Dark days for value investors

History suggests that cheap, unloved stocks usually have their day. But how long will value investors have to wait?

Value stocks – those that are cheap and unloved – have a long record of outperforming growth stocks – those that are expensive and popular. It’s very easy to make overly simplistic distinctions between “value” and “growth”, and not every “value” investor has had an awful time, just as not every “growth” investor has shot the lights out. But taking a broad view, betting on value rather than growth in the last five years has cost investors in the region of 6% a year, argued Norbert Keimling in a research piece for StarCapital in October.

That’s a massive gap. So what’s going on? The problem for value stocks today is mean reversion – or the lack of it. Mean reversion refers to the tendency of a given trait or data series to move around a long-run average. If the series rises too far above the average, or falls too far below, it makes sense to bet on a reversal (at some point). Not every series is mean-reverting, but in the financial markets mean reversion is logical.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free
https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up
Explore More
John Stepek

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.