A recent article in The Wall Street Journal argues against giving up on value investing notwithstanding more than a decade of poor performance.
It contends, however, that there’s more uncertainty about the strategy than there once was because:
- Value investors have never been “ground down for so long;”
- If investors understand value’s “great history,” then they are less likely to overreact to bad news, which would mean that value stocks would become less of a bargain—as evidenced by the fact that value stocks are not especially cheap at the moment (based on price-book ratios).
“The reason for value’s underperformance is hotly debated,” the article notes, “but appears to be in large part because growth stocks have avoided the usual pitfalls.” While historically, growth stocks have been priced at too big a premium, the past decade has seen then beating earnings expectations. “The strong companies have grown stronger, and value investors have missed out on them,” the article reports.
The article explains that the seven years of outperformance value stocks enjoyed after the dot-com bubble attracted investors to the strategy, rendering it less effective. It concludes, “My hope is that the constant disappointment of recent years has driven away enough investors to set up value strategies for a successful future,” but notes that this might be offset by large investors channeling money into the value “factor.”
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