Is value investing making a long-awaited comeback?
There have been signs this autumn that after nearly a decade in the doldrums, one of the most tried and trusted stock market strategies is starting to work again. Value investing - the part-art, part-science approach to buying shares when they’re marked down - has flickered into life on both sides of the Atlantic.
For weary value investors, the headlines are a welcome relief. But after an unusually long spell of underperformance, it’ll likely take more concrete proof to convince many that the market really is turning a corner.
While everyone knows that value strategies suffer lapses in performance, a 10-year hiatus has been a tough test for even the most devout followers of Ben Graham (the father of value investing).
In that time, the expansionary effects of cheap money and central bank stimulus has washed through the economy and spilled across the stock market. Confidence has surged and growth stocks have benefited most. Meanwhile, those beaten, broken, unloved and unsupported value stocks have been left on the sidelines.
The trouble with value
When value works, the principle of owning mispriced stocks until the market catches on and corrects them can pay off handsomely. But when value falters, buying cheap stocks means tip-toeing around traps, dodging disasters and waiting endlessly for a change in sentiment.
Despite the pain, there are good reasons why so many investors define themselves as value-oriented. For a start, value is probably the most heavily researched, professionally tested and best understood investment strategy around.
It’s also got a very solid recent record of blowing other strategies out of the water. Two memorable examples - the periods after the tech collapse in 2000 and the financial crisis in 2009 - saw value stocks roar to life. Fortunes were minted, and reputations cemented - and that’s been an important comfort for those waiting for its comeback.
Earlier this month, Cliff Asness, the well-known quant-value, billionaire-boss of the hedge fund AQR Capital, wrote a note he’d probably been wanting to write for some time. Like other pro investors with a value bent, some of Asness’s funds have suffered in recent years.
In it, he wrote that the first eight years of value’s recent 10-year losing streak were “rational”. In other words, value just didn’t look that cheap. But in the past two years things have changed. Value has…
