As contrarian value investors, our mandate at HCM Value is straightforward: accumulate durable, mispriced assets with real intrinsic worth. But in an era of chronic monetary expansion, the deepest valuation challenge isn’t in equities, real estate, or commodities.

It’s in the measuring stick itself: the U.S. dollar.

From Bretton Woods to Fiat Decay

When the U.S. suspended the Bretton Woods system in 1971, the dollar was severed from gold and placed entirely in the hands of policymakers. It was the start of a half-century experiment in unconstrained fiat money.

The results are unequivocal.

• By official CPI data, the dollar has lost ~87% of its purchasing power since 1971.
  One 1971 dollar buys roughly 13 cents of today’s goods and services.

• Using a pre-1996 CPI methodology—before substitution and hedonic adjustments softened inflation reporting—the decline is closer to 96%.
  Every 1971 dollar is now worth about 4 cents in real terms.

That’s what fifty-plus years of “managed money” have delivered.

And this debasement didn’t occur during a period of national decline. It happened during one of the strongest economic half-centuries in American history—an era defined by world-leading innovation, corporate profitability, technological progress, and U.S. dominance at the center of global finance. The tragedy is that a structurally robust, dynamic economy was treated as if it required permanent monetary life support. The economy thrived; the currency quietly eroded underneath it.

The Great Moderation Was a Mirage

This erosion wasn’t linear. From the 1990s through around 2020, inflation appeared subdued. The “Great Moderation” narrative took hold: central banks could expand liquidity aggressively without triggering inflation. That confidence was misplaced.

The low inflation of that era was not monetary genius—it was a globalization dividend:

• China’s integration into global trade

• Offshoring and supply-chain optimization

• Stagnant commodity prices

• A flood of low-cost manufactured goods

These forces exported deflation to the West and masked the real effects of loose monetary policy. Policymakers misinterpreted a one-time structural shift as a new equilibrium. They believed they had discovered a model where money printing had no cost.

History says otherwise. Across centuries, fiat currencies have declined. Calm periods aren’t the end of inflationary pressures—they’re the setup for the next surge. Post-2020 exposed the fragility of the illusion.

The Real-World Ledger: Housing, Cars, Gas, Food

You don’t need an economic model to see what happened. The necessities of life tell the story plainly.

Housing

• 1971 median U.S. single-family home: $25,200

• CPI-adjusted equivalent today: ~$225,000

• Actual median today: $400,000+

• Premium markets (e.g., Southlake, Texas): $1M+

Automobiles

• 1971 Mustang Mach 1: $3,268

• CPI-adjusted: ~$29,200

• Modern performance equivalent: $45,000+

Gasoline

• 1971 price: $0.36/gal

• Today: ~$3.00+/gal

• Even after ~2× efficiency gains, mobility costs are up roughly 10×

Basic groceries

• 1971 loaf of bread: $0.24

• Today: ~$3.00+

• A 12–13× increase—well above what official CPI implies

This isn’t cherry-picking. It’s shelter, transportation, food—the backbone of real-world living.

If the Fed Were a Money Manager

Imagine you hired an asset manager in 1971. After 54 years, he hands you your statement and proudly reports:

“You now have 4% of your original capital.”

You’d fire him on the spot and probably litigate.
Yet this is exactly what U.S. monetary policy has delivered to dollar savers—no prospectus, no disclosure, no performance reporting.

We call this “price stability.”

Hedonic adjustments can celebrate better TVs and faster phones, but pensions and retirees don’t eat electronics. They pay for housing, fuel, healthcare, and food—categories where inflation has been relentless.

What This Means for Allocators

This isn’t merely a philosophical critique of fiat money. It’s an allocation problem, and a serious one.

Equities have been the escape valve.
Since 1971, the S&P 500 has risen tens of thousands of percent in nominal terms. Even after adjusting for inflation, long-run real equity returns remain robust. The equity market has been the mechanism investors use to outrun monetary debasement.

Fixed income has been the casualty.
Across multiple regimes—especially when yields were artificially suppressed—bondholders have frequently earned negative real returns. The past few years simply made it obvious.

For value investors, the takeaway is blunt:

In a world where the dollar retains roughly 13% of its 1971 value by official metrics—and closer to 4% under earlier inflation measures—holding excess cash is choosing long-term value destruction.

Prudent stewardship requires exposure to real, cash-flowing assets:

• undervalued equities with durable economics

• real assets and commodity-linked businesses

• selective foreign exposures with more disciplined monetary regimes

At HCM Value, that means focusing on discounted, durable claims on real economic activity—not hoarding a currency policymakers have repeatedly demonstrated they’re willing to dilute.

If your benchmark is nominal dollars, you can pretend the last half-century was a success.

If your benchmark is purchasing power, there’s only one honest conclusion:

You don’t beat debasement by sitting in cash. You beat it by owning assets that grow faster than the unit used to measure them.

The Enduring Case for Value

Value investing has a record of success that stretches back nearly a century. From Graham and Dodd’s work in the 1930s to the Fama-French research in the 1990s, the data are consistent: systematically buying undervalued securities delivers superior long-term returns.

Yet, despite the evidence, most investors either avoid value strategies or abandon them when they matter most. The barriers are rarely analytical. They are behavioral and structural. Understanding these obstacles explains why value continues to work, because so few can stay the course.

