Patience is a Virtue with Value
Submitted by Group W - Investment Management on October 7th, 2019Well, we’ve had another quarter of steady gains in the U.S. equity markets. The S&P 500 Index increased 1.2% during the quarter and is up 18.7% so far this year – the best three-quarter performance since 1997.
There has also been a high level of economic and political uncertainty of late, e.g.: trade war with China, impeachment inquiry, Iranian saber-rattling, inverted yield curve, Brexit, dysfunction in the repo market to name a few. But what else is new? It is hard to think of a time when there wasn’t something ominous coming down the pike to worry about.
How is an investor supposed to know what to do amidst all the tumult? The answer is this: pick an investment strategy and stick with it. At Group W Investment Management, the strategy of choice is long-term value investing. In simple terms value investing is buying good companies at below-average prices. The system works because, at any point in time, the market can and will undervalue or overvalue a given company’s stock without regard to fundamental values. The key is to hang in there for the long term.
Prominent stock market investor Joel Greenblatt had this to say about value investing:
“Value investing doesn’t always work. The market doesn’t always agree with you. Over time, value is roughly the way the market prices stocks, but over the short term, which sometimes can be as long as two or three years, there are periods when it doesn’t work. And that is a very good thing. The fact that the value approach doesn’t work over [short] periods of time is precisely the reason why it continues to work over the long term.”
and
“It is very difficult to follow a value approach unless you have sufficient confidence in it…I spend a lot of time trying to get people to understand that in aggregate we are buying above-average companies at below-average prices. If that approach makes sense to you, then you will have the confidence to stick with the strategy over the long-term, even when it’s not working, and you will give it a chance to work. But the only way you will stick with something that is not working is by understanding what you are doing.”
Sadly, many value investors don’t really understand what they are doing. This is especially true when the market is rising steadily, and profits are quick and easy. But, the unwillingness of many market participants to stick with an investment strategy creates opportunity for the few committed to long-term holding periods. Most unsuccessful value investors fail because they lack the patience to commit to the strategy through thick as well as thin.
1 October 2019 Group W Investment Management LLC
