Why value investing works

Value buyers need not be right--only not wrong.

John Rekenthaler 9 July, 2018 | 5:00PM

Not so long ago, investment writers appealed to their readers by calling them stupid. "Mutual Funds for Dummies" was the field's classic (seven editions!), while "The Pocket Idiot's Guide to Investing in Mutual Funds" served those who were pressed for time. For hopeless cases, there was "The Complete Idiot's Guide to Making Money with Mutual Funds." Personal finance for every flavour of blockhead!

This column is offered in that spirit, but sadly such blandishments have become unfashionable. Sometimes, it is useful -- even to the author -- to consider a subject from first principles, to examine the underlying assumptions. Today's subject is value investing. Per the academic research, buying stocks on the cheap has flourished for as long as the data has existed. Why?

The common explanation is sentiment. What is now unloved will later receive its due. A classic case would be  JPMorgan Chase (JPM): Its stock bottomed at US$14.96 per share in March 2009 and trades today at US$104. Nine years ago, bank stocks were very unpopular. Now they are not. Those who foresaw that change, and who were brave enough to purchase the stock when others feared, have reaped their just rewards.

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John Rekenthaler

John Rekenthaler  John Rekenthaler is Vice President of Research for Morningstar.

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