Value investors believe cheaper stocks outperform more expensive ones. The only problem is that is hasn’t worked for much of the past decade.
In fact, Eugene Fama and Kenneth French who formalized the value premium, even questioned its existence in a 2020 paper. That may have been a good counter-indicator. In 2021, value investing did see some signs of life. Will it last?
What Is Value Investing?
Value investing has a host of different variations, but at its core it’s buying stocks that are less expensive than others. For example on metrics like earnings, cashflow, EBITDA, dividends or book value, value investing means that you own the stocks that give you more bang for your invested buck.
Yes, other stocks might seem to have better prospects, but over the long-term forecasting revenue and earnings growth is challenging as easy to get wrong. Those stocks which are overlooked by the market may shine, or at least do less badly than feared, while the more richly-valued growth stocks fail to deliver as much as expected.
Value has been a robust investment factor from 1800 to 2016. That means that betting on value stocks has tended to outperform the broader market, on average. As such the historical evidence for value is quite strong.
The concept of value investing has held up across time, asset classes and geographies. That’s normally a good sign. However, in recent years value investing has not delivered the returns that many hoped for. That may be because now it is too popular. Perhaps value is a crowded trade. It may also be that the markets have become more sophisticated. Perhaps better quant models now make the definitions of value such as price to book-value look naive.
However, if that’s not the case, then maybe value is poised for a rebound, and maybe 2022 is the year for that. The January effect suggests that certain cheaper stocks may be set for a bounce early in 2022, whether or not that occurs may signal how the year may play out for value investors.
Although, you should also be careful what you wish for. There is some evidence that a value investing strategy tends to perform better during recessions.