Value stocks have been underperforming for a long time though experts feel this really won’t continue for value investing.
Stock trading decisions often revolve around a plan or philosophy. Usually they belong to either the growth investing philosophy for traders who are prepared for some risk or the value investing philosophy for traders who can’t stand volatility and are looking for some stability.
Value investing is a highly valued means of investing, but some experts feel that value investing is actually failing. They point out that the value investing approach has caused a 15% cumulative loss through the past decade. This has happened simultaneously when the S&P 500 Index (SPX) has managed to double in around the same period of time.
Goldman Sachs Research
Bloomberg quotes a report by the Goldman Sachs Group ($GS) that states these figures, concluding that value investing isn’t really lending its proponents much value. Among its many proponents is none other than celebrity investor Warren Buffett himself. The investment strategy Goldman focused on for the research was value-factor investing, a strategy conceived by Eugene Fama and Kenneth French, by which stock traders buy stocks having the lowest valuations while those with the highest valuations are sold short.
According to Goldman’s study, value-factor investing proponents are currently experiencing the longest stretch of underperformance since the 1930s when the Great Depression struck the United States. However, the research team admits that it still could be too early to draw conclusions. That’s because the environment for value returns has not been particularly favorable recently, though that’s unlikely to continue. However, in the imminent future value returns could remain subdued.
Comprehensible Reasons behind Value Stocks Losing
Analysts believe that much of this weakness is the result of the present economic cycle continuing in its unusually retarded growth for an extended period of time. There were also certain specific characteristics in the equity market before the last crisis that contributed to the recent weakness.
These cyclical trends are set to fade and, though the imminent outlook for growth stocks is better than for value stocks, researchers believe that value will eventually work out. But with greater adoption and appreciation of passive funds plus great beta strategies, returns could get harder to capture.
Value stocks usually outperform in a broad-based expansion at the beginning of an economic cycle. But when the economic environment is weak amidst scarce growth, value stocks underperform. In such situations of slower growth, investors prefer growth stocks over value stocks. Investors allocate significant value to stocks that can generate their own growth. This leads to high-growth stocks outperforming without any regard to value.
The Remarkable Exception of Warren Buffett
There are exceptions too, with value investors enjoying great success. The most illustrious exception is Warren Buffett himself. Class A shares of Buffett’s company Berkshire Hathaway ($BRK-A) have tripled since June 2005 while the S&P 500 only doubled. This translates to an approximate return of 200%, which is double the gain on the S&P 500 in this period. Though Buffett always thinks of the long haul while making investments, he is a unique investor in that his decisions are based on criteria that are more complex than just the price-earnings ratios.
The bottom-line is, value investing is expected to pick up and won’t remain continuously down. Successful stock trading is an art that takes time to master, but the process can be made easier with the right trading software. Trade using either ZeroPro, ZeroWeb with both platforms coming with a free mobile add on with TradeZero.
This content is restricted to site members. If you are an existing user, please log in. New users may register below for FREE.