Book me in

Low price-to-book stocks outperformed the market. But there’s a catch.

Walter Schloss, a famed value investor, was well known for buying stocks that traded far below book value. “I really have nothing against earnings except that, in the first place, earnings have a way of changing… I find it more comfortable and satisfying to look at book value.” Thanks to this strategy, Schloss returned 21% a year, on average, for 28 years—an incredible result. So, have low price-to-book (PB) value stocks outperformed? The simple answer is yes. But should you sell everything and buy low PB stocks? That depends on whether you want outperformance, can handle volatility, and can stick it out through the cycles.

A simple equal-weighted portfolio of low PB stocks outperformed the market. Consider you built a portfolio of the bottom 10% of American stocks arranged by their PB ratios, and you rebalanced this each year. From 1927 to 2022, this portfolio—I’ll call it the value portfolio—compounded at 19% a year. A $100 investment back then would have become $2.2bn in 97 years.

Th…