1. Investors Unaware of the Data

Much of the investing public never encounters the long history supporting value. Decades of research have confirmed that low valuation multiples — such as price-to-earnings, price-to-book, and price-to-cash flow- outperform over time.

Instead, investors are fed a steady diet of growth stories, thematic products, and daily price headlines. The long-term power of compounding in value stocks goes largely unseen, and without access to the data, many never realize the opportunity exists.

2. Fear of Inconsistency

Value investing does not produce smooth results. There are long stretches of underperformance, such as the late-1990s dot-com bubble and the 2017–2021 dominance of mega-cap growth stocks.

This irregularity is intolerable for many. Institutions fear relative underperformance; individuals fear missing out. Yet inconsistency is central to why value works. If the strategy delivered constant outperformance, the excess returns would be arbitraged away. The discomfort of volatility is the price of admission.

3. Extrapolating the Past

Investors often project the past into the future. Winners are assumed to keep winning, and laggards are expected to remain impaired.

This thinking runs counter to mean reversion, the very principle on which value thrives. Stocks priced for permanent failure often recover once conditions normalize. Overhyped winners priced for perfection frequently disappoint. Recognizing where markets have extrapolated too far is where disciplined investors find opportunity.

4. Good Companies ≠ Good Investments

A strong business does not always equate to a strong stock. Cisco in 2000, Coca-Cola in 1998, and several recent mega-cap names illustrate the danger. The companies were excellent, but investors paid valuations so high that future returns were weak.

At Hoover Capital, we distinguish between company quality and investment quality. A mediocre business at the right price can outperform an outstanding business at the wrong price. Price matters more than narrative.

5. Momentum and Immediate Gratification

Modern markets amplify impatience. News cycles, social trading, and constant updates encourage chasing what is already working. Momentum itself is a valid factor, but pursued without discipline, it leads to buying high and selling low.

Value requires patience, buying what others are discarding and waiting years for recognition. In a short-term world, this delayed gratification is rare. That rarity sustains the value premium.

Why Value Still Works

The barriers to value,  including a lack of awareness, fear of inconsistency, extrapolation bias, confusion between company and investment quality, and impatience, ensure that most investors cannot sustain their commitment. These obstacles are precisely why value investing continues to deliver.

At Hoover Capital, we welcome the discomfort. Our contrarian process targets investments that are overlooked and mispriced. We understand that markets test conviction before rewarding it, and that discipline is the true edge.

Value investing has never been easy, but for those willing to endure its challenges, it has been profoundly rewarding. That is where the real opportunity lies.

Executive Summary

After a decade dominated by capital-gain chasing and massive share buybacks, dividend yields have quietly slipped from the spotlight. Yet, history shows that dividend yields, not just price appreciation, have often carried the heaviest load in delivering long-term returns on equity. As the cost of capital resets higher, global demographics age, and regulatory scrutiny on buybacks intensifies, the next cycle is likely to reward investors who secure reliable cash distributions. This blog revisits the role of dividend yields in total returns, examines the post-GFC dividend drought, and explains why a global, value-focused portfolio is well-suited for the environment ahead.

1. The Overlooked Pillar of Total Return

Since 1926, dividends have accounted for roughly one-third of the S&P 500’s total return—about 32% by most estimates. During inflationary periods such as the 1940s and 1970s, their share exceeded 60%, cushioning real returns when multiples compressed. In sharp contrast, during the 2010s, dividends made up barely 15% of U.S. equity gains, as ultralow rates and aggressive buybacks propelled valuations higher.

2. What History Teaches

• 1930s–1950s: Cash was king as the market recovered from the Depression’s scars and financed post-war reconstruction.

• 1965–1982: Stagflation and punitive tax regimes hammered multiples; dividends delivered more than half of real returns.

• 1982–1999: The great disinflation enabled a multiple-expansion supercycle; the income contribution declined but still averaged around 25%.

• 2000–2009: Two significant drawdowns (Tech Bust, GFC) reminded investors that promises of future growth are no substitute for cash in hand.

3. The Post-GFC Dividend Drought

Between 2010 and 2024:

• The S&P 500’s indicated yield dropped below 1.2%, with a modest rebound to 1.28% by April 25, 2025.

• Aggregate buybacks outpaced dividends by a ratio of 1.6:1.

• Technology and communication services—now accounting for one-third of the index weight—yielded minimal returns.

Cheap money masked the opportunity cost, but that era has come to an end.

4. Structural Winds Are Shifting

• Higher-for-Longer Inflation: Persistent services inflation keeps real yields low, making investors demand tangible cash flows.

• Demographic Income Needs: More than 75 million American Baby Boomers are shifting from accumulation to decumulation.

• Policy Headwinds for Buybacks: The Inflation Reduction Act introduced a 1% excise tax on net repurchases and proposes raising it to 4%.

• Re-shoring & CapEx Super Cycle: Cash once reserved for buybacks must now fund supply chain redundancy and domestic manufacturing.

5. Dividend Yields and Portfolio Concentration Risk

The mega-cap stocks dominating U.S. indices—NVIDIA, Tesla, Amazon, Meta—either pay negligible dividends or none at all. Their total-return profiles are thus heavily exposed to duration risk: if long-term growth expectations decline even modestly, intrinsic valuations could collapse.

In contrast, a portfolio of reasonably priced, cash-rich businesses can deliver a carry of over 5% while investors patiently wait for sentiment to revert.

