Value Works But You Need to be Patient

Interesting article from James Saft at Reuters:

Ben Inker, of value-investing-orientated funds house GMO LLC, coined the slow trade term to describe a fascinating phenomenon: if something looks good from a value perspective now, you usually do better by waiting a year.

“The slightly odd fact is that moving slowly on value-driven decisions has simply made more money historically than moving immediately would have,” Inker, who is co-head of asset allocation at GMO, wrote in a note to clients.

“Buying the assets that are cheapest at any given point in time has been a profitable strategy historically, but buying the assets that were cheapest on average during the past year, or odder still, the assets that were cheapest a year ago irrespective of their valuation today, has done even better.” (here)

First, let’s look at the data.

Between December 1978 and June 1999 a portfolio comprising equal weights of the two cheapest equity markets outperformed the broad market by 2.8 percent per year in the following year.

Make one little adjustment – hold not what is cheapest today but what was cheapest one year ago – and you up your outperformance to a whopping 7.4 percent annually.

Since June 1999 the outperformance is less, just 1.8 percent annually, as against just an 0.4 percent annual outperformance if you buy what is cheapest in real time. Quite possibly the diminished effect since 1999 is because the globalization of both money flows and policy have cut into the advantages you can wring from country effects on portfolio construction.

Take it to a stock level and the advantages of buying what was cheap a year ago still stand out, according to Inker. If you buy the cheapest 10 percent of the market on a price to book basis you’ll have outperformed the market by 2.5 percent a year since 1965. Do the same thing lagged by a year and you outperform by 3.5 percent.

Even more impressive, the slow trade play seems to be able to help compensate for the general underperformance of cheap stocks since 1992. If you were to have bought the cheapest 10 percent of the market, measured by price to book, since 1992 you would have actually underperformed by 1.6 percent a year. Do it on a one-year delay and you still get a 2 percent outperformance.

Posted by on February 17th, 2014 at 6:53 pm


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