While value investing has had a difficult run, Validea CEO John P. Reese says not to give up on the discipline that Benjamin Graham created.
Since February 2007, U.S. value stocks have lagged the most expensive U.S. stocks by 2.6 percentage points annually, Reese writes. “The eight-year, seven-month stretch of underperformance is the longest losing streak on record, going back to 1926.” Does that mean good old-fashioned Graham-style value investing has gone the way of the dodo bird?
Reese doesn’t think so. “The idea of buying undervalued, fundamentally sound stocks still makes plenty of sense, and there’s no reason that such an approach should cease to work over the long haul,” he writes, saying that he believes several temporary factors are driving value’s underperformance. They include:
- The trauma of the 2008-09 financial crisis has caused many to become extra sensitive to any sign of danger in the market, likely leading many investors to avoid value plays, which tend to have short-term problems hanging over them.
- Weak global growth has likely led investors to reach for growth wherever they can find it–even if it is in overpriced growth/glamour stocks;
- The basic materials and energy sectors, which tend to be laden with value stocks, have been pummeled by the commodity collapse of the past year-and-a-half;
- The Federal Reserve’s extended period of ultra-low rates, which may well be distorting the growth/value cycle.
Reese says that often after going through rough periods, good strategies rebound with a vengeance. Because of that, he’s paying close attention to his Graham-inspired Guru Strategy, which is based on an approach Graham laid out in his classic book The Intelligent Investor. Reese looks at how this model works, and he examines a handful of stocks it is currently high on. Among those he highlights: clothing and apparel retailer Genesco.
Deena Friedman manages the Fidelity Select Retailing Portfolio, which has the highest 2015 return among mutual funds. With a return of over 18%, Barron’s notes that her “stock-picking easily outperformed comparable index-driven strategies,” given the 10.4% average return of ETFs investing in consumer discretionary shares. Friedman is a classic value investor, following Graham and Buffett, among others. “I found the way to generate alpha,” she says, “by thinking very long-term.” She also says that the American consumer “is increasingly value-conscious in an economy that is slow and steady, grinding upwards” – an outlook that fits well with her value investing approach.
Chuck Myers, who heads the Fidelity Small Cap Discovery Fund, shared some of the lessons he has learned as a value investor at the recent CFA Institute Equity and Valuation Conference. As reported in Enterprising Investor, these include:
- “Learn from the best, but think independently.” Myers cites some of the best known investors, and those with excellent records, as influences, but has developed his own “low expectations” approach to value investing by seeking out-of-favor stocks ripe for a turnaround. Myers cites great investors such as Warren Buffett, Benjamin Graham, and Seth Klarman as some of his top influencers in investing. Myers explains that studying Buffett’s shareholder letters and reading Ben Graham’s The Intelligent Investor have helped him develop a strategy for finding value stock opportunities.
- “Stay within your ‘circle of competence.'” Myers has an excellent stock-picking record, but his fund suffered early when he bet on sectors and became overweight in international stocks.
- “Aim for the ‘middle of the fairway.'” Focusing portfolio construction on his strengths as a stock-picker to avoid big bets that could go awry has served Myers well.
- “Relative valuation matters.” Myers looks at both absolute and relative returns, combining the approach of hedge fund and mutual fund managers.
- “When it comes to turnover, patience is a virtue.” Myers cited Morningstar data to suggest that lower turnover is associated with funds that outperform over the long run.
- “Focus on a margin of safety.” Myers asks whether a company can weather a severe storm without having to dilute its shareholders during a crisis.
With so much having changed in the financial world over the years, can decades-old investment strategies still work today? Validea CEO John P. Reese says they certainly can.
While he was no doubt born with some natural gifts, Warren Buffett didn’t become history’s greatest investor without any help. Buffett many times has praised his mentor, the late, great Benjamin Graham, for shaping his investing approach, and in a recent piece for Business Insider, Richard Feloni looked at some of the key lessons Buffett learned from the man known as “The Father of Value Investing”.
In an interview with Canada’s Business News Network, Validea CEO John P. Reese recently discussed how investors can profit from the strategies of history’s best money managers — and why so many fail to do so.
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