6. Actionable Takeaways for Investors

• Re-Underwrite Income: Stress-test portfolios under scenarios where valuation multiples compress but dividends grow 3–5%.

• Look Beyond U.S. Borders: The yield gap between the S&P 500 and Europe, Asia, and emerging markets is at its highest level in 20 years. Investors seeking stable dividend yields should not limit their portfolios to the U.S. alone, as global income opportunities are significantly stronger abroad.

• Asia’s Dividend Advantage:
  Beyond Europe, Asia offers some of the most compelling dividend opportunities globally. Markets like Taiwan, South Korea, Singapore, and India feature companies with strong balance sheets, high free cash flow yields, and shareholder-friendly payout policies. Sectors such as telecommunications, financial services, and energy infrastructure in Asia are generating dividend yields that often surpass 4–5%, with growth potential tied to expanding domestic economies. A well-constructed global income portfolio should thoughtfully include exposure to select Asian equities for both yield and diversification.

• Favor Total Payout Yield (Dividends + Buybacks): While buybacks can still be accretive, prioritize companies that sustain distributions without balance-sheet strain.

• Sector biases, including energy, tobacco, mid-cap industrials, shipping, and select Asian telecoms, are attractive on free cash flow to dividend coverage ratios.

• Mind Quality Filters: Cheap stocks with weak balance sheets are value traps; focus on companies with a CROIC greater than WACC and improving FS-Score metrics.

7. How Hoover Capital Is Positioned

Our Global Opportunities strategy currently delivers a 5.1% dividend yield, compared to a broad market yield barely above 1%. According to Multpl.com, the S&P 500’s dividend yield remains historically low, reinforcing the importance of global income diversification. We maintain overweight allocations to high-dividend energy infrastructure, non-U.S. financials with excess capital, and overlooked industrial cyclicals trading at mid-single-digit price-to-earnings (P/E) ratios.

While the S&P 500’s yield barely clears 1%, broad global indices offer significantly higher cash flows.  Reinvesting a 4–5% yield compounds returns meaningfully when valuation growth stalls. The current yield gap between U.S. and international equities resembles the setup seen in 2002 and 2011, periods that preceded extended stretches of non-U.S. outperformance.

Conclusion

The pendulum is swinging back toward income. Investors lulled by a decade of multiple expansion must now adapt to a world where what you earn matters more than what you hope for.

A disciplined, value-driven portfolio—globally diversified and anchored by dependable dividends provides a prudent path through the looming “dividend drought.”

The payoff for contrarians is twofold: collecting strong cash flows now and positioning for a valuation re-rating once the market re-prices dependable income.

As always, investors should demand to be paid while waiting, because mean-reversion in valuations can be slow and often arrives suddenly.

Explore how partnering with HCM Value can help you navigate the evolving investing landscape with confidence.

Everyone knows the timeless investing rules: buy low, sell high, diversify, and stick to the fundamentals. But even with this knowledge, the majority of investors fail. The culprit? Ourselves. Neuroscience tells us that the very brain that brings us those capabilities can wreak havoc on our portfolios via emotional reflexes and cognitive biases. Neural wiring, on the other hand, is challenged head-on by contrarian investing because it thrives on distinguishing itself. Understanding this conflict lies at the heart of investment psychology.

The Neuroscience of Investing: Hard-Wired for Survival, Not Stocks
Our brains are designed to outsmart predators, not financial markets. The limbic system, especially the amygdala, determines emotional responses to threats and rewards. In investing, this manifests as knee-jerk reactions: selling in a panic when stocks fall or chasing hot trends out of FOMO (fear of missing out). Your long-term plan means nothing to the amygdala—it’s designed for now, not the next 10 years. The amygdala (highlighted in red below) is responsible for emotional response, which often conflicts with rational investing.

Emotional Hijacking: Smart Investors in a Panic
Think of market crashes as in 2008 or the COVID-19 bottom of 2020. Fear lights up the amygdala, zoning out the prefrontal cortex—the brain’s center of logic and planning. As a result, investors sell stocks at giveaway prices, cementing losses right when history shows the best buying opportunities arise. Your brain screams, “Flee!” while contrarian logic murmurs, “Buy.” Guess which voice is louder?

Speculative Mania: Obtaining a Hit of Dopamine
Consider today’s AI tech stocks or the stock market’s crypto infatuation, with Bitcoin currently out front in a pack of thousands. Every quick hit brings a surge of dopamine, the brain’s reward chemical, which leads to riskier bets. This emotional high prevents us from accepting an uncomfortable reality: markets correct, and speculative bubbles pop. That’s a trap better left to the conventional geniuses and their followers—contrarians avoid it by hunting value, whereas others see only hype.

Herd Mentality: Humans and the Neurology of Belonging
Humans are social animals—and we are neurologically built to belong. When everybody rushes to buy the same stocks—dot-coms in the ’90s, AI/tech today—we get a hit of dopamine and oxytocin that makes us feel warm and safe. But that comfort is an illusion. Herd-driven bubbles blow up prices, making contrarians—the ones who pick up the left behind and short the overhyped—set up for a profit when the mob finally wakes up.

Overconfidence: How Dopamine Can Lead You Astray
A few winning trades can make you think you’re all that. Dopamine encourages this overconfidence, leading you to forgo research, overinvest in “sure things,” or overlook risks. However, ego has no place in markets—contrarians find success by challenging their brilliance and focusing on disciplined analysis.

