than large companies.

Yet, even though historical data and academic theory support our investment views, it doesn’t mean our investment approach will always be in favor. If small value companies always outperformed large growth companies, it would be a guarantee, and investment guarantees typically don’t offer attractive relative returns.

But, good things can come to those who wait and the waiting was rewarded last month. In September, U.S. small value companies (measured by the Russell 2000 Value Index) gained 5.1%, whereas U.S. large growth companies (measured by the Russell 1000 Growth Index) returned 0.0%. The math is easy here, and we can see that small value companies outperformed large growth companies by slightly over 5%.

One month surely doesn’t make a trend, and we aren’t going to say this is the start of a long run in small value or attempt to speculate as to what caused the favorable performance. Both feats require a crystal ball that we don’t possess. We bring up the surge in the price of small value companies as a reminder that the benefits of our investment approach can be realized very quickly and at unexpected times though, of course, it is still very much subject to investment risk and the potential for loss. The past month is a great example of why we feel we believe it is important to follow a disciplined investment process and stay focused on the long term. If we were trying to time when to be in small value companies and when to be in large growth companies, or if we gave up on our investment processes because it was out of favor, we could easily miss out on the potential, long-term benefits.

Long-term investing neither assures a profit nor guarantees against loss in a declining market. Past performance does not guarantee future results. Stock investing involves risks, including increased volatility (up and down movement in the value of your assets). All investing involves risk, principal loss is possible.