When I say I'm a value investor, people often look at me as though I'm crazy. I'm not. I just know how to stack the odds in my favor. And I'm Foolish enough to believe that everyone should include value stocks as a significant part of an investment portfolio.
Value doesn't always lead to quick returns (what investment strategy does?). But over the long term, it blows all other strategies away by a huge margin -- and does so with less volatility, to boot. It's no coincidence that Warren Buffett is both the best-known value investor and the world's second-richest person.
Ibbotson Associates compared the performance of value stocks, growth stocks, and the S&P 500 between 1968 and 2002. The results are clear:
|
Annual Return |
$1,000 Becomes | |
|---|---|---|
|
S&P 500 |
6.5% |
$8,471 |
|
Growth |
8% |
$17,520 |
|
Value |
11% |
$34,630 |
Investors who focused on value finished with twice as much cash as the growthies, and four times as much as the plain-vanilla indexers. That's the difference between dog food and steak.
Beat that
That study mechanically divided the market into value and growth categories, meaning that each included both great stocks and complete garbage. Suppose that instead of just buying them all, you focused only on the best and the cheapest? Avoided the worst performers and focused on the best?
That's what we attempt to do at our Motley Fool Inside Value investing service. We're looking for businesses with the following traits:
- Solid financials.
- Strong competitive position.
- At least 20% undervalued.
We don't care what sector the stock is in -- our picks include tech, banking, health care, and more. In addition, almost all of our picks have significant future growth potential. We love to buy growth, as long as we can buy it at a cheap price.
Such picks can really outperform. Take, for example, a relatively low-hype company like Disney (NYSE:DIS). At the dawn of 2000, shares of the company were heading north of $40 a share. Then they took an absolute nosedive, thanks to an exploding bubble, fears of long-term recession, and managerial questions. While competitors such as Time Warner (NYSE:TWX) felt a similar sting, saavy value investors jumped into Disney at the bottom, riding subsequent returns of nearly 140% since.
Buffett used a similar strategy with his purchase of Gillette at Berkshire Hathaway (NYSE:BRK-B), before consumer giant Procter & Gamble sucked it up from him after an amazing return. He did the same thing with Coca-Cola beginning in 1988, at a dividend-adjusted price of around $4 per share. Over the next 15 years, that investment generated roughly 18% annualized returns for him.
These aren't isolated examples. Opportunities come up again and again to investors who are both patient and alert. I'm thinking of Lowe's (NYSE:LOW) in 2003, Nokia (NYSE:NOK) in 2004, and US Bancorp (NYSE:USB) in 2000.
The Foolish bottom line
Such opportunities are out there right now, particularly given the market's recent volatility, so make sure you look for them. If you'd like a shortcut, try our Inside Value newsletter. A number of our picks are still trading at what we consider bargain levels. You can browse through the entire list using a free 30-day pass. They may be just what you need to jump-start your portfolio's long-term performance.
This article was originally published on Sept. 20, 2006. It has been updated.
Fool contributor Richard Gibbons doesn't know just about stacking odds -- he knows how to stack chairs and plates as well. Richard owns no shares of any company mentioned above. Coca-Cola and Berkshire Hathaway are Inside Value picks. US Bancorp is an Income Investor pick. Disney, Berkshire, and Time Warner are Stock Advisor picks. The Fool has a disclosure policy.