Loss Aversion: Hurt Over Scoring Pain Outpaces Gain
Neuroscience has established that pain has a far more significant impact than gain. Brain scans show that losses turn on pain and fear centers far more powerfully than gains turn on pleasure centers. As a result, investors tend to hold onto sinking stocks, hoping for a rebound, or they prematurely cash out winners to avoid future pain.

Contrarians, however, will lock in losses decisively and let winners run, embracing the infinite upside against instinct. Studies show that loss aversion disappears in patients whose amygdala has been damaged, and they tend to weigh gains and losses more evenly. While nobody argues that neurological impairment should be part of any investment plan, the finding highlights how much our emotions—especially fear—distort our investment decisions. Contrarian investors achieve similar discipline naturally—tapping into psychological control as a potent competitive weapon—by identifying and deliberately opposing these emotional distortions.

Avoid Thinking Like the Crowd
Awareness isn’t enough—you need practical strategies. Use these strategies to outsmart your emotional brain.
1. Be more mindful – Hit the brakes, take three to five deep breaths, and notice emotional hot buttons before they derail your ability to make the best decision.
2. Have a plan and follow the rules – Use a clear investment checklist to help you do the right thing, letting logic control your actions instead of emotion.
3. Journal your moves – Write down and review them regularly so you can spot past emotional mistakes and learn from them.

Discipline: Your Contrarian Superpower (The Key to Empowerment in Investing)
Investing is not just mathematical—you have to control your psychological impulses. The amygdala will always fight contrarian moves, longing for safety over daring decisions against the herd. Not even seasoned fund managers and analysts are exempt from emotional traps, chasing trends, or panicking during downturns.

But you can change the story by understanding your brain’s quirks. So bring on the discomfort, take a different path than the herd, and let discipline—not dopamine—tell you what to do. This is how you turn your brain from a foe into an ally, building wealth when others are afraid.

At Hoover Capital Management,  we take care of this for our clients. As seasoned contrarian thinkers, we thrive on identifying opportunities that others overlook, allowing us to build wealth precisely when the herd hesitates.

NVIDIA’s Valuation and the DeepSeek Disruption
Before this past weekend, we had already been analyzing NVIDIA’s (NVDA) valuation, applying the Mauboussin expectations framework to understand what growth was needed to justify its massive $3.6 trillion market cap.  Is Nvidia Overvalued? What we found was eye-opening: NVIDIA’s stock price implied that the company would grow its free cash flow (FCF) at 10.6% annually—forever.
As luck would have it, a significant event shook the AI landscape as we worked through these numbers. Over the weekend, Chinese AI company DeepSeek announced that it had developed a more efficient AI model that cost only $6 million to build.
This news is significant because it represents a technological breakthrough and highlights a key challenge for NVIDIA: U.S. restrictions prevent it from selling its most advanced AI chips to China, forcing Chinese companies to develop their own solutions. The takeaway? China has found a workaround—and may have even built a better model in the process.
The market responded immediately. On Monday, the 27th, NVIDIA’s stock sank 18%, reducing its market cap by over $600 billion.
What Is the Mauboussin Framework?
To understand whether NVIDIA’s stock price made sense, we used the Mauboussin expectations framework from Michael Mauboussin’s book Expectations Investing: Reading Stock Prices for Better Returns, which explains how to reverse-engineer market expectations.” which explains how to reverse-engineer market expectations. Rather than guessing what a stock should be worth, this approach starts with its current price and works backward to determine the market’s assumed growth rate.
Here’s how we applied it to NVIDIA:
• We took Wall Street’s free cash flow (FCF) estimates for the next several years.
• Using those numbers, we backed into the growth rate needed to justify NVIDIA’s $3.6 trillion valuation.
• The result? A required long-term growth rate of 10.6% per year—in perpetuity.
Why This Is a Huge Assumption
A 10.6% perpetual growth rate is extremely rare, if not unrealistic. Here’s why:
• The global economy grows at around 3% per year on average. NVIDIA would have to outpace the entire world economy forever.
• Even the most successful companies struggle to sustain 5%+ growth; intense competition, market saturation, and economic cycles inevitably slow them down.
• A perpetual growth rate above 10% is almost unheard of in stock market history.
For NVIDIA to justify its $3.6 trillion valuation, it would need to:
• Dominate AI permanently, with little to no competition.
• Expand its market indefinitely, despite real-world limits on technology adoption.
• Maintain or improve its margins, even as industries mature and pricing pressure increases.

Tech stocks like Nvidia remind me of past market cycles where investors believed certain stocks could grow indefinitely. A similar pattern can be seen today in The Magnificent 7 Shaping Market Trends analysis, where a handful of companies dominate the market narrative.

Why the DeepSeek News Matters

Before the DeepSeek announcement, NVIDIA’s valuation was already under scrutiny. However, this new development directly challenges the assumption that NVIDIA will remain the dominant force in AI:
• Stronger-than-expected competition: DeepSeek’s model suggests that NVIDIA’s technology may not be as untouchable as investors assumed.
• China’s rapid innovation: U.S. export bans were expected to slow China’s AI progress. However, the emergence of DeepSeek suggests that they may have actually accelerated it.
• NVIDIA’s valuation left no margin for error: At $3.6 trillion, the stock was priced for near-perfect execution—but as Monday’s 18% drop showed, even the perception of a threat can send it tumbling.  For a detailed analysis of this event, see The Day DeepSeek Turned Tech and Wall Street Upside Down.
What This Means for Investors
NVIDIA’s valuation assumed 50% free cash flow growth through 2027, then a sustained 10.6% annual growth rate in perpetuity. Even before the DeepSeek news, that seemed unrealistically high. Those expectations look even harder to meet with a serious new competitor emerging.

