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BLOG: Considering value stocks for 2022? Here’s what you need to remember

Paloma Kubiak
Written By:
Paloma Kubiak

After a decade of neglect, value stocks seem to be in the spotlight as creeping inflation bites and investors look for reliable havens.

If I received a pound for every time I’ve been told over the past 10 years that “value is over”, I could probably have retired on that nest egg alone. However, I’ve always had faith in the logic behind the value strategy and the empirical data that showed time and again that the existence of a value premium is real.

This is a philosophy that has served me well during my career which has almost exclusively focused on value stocks despite the discipline receiving bad publicity – unfairly, in my opinion. However, for some it has been a long and protracted dip, with the relative underperformance of value indices since the end of 2006 at approximately 60% (depending on indices used) when compared with the wider market.

From personal experience, there have been many important (sometimes painful) lessons I have learned along the way since I started investing in my dorm room 20 years ago. It is my view that the economy has evolved considerably since then, and that successful value investors must be sure to evolve their investment process with it. With that in mind, I share these pearls of wisdom which I hope are helpful to my fellow investors, no matter what approach they take to investing their money.

1) Choose a strategy

You should view everything through the lens of your investment strategy. There is no absolute ‘best’ investment strategy for everyone; the best approach for you is the one that is the best fit for your personality. People who get a kick out of hunting for bargains in their everyday life will find value investing very appealing — those who don’t will be better off taking a different tack. Be consistent with your strategy but do remember to evolve it when necessary — the world is changing at an accelerating rate. The only way to succeed is to stick to your strategy and evolve it.

2) Understand what ‘value’ really means

Traditionally, value stocks have been defined as those with a low price-to-book ratio. But the world of business has changed over the past couple of decades and the old metrics appear to have stopped working during a time in which the economy, and the way businesses invest, has changed. So, while in the past there was a strong relationship between a company’s reported shareholder equity and its profitability, that is no longer the case. Be prepared to look beyond the balance sheets for hidden value, even in companies which appear expensive by more traditional metrics. Value investing has always worked. Sometimes you have to change where you look and other times you have to change how you look.

3) Try to win by ‘not losing’

Loss avoidance is highly underrated as an investment instinct. Many investment professionals market themselves as having beaten the odds when in all likelihood they have simply made sure the odds are stacked in their favour – and you can do this too by understanding and minimising your downside. For example, look for businesses that have a strong competitive advantage – or a ‘moat’ –  this quality will help them ride out difficult market conditions relative to their peers. Have a minimum quality threshold below which you will not invest in a business and this will help hugely – after all, there is never just one cockroach in the kitchen.

4) Be patient and say no to FOMO

One of the best advantages an investor can have is a longer time horizon. It’s a mix of structure and psychology. Both are very hard to change once set. Understanding that you are in this for the long-term will help you avoid those kneejerk reactions whenever there is a market wobble. Even the most experienced fund manager is vulnerable to human nature and all the accompanying foibles. Also remember that fear of missing out, or FOMO, is one of the worst instincts for investing – kill it.

Abdulaziz Alnaim is lead portfolio manager for the Mayar Responsible Global Equity Fund