With markets at all time highs and everyone seemingly fixated on the Dow pushing past 20,000, it may seem like value investing is all but dead since growth stocks are now flavour of the season.
So is it time to abandon value investing? From my perspective, ‘No’ and here’s why.
Firstly, this time is never different. It always scares me when I hear of investors in the market who tout their skills because they got lucky by jumping on the markets at the right time and riding the highs.
Let me share with you that this time is never different and it’s difficult to understand why there is so much contempt for value investors. Even though data contradicts the beliefs held by those who readily bash the value investor, especially when the strategy is most necessary in times like these at market highs. When the market reverses, it’s then that you get to see who’s swimming naked as Warren Buffett says.
Several prominent financial writers have recently criticised the buy and hold strategy because the market’s new norm is volatility and that ‘buy and hold’ is a dated strategy for investing. It appears that many investors are staying away from value investing and are leaning towards ‘growth’ type investing strategies, searching for high growth but unprofitable businesses with the promise of ‘potential’ future growth.
The criticisms are less bothersome to me than witnessing how misunderstood value investing actually is. Many regard value investing as ‘buy and hold’ investing, arbitrarily buying and holding stocks with the weak argument that markets eventually go up so they are regarded as ‘long-term’ investors. The difference between the two is significant.
Therefore just holding a stock for an indeterminate amount of time is not a sound strategy and is essentially, buy and hold investing, not value investing.
Using value investing as a strategy means buying stocks for less than they are worth (the cheaper the better). It is also about being willing to move on and sell if there is better value elsewhere.
There are two main reasons value investors often hold on to stocks for long periods of time.
The first reason is that they realize that value requires time. It is not realistic to think that simply because you bought the stock, the market immediately recognizes that it is under-priced. It can take months or even years for your investment to pay off, but some patience goes a long way and real value investors are willing to wait for their patience to be rewarded.
Just look at the recent stock price movements of US major banks like Bank of America and Citigroup who’s stock prices had remained battered for several years, selling for well below book value (it still is as we speak), but finally catching up and quickly making back lost time since US interest rates are finally rising, increasing their corporate profits dramatically.
Secondly, valuation is not an exact science. This is particularly true for businesses that are at one extreme or the other. It is an easier task to value an ‘average’ business. Value investors regularly seek out quality businesses and are not quick to sell before it’s time. They are more than happy to let the stock price drift over their upper valuation and understand that this can require holding on to the stock for longer periods before full value is reached.
Considering the above, value investors generally hold on to stocks for a long time, but this decision is not haphazard. Stocks are carefully chosen and it is not an instance of simply 'holding and hoping'. You can learn how stocks can be safely chosen here.
So is now the time to buy?
Proclaiming the demise of value investing is clearly one of the most contrarian indicators you’ll come across. Analysts declared value investing dead from the early 1970’s through the late 1990’s and we know the outcome of that. History shows that value investing is here to stay.
Regardless of the economic climate or current financial market conditions, the best long-term safe strategy continues to be buying something for less than it’s worth and holding on until the time is right to move on. Buying stocks is really no different to buying groceries at the super market when it’s on sale. In fact, during market highs, value investing is even important if merely to just keep you safe by investing in the right stocks and at the right price.