For investors, this raises key questions:

• How much of the AI boom is already priced into NVIDIA’s stock?
• Can NVIDIA maintain its dominance, or will competitors like DeepSeek force it to lower prices, cutting its margins?
• Does NVIDIA’s valuation still make sense after this news—or was it priced for perfection?

(You can review NVIDIA’s latest earnings report and financial statements on their Investor Relations page.)
Conclusion
Before the DeepSeek news broke, we were skeptical of NVIDIA’s valuation. Now, that skepticism looks even more justified.
NVIDIA remains a leader in AI, but the DeepSeek announcement is a wake-up call—the competitive landscape is evolving faster than expected. The AI race is far from over, and NVIDIA’s ability to maintain its dominance is no longer a given. The 18% drop in one day reflects how vulnerable high-growth stocks can be when expectations are too aggressive. Yes, Mr. Market, valuations still matter.

Introduction to International Diversification

In the ever-evolving landscape of global investing, the allure of the U.S. stock market has been undeniable, driven partly by the meteoric rise of large-cap technology stocks. These stocks have commanded eye-watering valuations, prompting investors to increase their exposure to U.S. equities significantly. While this strategy has borne fruit in recent years, it presents considerable risks, chief among them being overvaluation and market concentration. Such risks underscore the importance of international diversification—a strategy that allocates investments across various global markets to mitigate reliance on any single economy or currency.

Historical Perspective and Current Trends

Historically, the dominance of the U.S. stock market is not a constant. For example, during the 1970s, 1980s, and 2000s, U.S. equities generally underperformed compared to their international counterparts. This variance in performance across decades highlights the cyclical nature of market leadership and the benefits of a diversified investment portfolio that can capitalize on different regional dynamics over time.

The Prevalence of Overvaluation and Bankruptcy Risks

Before delving deeper into the specifics of market valuations, it is imperative to address the two predominant risks in equity markets: overvaluation and bankruptcy. Overvaluation occurs when stock prices exceed their intrinsic values, a scenario often propelled by excessive investor optimism and speculative trading. Bankruptcy risk, on the other hand, pertains to the potential for companies to fail financially, which can lead to considerable investor losses. Both risks highlight the critical need for a diverse investment portfolio that not only spreads out economic and financial exposure but also mitigates the impact of adverse movements in any single market or stock.

The U.S. Valuation Problem

The impressive performance of the U.S. market since the 1990s can largely be attributed to expanding valuation multiples rather than fundamentally superior growth. Between 1990 and 2022, U.S. stocks outperformed the MSCI EAFE Index by an average of 4.6% annually, primarily driven by rising valuations. Initially valued at half the level of their EAFE peers in 1990, by 2022, U.S. stocks commanded valuations 1.5 times higher. When adjusted for these valuation disparities, the apparent outperformance diminishes significantly, suggesting that the U.S. market’s returns were largely fueled by increased investor willingness to pay higher prices for stocks, an inherently unsustainable trend.

Graph Analysis: Valuation Disparities Between Markets

As illustrated in the graph below, using the CAPE Ratio (the CAPE ratio is a p/e ratio that uses 10-year average earnings) for a valuation metric there is a stark contrast in valuation trends between the U.S. and other major markets such as Europe, Hong Kong, and Singapore. Over the past few decades, we can observe periods where the U.S. market valuation significantly outstrips those of other regions, particularly during the recent tech-driven market rally. However, the graph also shows periods where these markets have either outperformed or provided better value compared to the U.S., highlighting the cyclical nature of market valuations and the potential for international diversification to capitalize on these disparities.

Source: Shiller CAPE data,  12/31/1981 to 6/28/2024

Opportunities in Emerging and International Markets

With U.S. markets currently sporting high valuations, it is an excellent time to be looking at emerging and international markets that offer compelling investment opportunities. These markets often boast more attractive valuations and the potential for significant returns, especially when global markets experience corrections or when U.S. valuations revert to more historical norms. Countries in Southeast Asia, Europe, and Latin America, in particular, present promising prospects due to their favorable demographics, growing economies, and expanding consumer bases.

Risks of Overweighting U.S. Stocks

Investors heavily concentrated in U.S. stocks face significant exposure to a downturn, particularly within the technology sector, which has disproportionately driven recent market gains. Such concentration heightens the risk of substantial losses in the event of a tech-sector correction or broader economic downturn. Additionally, the U.S. economy itself faces numerous challenges, including structurally higher inflation, geopolitical tensions, and potential recessions, which could undermine the sustained performance of its stock market.

Conclusion: The Strategic Necessity of Global Diversification

While the U.S. stock market has provided robust returns in recent years, its elevated valuations and sectoral concentrations pose substantial risks. A strategically diversified investment approach is not merely optional but essential in today’s complex global financial landscape. By broadening investment horizons beyond U.S. borders, investors can enhance their potential for risk-adjusted returns and safeguard against market volatility and economic downturns. In essence, HCM believes it is unwise to anticipate a continuation of the U.S.’s triumph over the last 15 years, which was largely driven by escalating multiples, and now is a particularly poor moment to misinterpret historical lessons.

