This past decade, value stocks have significantly underperformed growth or momentum stocks, and often by a wide margin. Investors who have sought value and received continuous negative returns may be tempted to go out and choose to allocate more toward such momentum stocks in this environment. After all, if it’s worked in the past, it will work in the future, right?
The premise of value investing is that buying stocks which are relatively cheaper than their peers should, over the long run, produce outsized returns relative to the market.
The thought process is simple: two stocks with $10 in annual dividend distributions per share, but one costs $100 per share and the other costs $80 per share means an investor in the company which costs $80 can expect to receive a rate of return which is 25% higher than an investor in the more expensive security (all else being equal).
In times when the stocks of both companies increase or decrease at the same rate, value investing will outperform.
When momentum or growth stocks increase at a faster rate than value stocks is when value investors lose out – such has been the case in recent years.
Over the long haul, however, the data shows that value investors do better, on average. When value stocks underperform for an extended period of time is precisely when to buy these securities, meaning investors who have been waiting on the sidelines for opportunities should be looking at value in this environment.
Invest wisely, my friends.
