The Best Investment Writing Volume 5: John Pease, GMO – Value: If Not Now, When?

Episode Summary

Executive Summary: The episode presents GMO’s case that value stocks are historically cheap across many definitions and geographies, while growth stocks—especially U.S. mega-cap tech—look bubble-like by valuation and investor behavior. The speakers argue value can outperform even without a catalyst, though normalization, vaccines, or higher rates could accelerate the reversal. They conclude the opportunity is best exploited now, particularly in a long-short dislocation framework.

Main Topics: Value is historically cheap (Priority: 5/5): The central thesis is that value stocks across the U.S. and abroad are at exceptionally low relative valuations, regardless of how cheapness is defined or screened. Robustness across definitions and filters (Priority: 5/5): The argument is tested against multiple objections: different valuation metrics, sector neutrality, size buckets, excluding mega-cap tech, and quality screens all still show value as cheap. Structural reasons value can outperform (Priority: 4/5): The piece breaks value returns into growth, yield, rebalancing, and valuation change, arguing value can win even if valuations merely stay depressed. Growth as a bubble (Priority: 5/5): The episode contends growth stocks are extremely expensive and show classic bubble characteristics, especially given 2020’s speculative market behavior. Potential catalysts for mean reversion (Priority: 4/5): Possible triggers include post-pandemic normalization, vaccine-driven recovery, and higher interest rates/inflation, though the speakers stress they cannot predict the exact catalyst. Investment implication: act now (Priority: 5/5): Because the valuation opportunity is so extreme and timing the exact turn is impossible, the speakers argue the bigger risk is waiting too long rather than entering before the bottom is obvious.

Key Arguments: U.S. value is cheap across 11 valuation definitions; 10 of 11 are cheaper than in at least 90% of months since 1971. The cheapness of value persists even after controlling for sectors, industries, market cap, exclusion of FAANG/M, and quality slices. Value looks cheap not only in the U.S. but also in developed and emerging markets, suggesting a global opportunity. Value can outperform through three non-valuation channels—fundamental growth, dividend/yield advantage, and rebalancing—plus valuation mean reversion. Growth stocks appear bubble-like because valuations are extreme and 2020 featured clear speculative mania in names like Hertz, Kodak, Tesla, and Nikola. Catalysts are uncertain, but normalization after COVID-19 and higher rates would likely help value, especially financials. Waiting for a clearly identifiable catalyst is dangerous because market turning points are often only obvious in hindsight. Given the severity of value’s underperformance and the breadth of cheapness, the authors believe this is the right time for a long-short value strategy.

Data Points: GMO asset size: approximately $70 billion - John Pease describes GMO, the firm behind the valuation analysis. U.S. value relative valuation percentile: 4th percentile - After a difficult 2020, U.S. value trades at the fourth percentile of relative valuation. Cheap-half valuation definitions: 10 of 11 - Across 11 valuation metrics, 10 are cheaper than at least 90% of months since 1971. Price-to-scale percentile: 13th percentile - The cheapest half on GMO’s price-to-scale metric is less compressed but still very cheap. Reference low for U.S. value: February 2000 - The cheapest month for U.S. value historically, used as a comparison point for price-to-scale. Value’s worst annual performance: worst 12-month performance in history - The speaker says value just experienced its worst year-long loss ever. Tesla share increase: about 800% - Tesla’s rise since fall 2019 is cited as an example of speculative growth valuation. Tesla sales growth: 17% growth in vehicles sold - Used to contrast modest operational growth with massive stock appreciation. Tesla market cap comparison: greater than the sum of all other U.S., European, and Korean automakers plus Honda, Mazda, and Nissan - Illustrates extreme valuation relative to actual production. Nikola public debut valuation: $3 billion - Nikola went public via SPAC at this valuation. Nikola peak 2020 market cap: about $30 billion - The stock rose roughly tenfold during the EV frenzy.

Pivotal Quotes: "No matter where you look, no matter how you slice it, value looks cheap." — John Pease / Ben Inker: Core thesis on the breadth and consistency of value’s cheapness. "With a combination of some of the highest valuations ever seen and clear corresponding manic investor behavior, it seems clear to us that growth stocks are indeed in a bubble." — John Pease / Ben Inker: The argument that growth has crossed from expensive into bubble territory. "We are far more confident that something will cause the turn than any one thing in particular will." — John Pease / Ben Inker: Explains why the authors do not need to know the exact catalyst to invest in value.

Implications: Listeners are urged to view value as a rare, global opportunity rather than a broken style. The takeaway is to favor value now, accept catalyst uncertainty, and consider long-short implementations to benefit from a likely rotation out of expensive growth.