Introduction

In an era marked by rapid changes in economic conditions and monetary policies, understanding the true strength of the stock market has become more complex. Traditional metrics often obscure the underlying economic realities, making it necessary to delve deeper into value and performance. Analyzing the S&P 500 in terms of a timeless asset like gold provides a precise measure of value and truth amid fluctuating currencies and inflation.

Unveiling the Real Market Value: The S&P 500 Measured in Gold

The log scale graph above vividly illustrates the S&P 500 index in gold terms from January 1950 to June 2024, highlighting the market’s performance adjusted for fundamental economic influences. This metric, which divides the index value by the price of gold per ounce, reveals not just nominal market trends but the real purchasing power and intrinsic value of stock market gains over time.

Key Insights from the Ratio Analysis

1. Understanding Real Purchasing Power

The graph shows that the S&P 500, when measured in gold, has experienced fluctuations that highlight the importance of considering real purchasing power. While nominal stock market returns have been strong, evaluating these returns against the price of gold provides a deeper understanding of their true value. This perspective encourages investors to be mindful of the real economic gains versus nominal increases.

2. Gold’s Role as a Hedge

Gold’s performance during periods of economic turbulence reaffirms its status as a safe haven. The recent subdued S&P 500-to-gold ratio reflects ongoing economic uncertainties and investor skepticism about future stability. When gold appreciates, it often signals a flight to safety, highlighting concerns about the broader economic and financial environment.

3. Monetary Policy Impact

The extensive use of monetary tools like low interest rates and quantitative easing has inflated asset prices without necessarily enhancing their actual value. The lagging S&P 500-to-gold ratio suggests that such policies may boost stock valuations nominally while diluting their real value, necessitating a cautious interpretation of market gains.

Reflecting on Recent Economic Dynamics

The past two decades, marked by the 2008 financial crisis, the tech boom, and the COVID-19 pandemic, have created a complex market landscape. These events have influenced investor behavior, monetary policy, and market dynamics, affecting how assets are valued against gold. The rise of technology giants and pandemic-induced market volatility have underscored the divergence between market optimism and economic reality.

A Call for Prudence and Strategic Diversification

The discrepancy between the S&P 500’s nominal and gold-adjusted values serves as a crucial warning: nominal gains do not necessarily equate to real economic growth or wealth creation. For investors, particularly those adhering to value investing principles, these insights suggest a diversified strategy that includes assets like gold as a hedge against inflation and market volatility.

At Hoover Capital Management (HCM), we’ve always championed the principles of value investing. Our commitment is rooted in the belief that focusing on fundamentally strong companies with undervalued assets leads to sustainable long-term growth. This belief is further reinforced by a recent analysis of the French High Minus Low (HML) factor, which highlights the historical performance of value versus growth stocks, as shown below:

The data, spanning an impressive 97 years from July 1926 to December 2023, presents a compelling case for value investing. The cumulative return of value stocks has eclipsed that of growth stocks by an astounding 3,000%. To put it into perspective, value investing has delivered 30 times the return of growth investing over this period.

This remarkable outperformance underscores the resilience and potential of value investing. It serves as a reminder that while market trends may fluctuate, the fundamentals of value investing remain a cornerstone for building wealth. As we navigate the complexities of today’s global markets, the lessons from the past century continue to guide our investment strategy at HCM.

We believe that this historical perspective reinforces our commitment to value investing. It highlights the importance of patience, discipline, and a focus on fundamentals in achieving long-term investment success. As always, we remain dedicated to helping our clients unlock global investment opportunities through a disciplined and informed approach to value investing.

A Return to Dominance: The Magnificent 7’s Influence in 2023

In 2023, the financial markets witnessed a striking phenomenon. The S&P 500 and MSCI ACWI reported robust returns of 26.2% and 22.2%, respectively, signaling a buoyant year for investors. However, these headline figures mask a deeper, more intricate narrative of market concentration and disparity.

The Disparity Behind the Headlines

While the market-weighted S&P 500 and MSCI ACWI indices soared, their equal-weighted counterparts told a different story, lagging with returns of 14.0% and 10.2%. This divergence underscores the significant impact of market-weighted movements, where a handful of dominant stocks disproportionately influence overall index performance.

The Rise of the Magnificent 7

Central to this narrative is a group of technology and growth-oriented stocks, aptly dubbed the Magnificent 7 — Apple, Microsoft, Amazon, Nvidia, Google, Tesla, and Meta. These titans not only dominated the market but also accounted for a staggering 62% of the S&P 500’s annual return. Their dominance favored stocks with high valuation metrics, such as price-to-earnings (P/E), price-to-sales, and price-to-book ratios, while traditionally value-based stocks lagged behind.

The Shift in Market Dynamics

Our 2023 market outlook speculated a shift away from the hegemony of American mega-cap/tech companies. However, 2023 saw these very entities, particularly the Magnificent 7, soar anew, largely driven by the burgeoning AI industry. This pivot to AI rekindled investor enthusiasm, cementing these companies as the must-own stocks and leaving the rest trailing.

