Value investing doesn’t mean what you think

A deeper look into why value investing underperformed the last decade. [Click to view in browser](. Dear subscriber, Risk is falling apart. And value is having a major resurgence. The Russell 2000 Small-Cap index (IWM) along with the Nasdaq 100 (QQQ) continue to flip flop in the face of rising interest rates. Enter value funds. Value funds are like George Lucas’s Star Wars prequels… They stick to their strategy even when it clearly isn’t working. Yet, we fork over our hard-earned cash anyways. [star wars lack of faith GIF] Slapping the word ‘value’ onto an ETF or mutual fund doesn’t make it so. But many of us don’t understand the difference. But we’re going to change all that right now. Warren Buffet isn’t a value investor. Or better said - value funds don’t invest like Warren Buffet. Get this - most value funds underperformed the market over the last decade. Yet, Warren Buffett’s Berkshire Hathaway (BRK.B) handily beat the majority of major markets. You see, the Oracle of Omaha knows that markets can and do change, and context is key. Passive value funds use simple criteria to define value, which isn’t necessarily a good thing For example. The S&P 500 value index looks at three criteria: - Book value to price ratio - Earnings to price ratio - Sales to price ratio They then divide these into buckets, where the ones with the lowest measures across these categories are considered ‘value’ stocks. Here’s the problem with that. All of these metrics look backward. And sometimes things look cheap for a reason. Take banking stocks in 2008. As they saw share prices plummet, their relative value improved. All their profits, sales, dividends, etc had yet to catch up. Once they did, things didn’t look so cheap. But the algorithm for ‘value’ doesn’t care about that. It just goes by its code. Nor did it consider the possible impact of expansive monetary policy that sent high growth companies stocks soaring over the next decade. So might a blended approach look like? Consider the Russell mid-cap value index and ETF (IWS). Mid-caps tend to boast higher growth potential than large cap stocks. Paired with a value factor, that creates a nice balance. And you can see how its performance compares to the S&P 500 as well as the S&P 500 value indexes. However, any index or index fund is only as good as its algorithm. As investors, we can choose to simply set it and forget it. Or, review it semi-regularly in the current context and make sure it still fits. The bottom line Don’t take any fund that uses the word value on its face. Take a look into how it actually works. Then make sure it fits with your investment style, strategy, and goals before your value potentially goes out the door. 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