Two investment myths vs. historical data

I think we’ve all been part of a conversation where the words, “they say”, popped up. Think about it for a minute… “They say” that the sequel of a particular film will be even better than the original. Or “they say” that the third wave of COVID-19 will be so much worse than the first two. It’s when these “they say” talks start to do their rounds in the investment world, that my interest is piqued. Two of the most popular “they say” subjects currently doing their rounds are:

  • The USA makes up 58% of the MSCI All Country World Index, so if the S&P500 struggles the FTSE/JSE All Share Index will also struggle.
  • It doesn’t matter how attractive value shares are, if growth shares collapse, value shares will also lose value.

Everyone will just follow the S&P500

I want to start by pointing out that I am well aware of the fact that historical movement does not guarantee any future movements. This time may very well be different. But I just had to have a look at what happened the last time we found ourselves in a similar situation. There are several ways to determine whether a particular share or market is cheap or expensive. The more popular method is the price earnings ratio or P/E. The P/E is calculated by dividing the company’s price per share by the earnings per share. The higher the P/E, the more expensive the share. The problem with the straight-forward P/E is that it’s only based on the last 12 months’ earnings, so it doesn’t really give us a good cyclical view. That is why experts prefer to use the Shiller P/E, also known as the CAPE ratio. The CAPE ratio is based on the same principle as the P/E, but considers the earnings per share over a 10-year period to smooth out the fluctuations in corporate profits that occur during different times in a business cycle.

Graph 1: S&P500 CAPE ratio (source: Barclays, Refinitiv Eikon & @SchalkLouw)

Back to the S&P500. When we have a look at the S&P500’s historical CAPE, you’ll see that at current levels in excess of 38 times, it’s trading much higher than the 24 times average since the beginning of 1982. What you’ll also see is that we’re currently trading at levels last seen at the end of 2000. Why is this important?

Well, everyone will remember that the S&P500 didn’t only contract shortly thereafter, but that it literally yielded no returns for an entire decade. I would like to focus on the five-year contraction period between January 2002 and January 2007 in particular. Over this five-year period investors lost more than 12% of their capital by being invested in the S&P500. Contrary to what “they” said, investors who were invested in the FTSE/JSE All Share Index at the time didn’t only manage to sidestep these negative movements experienced in the largest of world markets, but also earned a return of 187% over the same period.

I need to reiterate the fact that I’m not saying that this will happen again. All I’m saying is that I won’t listen to what “they” say.

Declines affect everyone, the value of it doesn’t matter

This one has to be one of may favourites, especially when combined with the opinion that value shares as an investment consideration is long dead.

When we place the MSCI All Country World Value Index relative to the MSCI All Country Growth Index, you will see that the last time this ratio traded below 1.5 times happened to be at the beginning of 2000. February 2000 to be exact.

Graph 2: MSCI All Country World Value Index relative to the MSCI All Country World Growth Index (source: Refinitiv Eikon & @SchalkLouw)

You will also see that at the turn of the growth cycle when investors sought salvation in value shares, growth shares (MSCI All Country World Growth Index) declined by more than 35% in US Dollar-terms in the five years that followed. Again, as with the S&P500 and JSE discussed above, value shares (MSCI All Country World Value Index) didn’t only manage to sidestep these types of declines, but managed to increase by 16% over this five-year period.

I would like to conclude by warning investors that you shouldn’t simply accept that what “they” say is the truth. Do your homework properly and if you’re not comfortable or competent enough to do it yourself, rather consult the experts. Yesterday’s winners may very well turn out to be tomorrow’s losers.


The opinions expressed in this blog are the opinions of the writer and not necessarily those of PSG. The information in this blog is provided as general information. It does not constitute financial, tax, legal or investment advice and the PSG Konsult Group of Companies does not guarantee its suitability or potential value. Since individual needs and risk profiles differ, we suggest you consult a qualified financial adviser, if needed. PSG Wealth Financial Planning (Pty) Ltd is an authorised financial services provider – FSP 728

Schalk Louw

As Portfolio Manager at PSG Wealth Old Oak and with over 20 years’ experience in the investment industry, Schalk has consistently delivered solid returns to his clients and has certainly become one of South Africa’s most well-known strategists. He started his career in 1994 at the stockbroking company, Huysamer Stals (later ABN Amro). He joined SMK Securities in 1997, (later became BoE Personal Stockbrokers) and was later appointed as director and branch manager. In 2001 he co-founded Contego Asset Management and managed the company as CEO up to March 2014, after which he joined PSG Wealth Old Oak. Schalk has also become a regular household name with investors, with his reports being published in many of the national press. He completed his MBA in 2008.

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