Value Investing: The Pain Train has Arrived and it Sucks.

Value Investing: The Pain Train has Arrived and it Sucks.

October 12, 2015 Value Investing
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A few months ago we highlighted a surprising result: cheap high-quality stocks were getting crushed by expensive junk stocks.

The spread at the end of June was around 18%. Here is the chart from the old post (details on construction are in the original post):

cheap hiqh quality versus expensive low quality stocks
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Logical conclusion: Buy Value!

Fast forward 2 months…

Here we look at the updated YTD performance comparing expensive junk stocks to cheap high quality stocks.

We examine value-weight returns for the cheap high-quality quintile and the expensive low-quality quintile. The daily returns run from 1/1/2015 to 8/31/2015. Results are gross of fees. All returns are total returns and include the reinvestment of distributions (e.g., dividends).

Specifically, here are the two portfolios:

  1. Cheap, High Quality = Value-weight returns to the cheap high-quality quintile.
  2. Expensive, Low Quality = Value-weight returns to the expensive low-quality quintile.
Expensive Junk Stocks are Killing High-Quality Value Stocks, YTD
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

An 18% spread was bad enough–how about we double down on that? The generic cheap quality versus expensive junk spread is over 30% YTD. Just when we thought things couldn’t get any worse – they got a whole lot worse! The results are driven by a horrific July, that looks anomalous, but still…Wow!

Logical conclusion: Buy value?! …hmmm…maybe it’s time to get rid of those value stocks and try something else? It’s not working now so maybe value doesn’t work any more?

But be careful with “logical” conclusions. As we’ve said time and time again, active value investing has been digging manager graveyards since 1900…but that is the nature of the active value investing game…long horizons are required and volatility relative to the standard benchmarks can be expected.

These are the times that try men’s souls.

– Thomas Paine

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About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray received a PhD, and was a finance professor at Drexel University. Dr. Gray’s interest in entrepreneurship and behavioral finance led him to found Alpha Architect. Dr. Gray has published three books: EMBEDDED: A Marine Corps Adviser Inside the Iraqi Army, QUANTITATIVE VALUE: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors, and DIY FINANCIAL ADVISOR: A Simple Solution to Build and Protect Your Wealth. His numerous published works has been highlighted on CBNC, CNN, NPR, Motley Fool, WSJ Market Watch, CFA Institute, Institutional Investor, and CBS News. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.