Ever heard that joke about how if you are young and you aren’t a democrat, you have no heart, but if you are old and you aren’t a republican, you have no brain? Well, there seems to be something similar happening with the portfolios of young and old investors. Stocks with the youngest median owners are very expensive (but so exciting!), but stocks with the oldest median owners are much more fairly valued.
I spoke at the CFA’s 2015 national Wealth Management conference yesterday on the topic of “Millennials and Money” and sadly, I had to report that millennials are making three big mistakes: they aren’t saving enough (-2% savings rate), their asset allocation is back asswards (very heavy on cash, light on stocks), and their stock selection stinks.
It is this third category-poor stock selection-that I found most interesting. First, a quick reminder of how powerful valuations are for predicting future stock returns, on average. Value here is a combination of P/E, P/S, EBITDA/EV, FCF/EV and Shareholder Yield (deciles rebalanced annually).
By just buying the cheapest stocks, you can significantly outperform over the long term (much easier said than done). Expensive stocks do so poorly that they have delivered a negative real return (after inflation). Simply put, you shouldn’t buy expensive stocks (even though some of them crush, the group gets killed).
So now let’s plot the stocks that have the youngest median owners (this is according to data from SigFig, which tracks 2.5 million portfolios representing about $350 billion in assets…their data is awesome). Look where they fall on the value spectrum.
I wasn’t surprised by these (although I’m not sure what Blackberry is doing there…), but the key point is how expensive they are, on average. If you take them as an equal weighted portfolio, they are priced in about the 80th percentile of the market. Not good. Stocks in this valuation decile have done poorly through history. An average 30-year return would turn $1M into $5.4M (nominal).
Now, let’s contrast the millennial portfolio with the boring (but much better valued) grandpa portfolio:
This group of stocks is about as exciting as watching paint dry. And yet, taken as a group, it is priced to do much better than the millennial portfolio. Using the average historical return for stocks falling in a similar valuation bucket, the grandpa portfolio would grow from $1M to $46.2M over 30-years.
Millennials are notoriously skeptical of the market, but have started dipping their toes in with stocks that they know and love. Unfortunately, these stocks are priced to do poorly. Millennials should embrace value investing, but value stocks are no fun. Returns earned from value stocks, however, are quite fun indeed. Millennials could learn a lot from their grandparents.
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Two falsehoods in this article. One is that value stocks are inherently superior to momentum stocks. Not true. Only true if you are a masochist and like pain. Value is superior to lottery tickets but not to momentum.
Second, it’s time to retire the joke about Dems and the GOP. Old Republicans these days are utterly brainless. They pride themselves on their hatred for science, education, women, minorities, children after childbirth and attempts to restrict military guns in civilian hands. They also can’t count, as the only Presidents in the last 40 years who have lowered the deficit during their terms were Clinton and Obama. So that joke can go the way of the Edsel.
alpha from value strategies is higher than from momentum strategies just about everywhere…but momentum is still great.
the joke was a writing tool 😉
"Buy what you know" .. ?
It’s not just about what decile one lands in, but also about the size of the spread between decline 1 and 10. The historical spread was in the past. How confident are you about the current valuation spread? IMO anyone owning individual stocks is playing a fool’s game in the first place. This all kinda begs an EMH question - if everyone knows that value stocks outperform in the long run, don’t you think that’s gonna get more than priced in, particularly when people feel so confident about this 40 year old theory that they consider it a fact. Besides the "mistake" of not saving enough is mostly because their genius parents and grandparents created this fantastic jobs environment for millennials. The mistake you’re making is having a major domestic bias. Not to mention starting off with an insult to your target market segment. Think that’s gonna sell your stupid book that’s been written at least 100 times?
Patrick,
Interesting article, but I fail to understand how you arrived at the 1mm-46.2mm figure. That seems comically exaggerated. When we run Monte Carlo simulations over 30 years it is common to see a 500% increase, or even a little more, but a 4,620% average gain? Seems implausible.
Panskeptic is a writing tool…
In re: Panskeptic: As value stocks revert to the mean, they generate momentum. The two terms are not mutually exclusive.
The joke is a popularization of a classic quote: Lord Chesterfield, the 18th century aesthete, received a letter from his son, deploring the conditions of the farm workers on his estates. Lord Chesterfield replied, "He who is not a radical at fifteen hath no heart. He who is not a conservative at fifty hath no brain."
and what happens to the ‘value’ of these grandpa stocks as the positions are liquidated over the next 10-15 years as grandpa needs that money to live?
You’re looking backwards. The future is in the other direction.
Those value decile results are based on a rolling 1- year hold period, not a 10-15 year holding period (over which value and any other factor dies out…)
success looking forward would require consistently successful forecasting, which is impossible for most. The key is to find stocks that are currently mispriced (good or bad) and value has been a phenomenal way of doing so (using only "backward" data at that)
Those are excess returns, not absolute. The absolute return is about 13.5% (1.135^30 = ~4,500%)