Just How Important Is Value Investing? - Finance

Posted by publisher on December 26th, 2011

A price-driven discipline that seeks companies whose shares are selling at a discount to their true or intrinsic value is value investing and its roots date back to the 1930s.

Value investors seek companies that are temporarily out of favor while growth-oriented investors focus on firms whose earnings are growing at a rapid pace, a quality that makes them highly sought after. Due to factors ranging from company-specific issues to shifting investor sentiment, cyclical trends, poor economic conditions, or an overall market decline, their shares may be depressed. For no good reason, they are sometimes being ignored by the market.

There are three factors that have amply made the case for the value style of investing over the past 25 years and these are performance, diversification and risk control.

When it comes to performance. Value investing is first and foremost a strategy that has done well over time and it rewards investors with strong risk-adjusted performance. This has actually been true over the past quarter-century.

Another important thing you need to remember is that dividends, particularly those of value stocks, have and continued to be a significant component of the stock market?s total returns.

Diversification. Over time, value and growth stocks have tended to move in different cycles. When growth stocks are in favor, they tend to outperform value shares, and vice versa. Encouraging many investors to construct portfolios employing both value and growth strategies and helping to ensure that they have equity investment with the potential to perform in changing market environments is that kind of knowledge.

The value strategy has more than held its own against its growth counterpart and this is something you should keep in mind. Value?s outperformance has been particularly pronounced in recent years.

Risk control. By their nature, generally tending to be less volatile than their growth counterparts are value stocks. Their shares are typically selling at depressed prices which is why value firms are better positioned to withstand market declines. But normally having higher earning expectations that are built into their prices are shares of growth companies which means that they are subject to wider price swings as those expectations change.

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Source: http://www.thefinanceanalysis.com/2011/12/26/just-how-important-is-value-investing/

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