Value Investing: Is It Dead?

| November 11, 2010 | 0 Comments

Most investors are familiar with the concept of value investing.  Warren Buffett popularized this age old method by earning massive returns year after year.

In a nutshell, value investing focuses on identifying undervalued companies.  Seems pretty simple right?  You just go out and find some cheap, mispriced company, load up on the shares, and watch it soar.

Of course it’s never as easy as it sounds.

Just look at the financial crisis of 2008.  Value investors got creamed during the huge market selloff and its aftermath.  Though to be fair, so did growth investors, income investors, commodity investors… well you get the picture.

Here’s the thing…

Value investing has really lost its luster this year.  I’ve read several articles in places like The Wall Street Journal and Barron’s about how many investors have moved away from picking individual undervalued companies.  Instead, they’re focusing on ETFs.

It’s a major change of pace for investors.

So what’s the deal?

First off, and most importantly, Exchange Traded Funds (ETFs) are growing by leaps and bounds… and they’re attracting piles of investors’ cash.

You see, ETFs are a convenient and cheap way to trade the market.  They come in all shapes and sizes… so they appeal to all types of investors.  With all the compelling ETF choices out there, it seems like investors aren’t interesting in picking individual companies anymore.

And that’s not all…

The markets are moving on macro news more than ever before.  Major economic news and events are now catalysts investors base their investment decisions off of.  Individual company news isn’t in vogue.

So what’s that mean to you?  In a word… correlation.

Markets are extremely correlated with each other right now.  Part of this is due to all the major macro events occurring in the world today.  Part of it is due to the growth of ETFs.  But no matter how you slice it, many equities – and asset classes in general – are moving closely together.

For instance, the returns in large cap companies, small cap companies, and foreign companies are all very similar.

It’s because many of these asset classes are moving on the same news.  Potential government debt defaults, political uncertainty, quantitative easing, and currency devaluations are just some of the big picture items moving the markets these days.  And they’re having a global impact on the financial markets.

Meanwhile, individual companies are being lost in the shuffle.

These days, ‘buy and hold’ are four letter words in the investment world.  Being a buy and hold strategy is an aspect of value investing which is working against it.

It’s not totally without merit.  Buy and hold would have earned you a negative or minimal return over the last decade.

But here’s the thing…

While ETFs, market correlation, and the rumored death of buy and hold are putting a damper on value investing, keep in mind they’re all short-term trends.  The fashions are changing.

Right now, value investing isn’t in fashion.

But here’s the key… value investing is not dead.  It’s not even on life support.  It’s just taking a nap.  Sooner or later, the merits of value investing will take the main stage once again.

ETFs may be hot right now.  Correlations might be high.  And perhaps buy and hold is on the backburner.

But here’s the bottom line…

When value investing starts posting decent returns, investors will return to it in droves.  After all, nothing is more in fashion than making money.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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