We’re always on the look out for the latest value investing news here at The Acquirer’s Multiple – Stock Screener.
I recently found a great value investing article at Barron’s by Robert Johnson, the President and CEO of the American College of Financial Services. Johnson writes, “In an ADHD world, patience is, unfortunately, in short supply. Advisors who face regular questioning from clients about quarterly investment returns know this all too well.”
Johnson highlights the timeless principles of patient and discipline in order to be a successful value investor today.
Here’s an excerpt from that article:
The evidence is clear: value investing beats growth investing over the long run, and it is not even close. If it were a prizefight, the referee would have stepped in and stopped it.
From 1926 through 2015, using the data compiled by University of Chicago professor and Nobel laureate Eugene Fama and Dartmouth University professor Kenneth French, large-cap value provided a geometric average annual return of 11.2%, far exceeding the 9.4% provided by large-cap growth. The differences in small-caps were even greater, with small-cap value returning 13.9% compared with small-cap growth’s 9.5%.
Famed investors like Ben Graham, Warren Buffett, Charlie Munger, John Neff, and Seth Klarman have all trumpeted the virtues of value investing. Intellectually, we understand the arguments for adopting a value style. So, why do many of us, financial advisors and clients alike, fail to invest according to these principles?
The answer is that many of us simply are not wired to practice value investing. In an ADHD world, patience is, unfortunately, in short supply. Advisors who face regular questioning from clients about quarterly investment returns know this all too well.
The truth is that successful value investing requires patience. Though value is superior to growth over the long term, there are years in which growth beats value by a sizable margin. For instance, in 1998 and 1999, large-cap growth returned 34.6% and 29.4%, while large-cap value returned 16.2% and minus 0.2%, respectively.
At its core, value investing requires the adoption of a contrarian stance. The value investor must zig when the majority zags. We are social beings and have a natural tendency to conform. Researchers have attributed this to the desire to preserve harmony within a group. Additionally, conformity is a defense mechanism to reduce the psychological pain of making mistakes. We rationalize that if we follow the herd, we will have company if our decisions do not pan out. If we, however, deviate from the crowd and fail, we run the risk of being ostracized. To paraphrase Kermit the Frog, “It’s not easy being…a value investor.”
We now find ourselves at a critical juncture with respect to market valuations. Price/earnings ratios are near the high-end of historical ranges, yet optimism abounds, fueled by expectations of future tax cuts, reduced regulations, and increased infrastructure spending. The short-term path of stock prices is truly a crapshoot. Some pundits contend that the value trade has become crowded and that value investors may be disappointed over the short term. But, from the current point, over the long term, the odds are stacked in favor of the patient and disciplined value investor.
You can read the original article by Johnson at Barron’s here.
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