Bloomberg's Currier: Will Success Spoil Value Investing?

It's a "spoilsport" question to ask, writes Chet Currier in his latest Bloomberg column:

But someone has to ask it. With value stock mutual funds trouncing their growth-fund counterparts for a seventh straight year here in the waning weeks of 2006, the issue can't be avoided much longer: At what point do value stocks and value funds get so fat and happy they don't represent "value'' any more?

Currier points out that many value managers today are buying stocks no one would have ever tagged as "value" just a few years ago:

See Warren Buffett at Berkshire Hathaway Inc., the paragon of value investors, snapping up shares of drugmaker Johnson & Johnson. See value managers like Southeastern Asset Management Inc. in Memphis, Tennessee, and Harris Associates LP in Chicago loading up on the stock of computer-maker Dell Inc.

I don't own either. You've read me say before that I just can't get excited about stocks like Dell. Or Wal-Mart.

I COULD at a price, I suppose. So I may well bite on one or both in the future. Just not now.

Back to Currier:

Regression to the mean -- it's a favorite subject of many a value manager. In financial markets, nothing stays hot forever. And after seven strong years in a row, value investing would seem to be a prime candidate to feel some regressionary pressures.

So where does that leave us? Seems like I've argued both sides of the question -- that value investing is forever, but also may be due for a disappointing year or two soon.

Well, that's what happens in markets. Strong opposing forces, trends and ideas collide. Value investing stands every chance to prove its enduring worth in the years ahead. But probably not without a struggle.

Note that word "struggle." I feel like value investing is all about struggling -- buying stocks unheard of or universally disliked. Companies facing headwinds that are hampering their share prices. Firms going through workouts that will take months or even a couple of years or so to complete.

But you and I see Currier's point. Value investing will go through periods where it WON'T do well. I remember practicing the concept in the last half of the 1990s and, let me tell you, the value style didn't outperform during the tech boom.

So if you've come to the value approach in the last two or three years, understand that. Understand that you will go through periods -- short by historical standards, but agonizingly long at the time -- where your portfolio will under perform. But my unsolicited advice is to stick to it.

Besides, if even Warren Buffett goes through times where people think he's "lost it," what should you and I expect? ;-)

Comments

[Bill a.k.a. NO DooDahs!]

There are two dynamics going on here. First, what the "value managers" do is immaterial to the retail investor, as they are constrained by multiple rules and too much capital to find equities that are truly mispriced with large margins of safety. The second dynamic is the "search for the holy grail of trading" and keep in mind I consider value investing to be a subset of trading.

While it is easy to find methodologies that outperform the broader market over time, all of them suffer from periods of underperformance or even drawdown. The key is exercising discipline so that one doesn't switch from a method that works in general just because it didn't work "this time," and using money management so that the times it doesn't work don't wipe one out.

[John]

Bill: I agree that many mutual fund managers have so many assests under managements that lots of small situations aren't practical for them.

I also agree that different styles outperform over time.

I should point out here, just in I'm not clear on something. I do value investing because it works for me over time. I think others can do other approaches -- growth investing, day trading, etc. -- and also do well. I couldn't because it's just not my game.

I appreciate your view on value investing being a subset of trading. You've written wonderfully about that on your site.

[Bill a.k.a. NO DooDahs!]

Thanks for the love!

Good point, in addition to method and discipline, the strategy must fit the personality that is executing it.

Also, there are other constraints, like available time to devote to the process. To even give day trading a try, one needs unfettered access to the markets for 5+ hours a day. People with less time available should look at trend-following, value investing, sector allocating, swing trading, etc., and find something that they're comfortable doing.

There are so many things that work, it's a question of finding your niche more than anything else, IMO.

[John]

Bill: Great point about having the time to use the appropriate approach.