Investing Legends: Steven Bregman – Value Investing In Uncertain Market Conditions


Investing Legends: Steven Bregman – Value Investing In Uncertain Market Conditions

Markets around the world are overpriced. Value stocks have under-performed for over 10 years. If you are a value investor, where do you invest?

This is one of my favorite interviews. This week we  interview Investing Legend, Steven Bregman. He explains how he looks at the markets from a value lens, why value investing is important to overall market health, the danger of low interest rates, why you should worry about the indexation of markets, and the bond ETF bubble. We cover a lot in this episode, but if you are serious about investing, this episode is pure gold.

Value Investing - One Historical Extreme Among Many

Interest rates are now the lowest in the recorded history of mankind. Here is a sampling from across the scope of global history to give you a sense of what ‘normal’ rates are.

o   Over the course of 600 years through 100 BC, the ancient Greeks generally charged between about 6% and 12% for loans secured against real estate or to cities.[1]

o   During the 1300s, in Venice, long-term loans to States were generally in the 5% to 8% range.

o   In 1799, after Napoleon gained power, France issued 5% bonds.

o   In the 1860s, during the Civil War, U.S. Treasuries were largely in the 4 ½% to 5 ½% range.

o   During the entire 20th Century, there were only 3 separate years – all during the 1940s – when U.S. 10-year Treasuries declined below 2%. This reflected the government’s extraordinary mobilization of the economy for World War II. To understand the extremity of that environment, every American citizen was issued ration books, with coupons that were required for buying necessities ranging from gasoline to butter. Infractions were punishable by fines up to $10,000 – in 1940s dollars! That would be roughly $300,000 today.

[1] A History of Interest Rates, Sidney Homer, Rutgers University Press, New Brunswick, NJ. 1963.

Bonus Insight into YCharts Stock Screening Tools

Value Stocks Travel Industry
Value Stock Screen


The Path to Indexation Dominance of Modern Investing

The 2008/2009 Financial Crisis catalyzed an accelerated movement toward indexation:  no one wanted security specific or manager specific risk. They wanted a basket of securities.  The accumulation of over a decade of $100 billion+ annual flows into ETFs looks a little like this:

  • At March 2009, there were fewer than 100 ETFs in the U.S., today there are over 2,000.  This occurred even as the number of listed stocks in the U.S. declined by about 25%.
  • The ETF industry in March 2009 had total assets of $485 billion, today it’s $4 trillion. Just a single ETF, the SPDR S&P 500, now has over $300 billion. 

An ocean of buying power has been directed at an ever-smaller sub-set of mega-companies with sufficient share trading liquidity to serve index funds’ needs.  Last year, Indexed equities passed that critical 50% border: they are now well above 50% of all equities – the majority of the pool – and have been the marginal trade for a decade. They were supposed to be passive, just along for the ride, but it appears they have hijacked the clearing price mechanism.  If the clearing price mechanism of the marketplace is broken, how does one know what the fair or natural price is, what the ‘market price’ is?



A Window into the Value of the Industrial Strength Trading Liquidity of Mega-Cap Companies

Microsoft is in 212 different ETFs.  This small sample might shed some light on why.  It’s in:

    • The Technology Select Sector SPDR Fd, as a 20.2% position.
    • Vanguard Growth ETF, 9.3%
    • JP Morgan US Value Factor ETF, 2.3%
    • iShares USA Momentum Factor, 5.4%
    • iShares Minimum Volatility USA, 6.1%
    • Invesco Dividend Achievers ETF, 4.5%

So, Microsoft is simultaneously a growth stock and a value stock.  It’s both a momentum stock and a low volatility stock. It’s also a dividend stock and, of course, a technology stock. The point is, there is an insufficient population of super large companies to go around.  If one of them really has industrial strength trading liquidity, and if a fund organizer is starting a new ETF, it will be shoehorned into that ETF if they can possibly swing it. 

Here are a few more Microsoft ETFs:

  • iShares USA ESG Select ETF (Environmental, Social, Governance), 5.5%
  • US Vegan Climate ETF, 5.3%
  • Impact YWCA Women’s Empowerment ETF, 5.4%



ETF Truth in Labeling (or Flying Blind)

Someone who wanted diversified exposure to Spain would probably have bought the iShares Spain ETF (EWP), a popular asset allocation building block with $940 million of AUM.

Just two problems:

  1. The top 5 holdings account for over 50% of the ETF’s value, and the top 10 for over 70%.  So, it’s super concentrated, not diversified. Security-specific diversification is a basic tenet of passive investing, so that a disaster in any one or few stocks will not meaningfully harm the fund’s results. Rest assured, any active manager found to be that concentrated would immediately be dismissed by a consultant for taking excessive risk.  But an index can’t be dismissed; it merely represents ‘the market’, after all.
  2. These top 10 holdings get over 70% of their revenues from OUTSIDE of Spain!  Buy Spain, and get NOT Spain.

This is another reflection of the requirement by ETFs for large, liquid companies:  EWP can’t afford to traffic in modest-sized local companies that truly reflect the character of the local economy.  All but one of the top 10 are global multi-national companies. Buying Banco Santander is not so very different than buying Citibank in the U.S., and buying Amadeus, the airline reservation infrastructure system, is not so very different than buying Sabre in the U.S. 

Historical Risk


Compare & Contrast:  Indexed Bond Funds vs. a non-Index-Centric Bond Fund

Bond Market Bubble


iShares Invest. Grade Corporate Bond ETF (LQD)

BlackRock MuniHoldings Quality Fund (MUS)

Inception date




35 Billion

0.3 Billion

Yield to Maturity



Distribution Yield



Yield after Fed Taxes



Average Maturity

13 Years

25 Years

Average Bond Price



Credit Quality


















Discount to NAV



10 Year Annualized Return

5.93% (taxable)

5.97% (tax-exempt)

Closed End fund search tool:

Basically, the laws of supply and demand have never been healthier. If every institution determines to buy bonds through the index funds that traffic in the same large-tranche securities, they will be priced higher:  a 2% after-tax yield. If every institution ignores non-index-suitable bonds, even if in a fund format (but a non-standard format), they will be priced lower; in this case 4% after tax yield, plus the possibility of appreciation.


[1] A History of Interest Rates, Sidney Homer, Rutgers University Press, New Brunswick, NJ. 1963.

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Today's Guest:  Steven Bregman

Steven Bregman - President, Co-Founder of Horizon Kinetics LLC

Steven is the President of Horizon Kinetics and is a co-founder of the Firm. He is a senior member of the Firm’s research team, a member of the Investment Committee and the Board, and supervises all research reports produced by the Firm. As one of the largest independent research firms, Horizon focuses on structurally inefficient market sectors, including domestic spin-offs, global spin-offs (The Spin-Off Report and Global Spin-Off Report), distressed debt (Contrarian Fixed Income) and short sale candidates (Devil’s Advocate), among others. Horizon Kinetics has also taken an interest in creating functionally improved indexes, such as the Spin-Off Indexes and the Wealth Indexes (which incorporate the owner-operator return variable). Steve is also the President and CFO of FRMO Corp., a publicly traded company with interests in Horizon Kinetics. He received a BA from Hunter College, and his CFA® Charter in 1989. Steve has authored a variety of papers, notably “Spin-offs Revisited: A Review of a Structural Pricing Anomaly” (1996) and “Equity Strategies and Inflation” (2012).

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