In my Friday letter, Thoughts from the Frontline (you can view it here), we looked at how valuation and prices change over market cycles. As I mentioned and have written about extensively in my book Bull's Eye Investing, market cycles should be viewed in terms of valuation and not prices. But how does one capitalize on such a way of thinking? Today's "Outside the Box" will show how several valuation styles and categories have performed over different time intervals, how each styles compares to the other and how each style meshes with the other.
The piece titled "Just a Little Patience" is written by my good friend and fellow investment colleague, James Montier. James is the Director of Global Strategy at Dresdner Kleinwort Watterstein, a London and Frankfurt based investment bank. He is also a prolific writer and author of the book "Behavioral Finance - Insights into Irrational Minds and Markets."
Aided by data from the Quant department of his firm, James dissects a large amount of information in order to present a well-researched report on how value and growth strategies work over time. His conclusions show how patience (defined as a longer time horizon) favors the value investor and hurts the growth investor. One particular note of interest is where James shows the results of a value component in a growth strategy and vice versa.
A key insight to gain is that the prudent and disciplined investor is rewarded for not wavering in his investment methodology, while those that do achieve lower returns. This is one of the more in-depth editions of the year and I trust that you will find it to be "outside the box."
John Mauldin, Editor
Outside the Box
Just A Little Patience
This week we want to look at the benefits (and costs) of long-term investing from a portfolio point of view. Can value and growth managers exploit the noise to generate superior long-run returns? In order to answer this question I enlisted the help of Sebastian Lancetti of our Global Quant team (I would be lost without them!). I asked Sebastian to form quintiles based…