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Tedious and challenging

No before you even think it, that head-line is not the sub-editor’s assessment of this column. At least I hope not. Moving swiftly on, there are few things I hate more but do you mind if we start with a little bit of audience participation?

How many seven-letter words can you come up with in 10 seconds that fit the structure ’- – – – – n -’? Now, same question about ’- – – – ing’? Yes, essentially it is the same question but presumably you thought of a few more the second time, thereby neatly illustrating the availability heuristic.

This – so fund managers with an interest in behavioural finance tell me and I have no real reason to doubt them – is the bias people show when they assess the likelihood of an event based on how easily a similar example springs to mind. It is, if you like, why each year The Disc-overy Channel’s Shark Week generates a short-term decline in visits to Florida beaches.

Less colourfully, it helps explain why investors are not always as rational as they might be and I am also beginning to think it might shed some light on how I come up with topics for this space.

Thus, having last week rather enjoyed writing about behavioural finance guru James Montier’s Seven imm-utable laws of investment, I now feel moved to focus on human nature and the last great anomaly.

This is a paper by Charles Lahr, a global equity portfolio manager at Pimco, concerning the “value premium”, the extra annualised return of value stocks relative to their index. According to FactSet, using MSCI indices over the decade to the end of 2010, the value premium was worth an extra 0.19 per cent a year in the US, 0.89 per cent in Europe, 1.97 per cent in the emerging markets and 2.34 per cent in Japan.

Naturally, this begs the question why everybody is not a value investor and Lahr has a rather splendid answer – human beings are just a bit, well, rubbish. OK, that’s my word – he is more polite, saying: “Value investing can be down-right mind-numbing – few want to sift through boring, out-of-favour, often unloved companies looking for a diam-ond-in-the-rough investment.

“Also, a long-term outlook is prerequisite for value investing and many people tend to lack the patience needed. Indeed, pain avoidance is primary to the human condition, so value investing can feel somewhat unnatural – looking for inexpensive securities where there’s little buying interest goes squarely against what most investors do.” To recap, then, value investing is boring, difficult and time-consuming – yup, I was about right the first time with “rubbish”.

Lahr even has a caveat for anyone who still feels they have what it takes to join the Value Gang, warning value does not perform every year so “there is no free lunch in investing” – although my own career might suggest otherwise. Anyway, according to FactSet’s analysis of MSCI World annual returns, growth spanked value by some five percentage points in each of 2009 and 2010.

Undeterred, Lahr maintains the value premium is “one of the most persistent sources of return found in equity markets” and that studies dating back to 1900 in the UK have shown it averages about 3 per cent on an annualised basis. As such, he argues, the key point to take away from all this is “a long-term focus on value investing and unwavering discipline has worked in the past and did so without taking the forecast risk of trying to predict when value would be out of favour”.

But, boy, is it hard work. “The process of searching for undervalued and neglected equities is one that can be tedious, trying and challen-ging,” concludes Lahr, still refusing to sugar the pill. “Even when proper invest-ments are identified, toler-ating the market uncertainties and volatility that cloud intrinsic value is difficult.

“The very existence of a mar-ket with differing viewpoints can be a source of doubt to an investor and irrational fear has driven many investors from compelling long-term invest-ments. Value investing is not easy and it is not suited for most. It is not glamorous in any way, shape or form – and this is exactly why the anomaly will likely continue.” I get the feeling that Lahr would not have it any other way.

Julian Marr is editorial director of and


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There is one comment at the moment, we would love to hear your opinion too.

  1. The father figure for value investing is Benjamin Graham, who is still pretty much Holy Writ for the concept.

    However, Ben Graham’s investing partner was Jerry Newman, who pursued growth stocks, and Graham was quite open about the fact that Newman made all the money.

    Value investing is like getting up early in the morning – you feel virtuous for two hours, and sleepy for the rest of the day.

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