The Case for Long-Term Value Investing: A Guide to the Data and Strategies That Drive Stock Market Success. 2022. Jim Cullen. Harriman House
Jim Cullen’s bright yellow dust jacket The case for long-term value investing suggests caution or sun. On the cautious side, investors recognize that market-exposed assets lost value in 2022 and wonder whether they should liquidate and run for the hills or follow a discipline that meets long-term investment goals. On the bright side, Cullen proposes a discipline that should produce satisfactory risk-adjusted and inflation-adjusted returns over a period of five years, if not longer.
Cullen is a rare author among contemporary active asset managers, with a 60-year career in investment management. His life offers a scale of experience that few have, and he shares it generously here, supported by analysis, back-testing and memorable stories of investments gone right or wrong. The simple style of presenting the value strategy and how to apply it in any type of market will convert many who doubt its success into believers.
What is long-term value investing? It is clear that Cullen defines “long term” as at least five years. Ignoring this prospect highlights numerous near-term market meltdowns that leave value stocks in the dust. Examination of longer periods reveals a very different picture. Cullen presents abundant data covering very long time periods, generally ending in 2020. Holding on to long-term investment goals rather than chasing momentum out of fear of missing out leads to higher returns than the investment offers in growth The rolling five-year basis that Cullen highlights smooths performance and illuminates the growth/value debate. It makes a compelling case for a long, steep downside for growth stocks when they finally correct.
The author’s examination of the lowest (bottom 20%) P/Es and top (20%) dividend yields also considers earnings and dividend growth over time, encouraging a focus on the stock more than the stock market. The emphasis on lower price-to-book ratios further increases the value it makes. Many of us question asset valuations reflected in book value, with an extreme example being banking and financial assets before and during the 2008-2009 financial crisis. Outside of traditional industries such as airlines, metals and energy, and recognizing the dominance of the technology era, with their high or insignificant price/book ratios, the low price per book can be a tool of effective selection. The lowest price/book ratios in the S&P 500 index performed well along with the lowest P/Es and highest dividend yields, except in individual years during bubbles or meltdowns. The graphical evidence is convincingly presented in a chart depicting “The Three Disciplines” and how they performed each year from 1968 to 2020.
As astute as Cullen is in convincing us of the reality of value investing, he also provides a thoughtful analysis of market turning points based on such critical considerations as government debt levels, corporate and individual; the level and direction of interest rates; and consumer confidence. By reviewing the current data, readers can be assured that the current bear market may not last, especially for those who focus on valuations, earnings and dividend growth and stay the course.
Cullen sees market timing as the silent killer of investment performance, particularly in the case of “strategic” shifts in cash and attempts to improve yields. Cash changes targeted are those that last a month or more. Just a few moves out of the market can result in substantial investment underperformance, especially during frightening times of extreme illiquidity and deep recession.
Two other points should be noted. Value investing is applicable to all capitalizations and geographies, including emerging markets. Small-cap value has performed very well over the long term because of the frequency of acquisitions. Covered call writing can usefully come into play, given the sharp decline in bond yields caused by a bull market in 30-year bonds, even as interest rates rise. Cullen shares a covered call writing strategy for tax-exempt investment accounts that improves portfolio performance, rather than investing in selected bonds just for income.
A section titled “Getting Started: New Investors” takes up just a few pages before the book’s endnote. I found it very entertaining and educational. The author highlights the savings, investment and beauty of compound interest. Most readers will find it surprising that he recommends annual investment contributions up to age 80! My suggestion for the new investor would be to aim for this long trading period, but if that is not possible, at least try to reduce the expenses in the amount that cannot be continued to contribute to the investments.
After reading his well-made case for long-term value investing, testing additional periods beyond those published, and reviewing recent economic data with a critical eye as Cullen does, I agree with him that this is a book for all investors. This is so, even though analytically inclined investors will likely go beyond their stated criteria for stock selection, namely the lowest prices and price to book along with the highest dividend yields.
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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Janet J. Mangano
