Value Investors Riding a Hard Patch of Road

This has been a challenging year for big-cap value investors. The Wall Street Journal today highlighted this fact in an article [$] which began: "Name a big-company stock you didn't want to own this year, and there's a good chance it's in the portfolio of your large-cap value fund."

The article goes on to explain that the average value fund is down 2.6% this year, but many well-known and well-regarded funds are showing double digit losses. I would submit that financial stocks may be a good portion of the problem. I remember thinking earlier this year that many of the financial stocks looked very cheap. Bank of America (BAC) looked cheap when I bought it at $51 back in May. The P/E was quite reasonable at the time and I figured that the divided yield (around 5%) would help the stock hold that level. I and probably other value investors were greatly surprised by the impact the sub-prime meltdown would have on BAC and financial stocks.

The New York Times (NYT) looked cheap to me all the way down to this level and even now is very tempting. I think this company needs to find a way to completely restructure its business model and I am sure there is a lot of work going on right now to address this. NYT is a stock that should do extremely well over the next few years, but that confidence in the future does little to take the sting away from its negative impact on my portfolio this year.

I could go on and on as to why I think the stocks I own (and have lost money in) should become highly profitable holdings in the longer-run. However, I think it's more important to stress that just because an investment style is out of favor (or more precisely, not working) in the current market environment is not a good reason to abandon it.

In some ways, being a value investor really wasn't a choice for me; I feel that it is more likely to be a genetic disposition. As I learned about the stock market, only one way of looking at stocks and investing in them made sense to me. My style has been out of favor before and likely will be out of favor again. Nonetheless, it's how I invest now and will invest forever.

My way of mentally dealing with this hard patch of road is to think of the law of the harvest: there are times to plant and times to reap. I am now in a planting phase and doing my best to keep the elements from damaging my fragile newly-planted seeds. I have full confidence that the reaping season will come, just like it always does.

Disclosure: Long BAC and NYT

Comments

[Lisa]

Mike, I don't think this is about an investment style being temporarily "out of fashion". Rather, the stocks that looked to you as though they were value stocks weren't really value stocks, because their earnings prospects were worse than you assumed.

The remarkable thing about value stocks is the way the market has swung in such a short time. Only recently, tons of capital was swashing around, causing private equity funds to buy companies and pushing other companies to increase their leverage at the cost of free cash flow. Now companies -- particularly financials -- are being forced to shore up their balance sheets by raising more capital.

We now know that the "easy money" wasn't really so "easy", as the credit pyramid was rotten at its base. And the earnings projections that were based on that easy money weren't real earnings.

Surely that's why your value stocks weren't really value stocks.

But is value investing out of style? Look at BRKA's stock price for an answer to that question.