Rotman Management — Spring 2017

rotmanmagazine.ca / 51

Eric Kirzner: Many of us have been surprised by

how well the market has responded to Donald

Trump’s presidency thus far. How do you account

for it?

Charles Brandes:What is so interesting to me is,
all of the expert opinions and polls turned out to be
wrong — and we should keep that in mind, as far as
investing goes. Expert opinions are something you
have to be very careful about. As we have seen over history, in
many cases, they are worthless.
Whether people have been surprised by the results of
Trump so far or not, the fact is, nobody really knows what ef-
fects his presidency will have on the market. Having said that,
we do know a few things: Since 2008, value investing has not
performed as well as it usually does in comparison to growth-
stock investing, and there are a couple of reasons for that. First,
in periods of declining interest rates, the type of value stocks

people buy are from industry categories that don’t do as well

as growth stocks. Also, when you’re value investing, what you

are buying is present earnings and present cash flows; and when

you’re investing in growth stocks, you’re buying earnings poten-

tial in the future. So, if you discount that at a low interest rate,

you could pay more for growth stocks than you would for value

stocks when interest rates are low.

Now, it looks to me like interest rates are starting to re-

verse, and historically, in periods of rising interest rates, value

stocks do quite well. That’s because rising interest rates usu-

ally mean that the economy is growing, and when economies

grow, value stocks perform better. Historically, starting in the

early 1970’s during a period of rising interest rates, our value

stocks did quite well; and the same was true during the period

of rising interest rates from 2002 to 2007. After that, as rates

declined, value stocks didn’t do as well. Of course, there are

many other factors involved, but we’re starting to see a ‘value

premium’ that could last for quite some time.

Rotman Professor Eric Kirzner interviews two of North America’s leading

value investors about the current investing landscape, the efficiency of markets,

and how some things — like human behaviour — never change.

Value Investing,

Human Behaviour

and Why You

Should Ignore

the Market