Welcome to Fully Invested where we look at ways to increase your odds of success using evidence based investing strategies.

This week, we're looking at the style that made Warren Buffet famous: value investing.

Value Investing

Investing comes in many shapes and sizes and styles. What I want to focus on are the areas that don't always get attention in the media but have an evidence based track record of success.

One of the most common approaches that follows this philosophy is value investing.

Value investing is the idea that you want to buy the companies that are priced lower than other companies based on profits, sales, or assets.

No matter how value is calculated, the idea is that you want to buy the companies that are a good deal.

If you have many companies you could buy, intuitively, you would want to own the most profitable businesses at the lowest price.

As Warren Buffet has said,

The opposing side of value is growth investing. Growth stocks are those where their revenue growth or customer growth are so exciting that you'd rather get in "early" than worry about their profit.

In your mind, you can already imagine some of these companies where people will buy them regardless of their price. Hype, marketing, familiarity etc. will all drive their prices higher.

But is that the best way to make money in the stock market?

In business and in stock market investing, making money is less about what you buy than what you pay for it.

Overpaying for a business is a quick way to be out of business.

Value investing on the other hand has shown to be a reliable way to achieve higher returns over time. We call this the value "premium"; the returns associated with buying value stocks specifically.

Nearly 100 years of data show us the value premium is significant compared to the growth premium. In the US, value has outperformed growth by an average of 4.4% in all years since 1927.

The data above is from the US stock market but the best part of evidence based approaches is that they work in countries around the world! That's what makes the value premium so intriguing in my mind. It's not a glitch, it's a feature.

But this isn't a bit of magic. There will be times where growth stocks outperform value stocks. And these periods of time can be extended.

To effectively capture the value premium, you have to maintain a consistent exposure to value stocks.

Maintaining this exposure all comes down to your system for investing which will be our topic for next week.

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Next On The Canadian Money Roadmap Podcast

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Coming up on Wednesday, you'll learn all about your rate of return and why return figures don't tell the whole story.

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One of the fundamental factors at play when it comes to investment returns is the rate of return. This is the gain or loss made on an investment relative to the amount of money invested. It's the number that most investors focus on, but as the episode points out, it doesn't tell the entire story. It's important to understand that different investments can yield the same rate of return, but have drastically different investment narratives.

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This is where standard deviation comes into play. This statistical measure provides an idea of the volatility of an investment. The higher the standard deviation, the more volatile (and thus potentially risky) the investment is. It's an important tool in investment analysis as it can provide a clearer picture of what to expect from an investment. It helps investors understand the risk associated with their potential returns.

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However, focusing solely on the rate of return and standard deviation might not provide a comprehensive understanding of an investment's performance. That's why the episode also highlights the concept of personalized investment returns. This concept delves into money-weighted returns, a measure that takes into account the average return per dollar invested.

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This concept is particularly important because it reveals how different rates of return can lead to vastly different end results. It’s vital for investors to comprehend that the timing of their investments can dramatically influence their overall returns. This is where the sequence of returns becomes a critical consideration in any investment strategy.

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The episode also highlights the importance of understanding the stock market’s volatility by sharing the intriguing journey of Carvana, a company whose stock price has experienced dramatic fluctuations since it went public. This serves as a reminder of the importance of understanding the context of when and why you invested.

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Make sure you're subscribed to The Canadian Money Roadmap in the podcast player of your choice to receive the episode first thing Wednesday morning

Evan Neufeld, CFP®

P.S. When you're ready here's how I can help you:

Your Money Roadmap GPS Are you feeling lost when it comes to your saving and investment strategy? Want a professional review of your approach?... Read more Start Now

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