With news that the blistering 33-week streak of investors' mass exit from U.S. equity funds ended in the final week of 2010, value investors should be particularly delighted. Although many value funds saw double-digit gains in 2010, growth funds continued to outpace the former, a continuation of 2009 when the Morningstar U.S. Growth index returned more than double that of its value index. Much of 2010's outflows came from value fund investors, according to the Morningstar, whose preference for safety pushed them away from the stock market into bonds.
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A new book, The Triumph of Value Investing: Smart Money Tactics for the Postrecession Era, challenges investors not to turn their back on this classic strategy. Author Janet Lowe also addresses the subject as it pertains to commodities and foreign stock markets. Recently, U.S. News spoke with Lowe about how value investing has changed in recent years and how these strategies have changed since the philosophy's progenitor Benjamin Graham arrived on the scene.
After the market turmoil at the beginning and end of the last decade, many investors appeared to give up on the value of value investing and stocks in general, preferring bonds and commodities instead. Do you believe there are ever multi-year periods when value investing doesn't work?
No, I don't, because value investing, if you follow it, you would have been a little better prepared. Of course it was such a massive event that hardly anyone escaped unscathed, but value investors overall did better. And then an event like this is a great opportunity for value investors to buy what they need and ride the market higher. Even in my own experience with my own portfolio, I came back faster than most people in the economy.
Growth stocks beat value stocks in both 2009 and 2010. Do you think a change of fortune is in the air?
I would encourage people to think more long-term, because that is the best protection. But I'm also one of these people who take exception with the general field of growth versus value. I think a lot of growth stocks are also value investments. If they have the basic fundamentals, you can have a growth segment in your value portfolio. But it's not based on speculation.
Google is an example. Even when it went public, there was enough information. There was an earnings and sales history you could look at and make an evaluation.
How has the value investing landscape changed in the post-recession era, and how, if at all, should less-experienced value investors alter their strategies?
Two of the changes had already occurred, and they were that global investing and technology investing had become necessary. You couldn't avoid these fields.
The next one is that you have to take into account the value of the dollar, because investing has become so global even when investing in U.S. equities. A General Electric or a Kraft Foods has a worldwide span. The strength of the dollar and the future of the dollar is a new element to consider. You have to realize that the dollar may be vulnerable because of our deficit and what's going on in the rest of the world. I emphasize in this book that you can't always expect the dollar to be as dominant as it once was. We'll have good years and bad years, but you always have to be ready for the bad years.
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What is the most common misunderstanding of value investing?
A lot of people think it's just a formula. You take six different elements, you plug in the numbers and you come up with something. But it's actually a philosophy of trying to find undervalued investments in whatever field you're investing in. You could even realistically apply it to buying real estate. You want to buy the highest quality that you can at the lowest price you can. I think sometimes certain value funds are misnamed because they have such a narrow definition, but I like a much broader definition.
If an investor isn't confident about buying individual stocks, are there any value mutual funds you trust?
I think there are families that are very reliable. T. Rowe Price has some value funds, but you also need to look at the market cycles and whether the market is overvalued or undervalued in general. Even the best fund, if you buy in at the wrong time, you will have mistakes. David Iben's [Tradewinds Value Opportunities] fund over at Nuveen has worked very well.
Is value investing by itself a worthy investment philosophy, or is it essential to marry it to some form of technical analysis or market forecasting?
I tell people to look at all the information you can. You can't let crunching numbers override common sense. That's why gathering information and just understanding what's going on in the world is very important. For a value investor, or any investor, you need to be informed … Gold is a good example. I would say that if you looked at everything going on there, at some point you have to say gold is overvalued, because it can only go up so far. It can only serve so far as an insurance against currency risk.
You mention value investing's godfather, Benjamin Graham, in a chapter called Virtues and Vices of Graham's Philosophy. What are some of the vices you mention?
Graham was too cautious for contemporary times. He had gone through the crash and the Great Depression, and for instance, he was very interested in IBM, but he wouldn't do it because it was a new technology and it scared him. I think we have to get over that today, because we're in a world of technology. We have to learn about it.
The other thing that was different for Graham was that he went through a very, very long time where there were a lot of undervalued securities. It made it easier for him to find deep, deep discounts. We're not always going to be able to operate in the same climate that he did. The other thing was he would buy regardless of quality if he thought it was undervalued. I don't encourage most people to do that. Most readers need a little more long-term stability than that. And that type of investing almost requires you to be a professional investor. You have to know a lot.
Reader Comments Read all comments (2)
Robert Johnson 1:21PM June 16, 2011
Michael P. Wein of NY 11:07AM January 12, 2011