Does Value Investing Really Work? Problems, Difficulties and Facts of Value Investing

Описание: Warren Buffet is known as the greatest investor in the world, based on his track record over an extensive period. He is a value investor. Other great investors like John Templeton, John Neff, Peter Lynch, Joel Greenbalt, etc., are also value investors. Given their stardom in Wall Street, many people like to follow value investing strategies, hoping to become rich someday. However, there are numerous, very challenging problems associated with these strategies. It would be great to know about these problems beforehand rather than facing and regretting them later. Generally, value stocks refer to inexpensive underdog stocks traded at low P/E (price-to-earnings) or P/BV (price-to-book value) ratios.

Value stocks, despite being dirt cheap, can carry significant risk and may be on the verge of bankruptcy (phase of chapter 11). Relying blindly on valuation metrics might result in your money disappearing. Many studies that purportedly prove the effectiveness of value strategies have actually suffered from survival bias. This means they focused solely on companies that survived for a long time, while neglecting those value stocks that either vanished entirely or merged with other companies. Taking this into account, one might lose faith in value strategies because almost half of the value stocks didn’t perform well, even over an extended period.

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