A recent paper by DoubleLine refutes five commonly held misconceptions about the death of value investing. These are:
1. Book Value Is Flawed. Therefore, No Compelling Value Spread Exists
2. This (High-Tech) Time, It’s Different
3. The (Super) Stars Will Shine
4. Low Rates Lay Low Value Investors
5. The Crowd Has Competed Away Value’s Alpha
The paper concludes:
Finally, it is important to understand that value investing is well-known because it is intellectually simple to articulate.
That simplicity in theory, however, is deceptive in practice. The challenge in implementing value as an investing strategy is not intellectual but emotional.
Value investing requires one to make unpopular or contrarian decisions, and to stand outside the crowd. This can cause practitioners to feel foolish for quite some time while the crowd rides popular momentum stocks. This creates a psychic pain that ultimately overwhelms the would-be value investors’ reason, and they capitulate, sometimes close to the beginning of a new period of value outperformance.
Value investing requires not only a clear head but a strong stomach; most people are not hard-wired with both. It is for this reason that value investing can be widely known but scarcely followed. The last decade exemplifies this.
And so it is that value investing can be like the tortoise, which, universally known to be slow and steady, nonetheless repeatedly wins the race, but often only after the rabbit has first raced ahead and then fallen asleep.
You can read the entire paper here:
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