Tuesday, August 12, 2008

Is Value Investing Relevant?

In the past, value investors seldom lost their shirts as they normally pretty protected by margin of safety. This time around, value investors had very dismal performance.

Aug. 11 (Bloomberg) -- Bill Miller, Martin Whitman and David Dreman, mired in the worst slumps of their careers, are poised once again to trounce the stock market.

If history is any guide, the value investors' emphasis on shares trading at low prices relative to cash flow and earnings will provide returns superior to the holdings of so-called growth managers. Growth investing, which focuses on companies with the fastest projected profit increases, beat value strategies for the first time this decade in 2007 and by 15.5 percentage points so far this year, the widest margin since 1980, according to data compiled by Paris-based Societe Generale SA.

The five prior times since 1952 that growth beat value two years in a row, the latter group recovered and won by 17 percentage points annually on average for seven years, the data from Societe Generale show. Cheap stocks are becoming more attractive because of tumbling commodity shares, which had led the five-year bull market that ended in October, according to Societe Generale's James Montier, voted top global strategist in Thomson Extel's survey since 2005.

Value stocks became a liability as even Warren Buffett's Berkshire Hathaway Inc., the investment vehicle for the richest person in Forbes magazine's 2008 global tally, fell as much as 25 percent from a December record. Miller's Legg Mason Value Trust, which beat the Standard & Poor's 500 Index for 15 years through 2005, lost 27 percent including dividends this year, Bloomberg data show.

Honestly speaking, I have not seen this in my investing experience. You lose money in every sector even though they are cheap. They are just keeping cheaper by day. Those like to take big bet will suffer. Even our Omaha got whack. Those buy into Berkshire hoping to find refuge will be dissapointed as well.

Berkshire declined this year as Buffett lost money from his stakes in Charlotte, North Carolina-based Bank of America Corp., the biggest U.S. lender by market value, and New York-based American Express Co., the nation's largest credit-card company by purchases. The stocks declined 22 percent and 27 percent, respectively. Buffett, 77, couldn't be reached for comment.

Berkshire posted its third straight quarterly profit decline last week as lower rates pressured results from insurance.

I guess the best thing to do now is keep spending time study company. When the wind change, we will be ready to roar.

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