The Spectacle of Passive Investment and the Echoes of History

Today, the investment landscape is increasingly characterized by momentum-chasing. Approximately two-thirds of global passive investments flow into U.S. stocks, with a significant portion directed towards the Magnificent 7, often irrespective of their valuations. This trend is echoed in the behavior of large active money managers and hedge funds, reminiscent of historical market patterns that have often led to dramatic corrections.

Historical Parallels: Lessons from the Past

The 1960s Conglomerate Bubble

The 1960s saw conglomerates like ITT and LTV expand aggressively, driven by favorable conditions and accounting practices. However, this bubble burst due to rising interest rates and regulatory shifts, leading to a steep decline in shareholder equity.

The Nifty-Fifty Bubble of the 1970s

The Nifty Fifty era was defined by the meteoric rise of fifty large-cap stocks. However, their inflated valuations couldn’t sustain the momentum, resulting in significant losses during the 1973-1974 market crash.

The 2000 TMT/Tech Bubble

The late 1990s were marked by rampant speculation in tech stocks, culminating in a dramatic burst in 2000. Companies like Qualcomm and Cisco Systems, once market darlings, experienced severe declines, offering a stark reminder of the risks of overvaluation.

The Future: Caution and Perspective

The current market dynamics, heavily influenced by the Magnificent 7, raise important questions about the sustainability of such concentration. Are we on the brink of a scenario akin to the late 1960s, 1973, or 1999-2000? Only time will tell. Investors should be wary of the potential for a low single-digit return decade for the S&P 500, a scenario reminiscent of past market corrections.

In conclusion, while the current market performance, led by the Magnificent 7, might seem enticing, it’s crucial for investors to heed the lessons of history. Diversification and a keen eye on valuation remain key tenets of prudent investing, especially in an era marked by such significant market concentration.

In the world of investing, there are few names as revered as Sir John Templeton. A pioneer of global investing and the founder of the Templeton Growth Fund, Templeton’s investment philosophy has stood the test of time, consistently delivering value to investors. His approach to investing, which emphasizes value and contrarian thinking, resonates strongly with our philosophy here at Hoover Capital Management.

One of Templeton’s most famous quotes encapsulates his approach to investing:

“The ordinary investor will hear that X corporation has a good outlook, and he rushes in to buy the stock. Nine chances out of ten, that’s a mistake because if obviously it has a good outlook, the price already reflects that. And then if there should be any change in its outlook, the price will go down. So he’s basing his investment selection on something that is misleading him nine times out of ten. So you have to buy those things that other people are selling. Otherwise, you will never get a bargain. Don’t ask yourself, does this company have a good outlook? Ask yourself, how cheap is it? How unpopular is it? If you find that you’ve found a stock that investors say, oh that’s terrible, I wouldn’t buy that. That’s the one to buy.”

This quote underscores the essence of value investing – the pursuit of stocks that are undervalued by the market. This philosophy is at the heart of our approach at Hoover Capital Management. But how do we apply this philosophy in today’s complex and fast-paced market environment? Let’s break it down.

1. Look Beyond the Obvious

Just like Templeton, we at Hoover Capital Management caution against the herd mentality. Just because a company has a good outlook doesn’t mean it’s a good investment. The market has likely already priced in this positive outlook. The key is to look beyond the obvious, to find value where others may not see it.

2. Embrace Unpopularity

Templeton advises investors to buy what others are selling. This contrarian approach, which is a cornerstone of our investment strategy at Hoover Capital, can be challenging, as it often means going against prevailing market sentiment. However, it is in these unpopular stocks that one can often find the greatest bargains.

3. Focus on Value, Not Outlook

Rather than asking if a company has a good outlook, Templeton suggests asking how cheap and unpopular it is. This shift in perspective, which is integral to our approach at Hoover Capital, can help investors identify undervalued stocks that have the potential for significant price appreciation when the market corrects its undervaluation.

4. Don’t Shy Away from ‘Terrible’ Stocks

Finally, Templeton suggests that the stocks that investors are most averse to may be the ones worth buying. This doesn’t mean buying into companies with poor fundamentals or unsustainable business models. Instead, it means identifying companies that are temporarily out of favor but have strong underlying value. This is a principle we adhere to at Hoover Capital, as we seek to uncover value where others may not see it.

In conclusion, Templeton’s investment philosophy encourages a contrarian, value-focused approach. It’s about finding hidden gems in the rough, those stocks that are overlooked or shunned by the majority of investors but hold significant potential for value appreciation. At Hoover Capital Management, we resonate with this philosophy and strive to apply these timeless principles in our investment strategy. As we navigate the complexities of today’s global markets, the wisdom of Sir John Templeton serves as a guiding light, reminding us of the timeless principles of value investing.

