Value stocks have collectively lagged growth stocks by a decent margin over the past five years, leading many to question whether value approaches still work. In a piece written for Institutional Investor, however, Joseph G. Paul and Kevin Simms of AllianceBernstein say the discipline is alive and well — and more relevant than ever.
Paul and Simms look at some of the behavioral biases that underpin value investing approaches, including loss aversion, trend extrapolation, and short-term focus. All of these factors, they say, have been on display since 2008. “Investor loss aversion was heightened by the severe crash of 2008 and the ensuing volatility,” they say. “An abundance of bad economic and corporate news has made erroneous trend extrapolation even more ubiquitous. And as markets have lurched from crisis to crisis, with recurrent spikes in volatility, investors’ time horizons have become extremely short.”
Over the longer haul, however, these biases “are likely to eventually correct themselves and reward investors who have stuck to their knitting and dared to defy the crowd,” Paul and Simms write. They say, in fact, that many of the recent changes in the market — lower trading costs, technology that makes it easier to buy and sell stocks, and the instantaneous availability of information — “promote emotional reactions by investors”. Because of that, they say they believe “that traditional research-driven behavioral investing makes more sense than ever in the 21st century.”