. 2022. Jim Cullen. Harriman House.
The brilliant yellow dust jacket from Jim Cullen‘s advises either caution or sunshine. On the cautious side, investors acknowledge that market-exposed assets have lost value in 2022 and are wondering whether or not they should liquidate and run or follow a discipline that meets investment objectives over the long run. On the positive side, Cullen suggests a discipline that ought to produce satisfactory risk- and inflation-adjusted returns over a period of 5 years, if not for much longer.
A rare writer amongst today’s lively money managers, Cullen has a 60-year profession in investment management. His life offers a wealth of experience that few have, which he generously shares here, supported by evaluation, backtesting and unforgettable stories of investments that went well or failed. The easy type of presenting the worth strategy and its application to any market will convert many who doubt its success into believers.
What is long-term value investing? It’s clear that Cullen defines “long-term” as not less than five years. Ignoring this attitude reveals quite a few short-term market declines that leave value stocks within the lurch. Looking at longer periods of time shows a very different picture. Cullen presents quite a lot of data covering very long periods of time, generally ending in 2020. Sticking to long-term investment goals moderately than chasing momentum for fear of missing out ends in higher performance than growth investing offers. The five-year rolling basis Cullen emphasizes smooths performance and sheds light on the expansion/value debate. He makes a convincing case that growth stocks will experience a protracted and robust downtrend after they ultimately correct.
The writer’s examination of the bottom P/E ratios (the underside 20%) and the very best dividend yields (the highest 20%) also takes under consideration the expansion of earnings and dividends over time, encouraging a give attention to the stock market moderately than the stock market focus. The emphasis on the bottom price-to-book ratio further strengthens its case for value. Many of us query the valuation of assets reflected in book value. An extreme example is banking and financial assets before and in the course of the 2008-2009 financial crisis. Outside traditional industries corresponding to airlines, metals and energy, and given the dominance of the technology age with its high or uninformative price-to-book ratios, a low price-to-book ratio could be an efficient screening tool. The lowest price-to-book ratios within the S&P 500 Index, together with the bottom P/E ratios and highest dividend yields, performed quite well, except in individual years during bubbles or meltdowns. The vivid evidence is convincingly presented in a chart depicting “The Three Disciplines” and their performance in every year from 1968 to 2020.
As astute as Cullen is in convincing us of the realities of value investing, he also provides a thoughtful evaluation of turning points in markets based on such critical considerations as levels of presidency, corporate and personal debt; the extent and direction of rates of interest; and consumer confidence. When reviewing the present data, readers might come to the conclusion that the present bear market may not last long, especially for those focused on valuations, earnings, and dividend growth and staying the course.
Cullen believes market timing is the silent killer of investment performance, particularly within the case of “strategic” shifts to money and attempts to enhance returns. The transitions to money that he mentions take a month or more. Just a number of steps out of the market can lead to significant underperformance of investments, especially in frightening times of maximum illiquidity and deep recession.
Two further points require mention. Value investing applies to all market capitalizations and geographic areas, including emerging markets. Because of the frequency of acquisitions, small-cap value has performed remarkably well over the long run. Given the sharp decline in bond yields brought on by a 30-year bond bull market, at the same time as rates of interest rise, covered call writing could be put to good use. Cullen advocates a covered call writing strategy for tax-exempt investment accounts that improves portfolio performance versus pure income investing in select bonds.
A bit entitled “Getting Started – New Investors” is situated just a number of pages before the book’s conclusion. I discovered it extremely entertaining and academic. The writer sheds light on saving, investing and the fantastic thing about compound interest. Most readers will probably be surprised that he recommends annual investment contributions until age 80! My suggestion to the brand new investor could be to aim for this long contribution period, but when that just isn’t possible, not less than try to cut back expenses by the quantity that they will now not contribute to the investments.
After reading his well-presented arguments for long-term value investing, testing time periods beyond those published, and examining current economic data with a critical eye, as Cullen does, I agree that it is a book for all investors. This applies even when analytically inclined investors are prone to transcend his stated criteria for security selection – i.e. the bottom P/E and the bottom price-to-book ratio combined with the very best dividend yields.
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