The factors which typically affect the performance of a value investor are Valuations, Opportunities, and Speculation.
Valuations
Deep Value
Price-to-Cash-Flow Multiples over Time! This means stocks which are trading at
low valuations multiply in value over time and same way the valuation may
compress during another time.
Opportunities
Opportunities
for investment open to the investor that stresses quantitative factors with
precognition resulting into Growth.
Speculation
Massive interest
in investment performance created through a short-term orientation.
The markets during the last decade have shifted towards “Opportunities” and “Speculation“. These have seen sell off in “Valuations” based business. In other words, deep-value stocks are at attractive prices maybe because of pessimism or pervasiveness.
As we follow “Opportunities” for sustainable wealth creation policies, the same can be found in “Trends” of the markets. Trend following works especially well for large growth and improves returns relative to buy and hold strategy. Trends work wonders across multiple asset classes and will not do justice to Value Investing if Growth is considered as an effective means for long term strategy. In short, Trend is an important catch.
If the Value has performed worse in recent times or is at low multiples, the chances of its expected returns becomes higher. With Growth though, the better the historic return, the higher the expected future return. Growth is generally seen in the Innovative Business segment of the economy. By innovating and creating new technologies, growth companies become more efficient with resources enabling them to deliver higher profit margins and faster earnings growth than their competitors.
Markets will chase Growth stocks by investing huge capital to seek comfort in very few companies leading to irrational stock prices at times. Value even at low multiples will struggle to perform as they must take huge actions in order for the business to sustain in a competitive and ever-changing economy. Not much capital will chase these value stocks hence multiples will take time to climb higher.
While growth stocks have soared to ever higher heights, value stocks have struggled to attract investor capital over the past 10 years mainly after 2007. Growth companies have access to cheap cost of capital compared to value companies as the latter has to reduce operations costs, pay dividends, do stock buybacks, etc, to keep cost of capital attractive and on the other hand, large growth stocks’ breakthrough innovations and fat profit margins.
But all said some value stocks still have an edge with companies that are profitable and cash flow positive to perform going forward.
