Regular visitors to the value perspective will know how keen we are that investors should look to learn from history and, from time to time, this leads to questions as to how that view can be reconciled with constant regulatory warnings never to rely on past performance.
The crucial point here is that investors can learn lessons from history where something is repeatable for a reason. So, at the macroeconomic level, the evidence of the last 100 years or so would suggest some things are fairly mean-reverting – for example, strong GDP growth will tend to slow down at some point and then eventually pick up again and the same goes for profit margins. There are demonstrable economic reasons why this happens over time and why it repeats.
Similarly, at the human level, while you can never say for sure what any one investor will do, with hundreds of thousands of investors, you can begin to discount individual idiosyncrasies and just talk about 'human behaviour' – and human behaviour as an amorphous mass does not change so very much over time.
More often than not, however, when people talk about 'past performance', they are doing so in the context of a single fund manager, who may always be able to point to some very strong reasons for doing whatever they did – even if, in reality, it merely felt like the best thing to do at the time.
That is why, as value investors, we always come back to the foundation stone of valuation. Focusing on the valuation of a particular business means we enjoy the benefit of the 100-plus years of history that says value investing outperforms on average and over time.
Were we to choose to ignore those principles and do something different each time, then we would just be individuals doing whatever we felt like – and that is not repeatable. What separates the Warren Buffets of this world from the average fund manager is an investment process that is repeatable, process-driven and based on history. That is value investing.
There are of course no guarantees things will pan out the same way in every cycle. Value investing may underperform for two years out of six in one cycle and for five years out of six the next, but you put your faith in its principles and its very long track record. You do not get worried if, for whatever reason, things are a bit different this time but stick to the basics and hope it works out for you in the end. There is a massive weight of history – more than a century’s worth of data – to suggest it will.