It seems that everywhere we turn, journalists and market bloggers are taking great pleasure,it seems, in letting all of us know that the "Value" style of investing had a really, really bad year in 2008. Look what Fred W. Frailey, editor of Kiplinger.com wrote back in December in his article entitled, "Where Are The Wise Money Managers?":
You quit believing in Santa Claus long ago. Ditto for the Easter Bunny. Later on, as you grew up, you learned that life isn't always fair and that bad things really do happen to good people. Perhaps now is the time to lay to rest an article of faith among investors and own up: There are no geniuses in this business, after all.
R.I.P., Bill Miller (Legg Mason Opportunity fund, -59% for 2008 through October 30). And Mason Hawkins (Longleaf Partners, -47%), Bill Nygren (Oakmark Select, -36%), Chris Davis and Ken Feinberg (Selected American Shares, -36%), Ron Muhlenkamp (-37%) and the guys and gals at Dodge & Cox Stock (-41%).
Have no fear, all those guys mentioned will be back. The newest evidence is from our friends over at AFGview.com and their Value Expectations Blog. They just released a study on which style worked on a relative basis as investors panicked during the last three months and which styles did not work. Value investing works when saner heads prevail - when the markets recovered over the last few weeks, value stocks with strong fundamentals but selling at prices that imply very low expectations, performed the best. We see it in our portfolio.
Consider what the AFG folks found:
As investors panicked and hedge funds delevered, it seems that stock prices over the last three months were heavily influenced by short-term earnings, dividend yield, and price momentum as some investors looked for safe havens in the stock market, and others simply followed macro trends. Despite poor performance during the market decline, we believe that a long-term valuation approach will perform very well as an investment strategy as the stock market stabilizes, and the following article will summarize what we have observed during the stock market decline (9/19/2008 - 11/21/2008) and the recent recovery over the last six weeks.
After the focus on the recession, earnings, credit crisis, housing market, stimulus packages and bailout by expert opinions and media reports over the last three months we are wondering “what do we do now?”. After all, we are certainly no genuises (but we do believe in the Easter Bunny).
We spent the last several months examining every part of our investing process so we could retool and be ready for the upswing. I am excited to say that our philosophy has not changed at all , but we have tweaked a few parts of the process and added a separate momentum overlay to help warn us of the large hidden risks like we saw in the last three months.
Other than that, we are still value investors who buy EVA Companies, meaning we buy stocks of companies that are the best stewards of our capital and whose management's are focused on long-term intrinsic value growth of our shares, All that is meaningless if we do not have the discipline to buy the great companies at attractive prices - that has not changed, and many great companies are now selling at 50 - 70% off.
We treat lower prices as heaven sent. We get to trade undervalued stocks for really undervalued stocks and since we and our clients are mostly still savers and regular buyers of stocks, we get to buy more and more shares of great companies at lower prices raising our lifetime expected return from this point on. We want to accumulate as as many bargain priced shares as we can BEFORE THE SALE ENDS!
So regardless of the media and other traders and investors who scoff at Value Investing because of one horrible year where there was no place to hide, we don't care what worked when the market was going down. We only care about what has ALWAYS worked - buying great companies' shares at deep discounts to the shares' intrinsic value.
BERK
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