Consider Shoehorning Some “Rejects” into your Investment Portfolio

Back to school shoppers will soon be out in force looking for bargains as September approaches. With many options, including online sales, getting bargains on clothing, shoes and supplies is easy. When investing your hard earned money, things get a lot trickier.

Let’s recall a place jammed packed with bargains, Marion’s Shoes in Weymouth Landing. The huge store occupied a half block on the incline of the Landing. Once inside, shoppers were greeted by helpful staff and rack after rack, level after level of quality footwear at great prices. There were plenty of shoes but few shoe boxes as packaging costs money. Consequently, a scent of quality shoe leather reassured shoppers they would soon make out like a Buster Brown Bandit.

The Wicked Smart Investor recalls a time when he really cleaned up at Marion’s. Weeks before the fourth grade, the owner Fred fitted me with the perfect pair of Earth Shoes. The price tag was only ten bucks. Across town at the fancy schmancy stores, the ugly but trendy shoes cost $30. Okay, you got the shoe box and the mall smelled like eau de toilette (whatever that is) but big deal. In the late ‘70’s families were struggling with high unemployment and double digit inflation and $20 was lot. Many families really needed the savings Marion’s offered.

Marion’s was able to offer such savings because it frequently sold irregular merchandise. In fact, a campy sign on the roof famously boasted “The Best Selling Rejects in America.” The misfit shoes had slight imperfections in appearance but sturdy construction. The blemishes were barely noticeable and no one in Braintree really cared anyway because they probably got their shoes in Marion’s too. With my Earth Shoes and a few pairs of Sears Toughskins purchased during the July sale I returned to Hollis Elementary School in cost effective style!

How can you get similar bargains in the stock market? You could invest in value stock mutual funds. Let me explain: A value stock is a security trading at a lower price than what is expected giving it earnings, dividends and sales etc. In the financial world, these are known as “fundamentals.” The usual cause of the lower stock price (but good fundamentals) is the stock is slightly beat up like Marion’s Shoes. Maybe the company suffered a scandal, a labor strike or some other setback. Events like those tend to put companies out of favor on Wall Street and drive down the price. In a strange way, bad publicity can eventually make the stock a bargain. Investors are betting on a rebound.

The rebound may never materialize so investors are taking more risks when purchasing value stocks versus growth stock. Yet, when the rebounds do happen, investors are rewarded with a market beating return. Consider the performance of broad market indexes during the past 20 years. The Dimensional US Large Cap Value Index returned an annual average of 9.5%, while the more traditional S&P Large Cap Index’s average annual performance of 7.7% a year. Value investing can yield better returns (see footnote1).

Long term investors should consider allocating a portion of their portfolio to value stock. I recommend leaning into value investing, not leaping. Your Pro Keds from Marion’s really don’t make you an investing Bionic Man. Speak to your advisor for the proper mix.

We’ll never know if notorious shoe hoarder Imelda Marcos ever shopped at Marion’s but she would not have regretted it. If you implement value investing wisely, it is likely you won’t have regrets either.

1 Index returns from 1/1/1997 to 12/31/2016; data compiled by Standard & Poor’s and Dimensional Fund Advisors. Past performance is no guarantee of future results.

Chris Hanson is a CPA that specializes in financial planning at OakTree Capital Partners in Easton. He earned his BBA at the Isenberg School of Management University of Massachusetts and an MBA at Babson College's F. W. Olin Graduate School of Business.