At the Money: Stock Picking vs. Value Investing

Episode Summary

Executive Summary: Barry Ritholtz interviews Jeremy Schwartz of WisdomTree about value investing: buying stocks relative to fundamentals such as earnings and dividends. Schwartz argues valuation discipline can reduce exposure to bubbles and may reward investors over long periods, while emphasizing diversification to avoid value traps. He contrasts low-expectation value stocks with expensive growth stocks whose returns depend on meeting demanding forecasts, and cites historical outperformance for the cheapest stocks. The episode also briefly promotes a separate segment about quantum-era data security.

Main Topics: What value investing means: Schwartz defines value as comparing a stock’s price with fundamental measures, especially earnings and dividends, which reflect the cash flows investors ultimately receive. Valuation discipline and market bubbles: The discussion presents valuation-focused investing as a way to limit exposure to overpriced market segments, recalling Jeremy Siegel’s warnings about technology-stock valuations before the 2000 bubble burst. Long-term value versus growth performance: Schwartz argues that starting valuations influence long-run returns: expensive stocks can lag if expectations are not met, while cheaper stocks may benefit from pessimism already reflected in their prices. Diversification and value traps: Because a low price may reflect deteriorating fundamentals or unsustainable dividends, Schwartz favors diversified, rules-based portfolios over relying on a single apparently cheap stock. Quality investing and the Buffett example: The interview describes Warren Buffett’s evolution from buying very cheap stocks toward acquiring high-quality businesses at reasonable prices, treating quality as compatible with value investing. Interest rates, sector dynamics, and current valuations: The speakers consider whether higher rates support value over growth, but note that traditional relationships have been inconsistent. Schwartz maintains that valuations matter most over very long periods. Separate quantum-security promotion: The opening and closing mention Q Day and the risk that future quantum computers could decrypt data harvested today; this is an advertisement for another Bloomberg series, not part of the investing interview.

Key Arguments: A stock’s value should be assessed against the present value of its future cash flows; earnings and dividends are practical anchors for that assessment. Buying expensive stocks creates risk when high growth expectations are difficult to sustain. A company can grow quickly and still disappoint investors if it grows less quickly than its valuation assumes. Historical examples illustrate the role of purchase price: IBM outgrew Exxon on multiple measures over decades, yet Exxon reportedly delivered better returns because it traded at lower valuations and higher dividend yields. Diversified value strategies can reduce the risk of selecting individual value traps, including businesses whose low valuations reflect weakening fundamentals or likely dividend cuts. Schwartz cites long-run evidence that the most expensive stocks lagged the broad market while the cheapest outperformed, but the discussion does not establish that value will outperform in every period. The guest sees high-dividend and small-cap stocks trading at relatively low earnings multiples as potentially attractive, while acknowledging that interest-rate relationships and market leadership can change.

Data Points: IBM versus Exxon annual growth: IBM exceeded Exxon by about 3 percentage points per year on sales growth and earnings growth - Schwartz’s comparison across roughly 70 years; he says IBM also led on other growth measures, while Exxon delivered the better investment return. Average price-to-earnings ratios in the IBM–Exxon comparison: IBM: about 22; Exxon: about 12 - Schwartz uses these historical average valuations to explain how the lower-priced stock could outperform despite slower growth. Dividend yields in the IBM–Exxon comparison: IBM: about 2%; Exxon: about 5% - Historical comparison offered as another illustration of the valuation and income gap. Illustrative broad-market and high-dividend valuations: S&P 500: around 20 times earnings and below a 2% yield; high-dividend stocks: around 10 times earnings and about a 5% yield - Approximate figures used by Schwartz in the late-2023 discussion to contrast growth-oriented and value-oriented segments. Recent relative performance periods: Value had a difficult stretch of roughly 15 years through 2021; in 2022 the Nasdaq fell about one-third while high-dividend stocks were positive - Schwartz describes the reversal in leadership and notes growth had rebounded again in 2023. Earnings yield at a 10-times P/E: About 10% - Schwartz describes this as the earnings yield for a 10 P/E basket and argues that investors need less growth for returns when the starting yield is high. Historical relative returns by valuation: The most expensive stocks lagged by about 1–2 percentage points a year; the cheapest outperformed by about 2 percentage points a year - Schwartz says his studies cover the S&P 500 from its 1957 inception over roughly six decades. Illustrative high-growth stock valuation: NVIDIA was described as one of the highest-multiple S&P stocks - Schwartz presents it as an example of a company delivering exceptional growth while facing the challenge of sustaining elevated expectations; no precise multiple is given.

Pivotal Quotes: "Any asset is present value of future cash flows." — Jeremy Schwartz: His concise explanation of the underlying principle used to define value investing. "The higher the PE, the more the expectation, the harder they fall when they disappoint over time." — Jeremy Schwartz: Schwartz summarizes why expensive growth stocks can be vulnerable even when their businesses continue to grow. "I think we come back to valuation drives return over the very long run." — Jeremy Schwartz: His central conclusion after discussing interest rates and changing market relationships.

Implications: Investors may use valuation and diversified value exposure to manage expectations and reduce concentration in expensive stocks, while recognizing that value can underperform for extended periods. Historical results are not a guarantee, and screening for sustainable fundamentals remains essential.