Value Trap

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General  |  August 8, 2017  |  

Over the long history of financial markets the difference in returns between growth and value investment styles has been remarkably similar. However, today’s Wall Street Journal suggests that 2017 marks one of the worst period since the 1940’s for the relative performance of value investors. This can be seen on the chart below of the Russell 3000 Growth and Russell 3000 Value indexes.

Value Trap

Value investing was made famous by Benjamin Graham, known as the father of value investing and more recently by Warren Buffet. The market’s attraction to highflying stocks punished value investors in a similar fashion in the late 1990s during the dot-com bubble. Growth stocks beat their value peers toward the end of two major bull markets that peaked in 2000 and 2007, before large market selloffs reversed the trend, putting value stocks ahead.

Stocks that look cheap relative to traditional fundamental metrics such as profit or cash flow have fallen so far out of favor that Goldman Sachs in June questioned whether the markets are witnessing the death of value investing. History has proven that predictions like this are usually near the end of a trend.