Value investing, a strategy that involves buying securities that appear underpriced by some form of fundamental analysis, has historically shown to outperform other investment strategies for several reasons:

1. Market inefficiencies: Despite efficient market theory, which states that all available information is already factored into a security’s price, markets can often misprice securities. This can be due to cognitive biases, overreaction to news, or simply neglect. Value investors seek to exploit these inefficiencies by purchasing stocks that they believe are underpriced.
2. Margin of safety: The margin of safety is a principle of value investing where investors only buy stocks when the market price is significantly below its intrinsic value. This not only increases the potential for profits but also minimizes the downside risk if the assessment of the intrinsic value was wrong.
3. Long-term approach: Value investing usually requires a long-term investment horizon. This is because it often takes time for the market to recognize a company’s true intrinsic value. In the long run, this can lead to significant gains.
4. Focus on fundamentals: Value investing involves detailed analysis of company fundamentals, such as earnings, dividends, book value, and cash flow. This thorough analysis can lead to a more accurate understanding of a company’s true value and less reliance on speculative factors.
5. Contrarian nature: Value investing often involves going against the grain of popular market trends. This contrarian strategy can be beneficial because it avoids buying into overhyped stocks that may be overvalued.
6. Dividend yield: Value stocks often pay consistent dividends, which can provide a steady income stream and contribute to total return.

While value investing has historically been successful, it’s also important to note that it requires a great deal of skill, research, and patience, and it may underperform in some market conditions. During certain periods, like during the tech boom of the late 1990s or in other growth-focused markets, value investing may not perform as well as other strategies.

The Art of Value Investing: Unlocking Hidden Gems in the Stock Market

Have you ever wondered how some investors seem to have a magic touch when it comes to picking winning stocks? They don’t rely on luck or gut feelings; instead, they follow a strategic approach called value investing. Value investing is a time-tested investment strategy that focuses on identifying undervalued stocks and holding them for the long term. In this blog post, we will explore the principles of value investing, its benefits, and how you can get started on your own journey to becoming a successful value investor.

Unveiling the Essence of Value Investing

Discovering Hidden Value

At its core, value investing is all about buying stocks that are priced lower than their intrinsic value. In other words, value investors seek out companies that have strong fundamentals but are currently undervalued by the market. They believe that over time, the market will recognize the true worth of these stocks and their prices will rise accordingly. This approach allows investors to capitalize on market inefficiencies and profit from the long-term growth potential of undervalued companies.

The Power of Patience

Patience is a key virtue for value investors. Unlike short-term traders who are constantly chasing quick profits, value investors take a long-term view of their investments. They understand that it takes time for the market to recognize the hidden value in a stock, and they are willing to wait patiently for this to happen. By avoiding the temptation of frequent trading, value investors can benefit from compounding returns and minimize transaction costs.

Embracing Margin of Safety

One of the fundamental principles of value investing is the concept of a margin of safety. This refers to the difference between the intrinsic value of a stock and its market price. Value investors always seek stocks that have a significant margin of safety, as this provides a cushion against any unforeseen market fluctuations or company-specific risks. By buying stocks at a discount to their intrinsic value, value investors minimize their downside risk and increase their potential for higher returns.

Getting Started with Value Investing

Do Your Homework

Successful value investing requires thorough research and analysis. Start by identifying companies with strong fundamentals, such as a robust balance sheet, consistent earnings growth, and a competitive advantage in their industry. Look for stocks that have been overlooked or undervalued by the market due to temporary setbacks or negative sentiment. Dig deep into financial statements, industry trends, and company news to gain a comprehensive understanding of the potential investment.  You can learn more about how an investment process is set up to do this, refer to our website,  hcmvalue.com/investment-process/

Develop a Disciplined Approach

Value investing is not about making impulsive decisions based on short-term market movements. It is a disciplined approach that requires sticking to a well-defined investment strategy. Create a set of criteria for identifying undervalued stocks, and stick to it religiously. This will help you avoid emotional decision-making and stay focused on the long-term value of your investments.

Learn from the Masters

Value investing has a rich history, with legendary investors like Warren Buffett, Benjamin Graham, David Dreman, and John Neff,  paving the way for future generations. Study their investment philosophies and learn from their successes and failures. Reading books, attending seminars, and following value investing blogs can provide valuable insights and guidance for your own investment journey. For example, you can read ‘The Intelligent Investor‘ by Benjamin Graham, which is considered a classic in the field of value investing. Another insightful read is ‘Contrarian Investment Strategies: The Psychological Edge‘ by David Dreman. These books provide a wealth of knowledge for anyone looking to delve deeper into the world of value investing.

The Rewards of Value Investing

Long-Term Wealth Creation

Value investing has proven to be a highly effective strategy for long-term wealth creation. By buying undervalued stocks and holding them for the long term, investors can benefit from the compounding returns and the growth potential of these companies. Over time, the market tends to recognize the true value of these stocks, leading to significant capital appreciation and wealth accumulation.

Risk Mitigation

Value investing inherently incorporates a margin of safety, which helps mitigate risks associated with investing in the stock market. By buying stocks at a discount to their intrinsic value, value investors reduce the downside risk and increase the probability of favorable investment outcomes. This approach provides a level of protection against market volatility and unexpected events.

Focus on Fundamentals

Value investing forces investors to focus on the fundamentals of a company rather than short-term market fluctuations. This approach allows investors to make informed decisions based on the underlying strength and potential of a business, rather than being swayed by market hype or sentiment. By focusing on fundamentals, value investors can avoid the pitfalls of market speculation and make rational investment choices.

Conclusion

Value investing is a time-tested investment strategy that offers the potential for long-term wealth creation and risk mitigation. By identifying undervalued stocks, practicing patience, and maintaining a disciplined approach, investors can uncover hidden gems in the stock market. While value investing requires thorough research and analysis, the rewards can be substantial. So, if you are ready to take a thoughtful and strategic approach to investing, value investing may be the key to unlocking your financial goals.