Interesting commentary from deep-value investor Rich Pzena in his fourth-quarter newsletter:
Momentum investing, almost by definition, is driven by emotion. Investors are looking for what's doing well in the expectation that it will continue to do so and tend to extrapolate trends and ignore valuations. Each peak in momentum investing has a story that investors have bought into, justifying their confidence, as well as their disregard for traditional valuations. In the early '70s, Nifty-Fifty would make money forever. In 1990, fears of inflation drove the market to embrace energy and technology stocks. In the bubble at the turn of this century, the Internet revolution was perceived as making traditional industries irrelevant.
Today, the world seems to have completely adopted the China/India growth story, believing it means a permanent shortage of commodities. At the same time, the subprime crisis is thought to have undermined the world's financial system. This has led to record valuation spreads between commodities and financials... In fact, the spread in valuations is wider now than at any time in the past 55 years. In our experience, the extreme views driving this spread are a perfect example of momentum "groupthink," which rarely turns out to be correct, and we believe present us with an extraordinary value opportunity in financial stocks.
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