In his latest interview on MSN, Dimensional’s co-founder David Booth discusses why value investing is not dead, and the value stocks comeback. Here’s an excerpt from the interview:
What moves should investors make right now?
Booth: If you say, “Well, what about the short term?” — trying to get on short-term market movements is more like gambling. The last year, if anything, has shown the tremendous cost of trying to time those things and not getting it right. At the end of March last year, a lot of people got out of the stock market and it has done over 60% since then.
You want to have a long-term focus, something you can stick with. People talk about the “new normal” all the time, and if we look somewhere in the future, it will be the next normal too. It’s about uncertainty and sources of uncertainty change over time but the marketplace does a really good job of sorting through that.
Is value investing really dead?
Booth: Over the long haul, research shows that value stocks on average outperform growth. We think there’s a good reason for that. It’s lower-priced stocks and basically the lower price you pay for something the higher the eventual return.
In the last few years it hasn’t been there — that’s kind of the nature of premiums in general. But over the last year, it’s been really quite different. Value has come back the way we think it ought to. At the end of the day, it’s always about uncertainty.
If there is no uncertainty about the future, then your investment return would be basically a money market, a riskless asset return. On one hand, people shrink away from uncertainty, naturally, and on the other hand, it’s uncertainty that creates the opportunity to do better than a money-market-type of fund.
During the first decade of this millennium, when value was doing really well, we didn’t shout our lungs out. If you’re a value investor you have to be prepared for those kinds of times when they’re going to underperform.
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