Rob Arnott: Out-of-Favor Value Stocks Set to Outperform Next Five Years
By Robert Stowe England
Value stocks have been underperforming the market for most of the last 12 years. Their recent performance relative to large market cap benchmarks is well below historic norms. This might lead investors to think they should avoid this sector.
Think again, suggests Rob Arnott, chairman and founder of Research Affiliates of Newport Beach, California. “When value gets as cheap as it is now in the U.S., historically it has beat growth by 4% a year over the next four to five years,” Arnott says.
This projection comes with roughly a 5% uncertainty factor, which means it could be 5 percentage points higher or lower. That would mean “somewhere between zero and 10%,” Arnott says. “Oh, I’ll take that bet. The low end of the spectrum of the range is zero.”
Emerging market value is even cheaper by historic norms. “The expected outperformance is 8% with 5% uncertainty. I’ll take that risk anytime,” Arnott says.
A turnaround in the outlook for value would mark a stark change from the recent past. In the last five years, for example, the Russell 2000 Value Index (RUJ) has returned 15%.
By comparison the broader Russell 2000 Index (RUT) has returned a much higher 29%. The S&P 500 has returned an impressive 47%.
In making his case for the outlook for value, Arnott counsels against a common mistake that investors make, relying on recent past performance to make investment decisions.
“If you buy a mutual fund because it’s performed well – if you haven’t checked whether it did well by dint of having become more expensive, by dint of the valuations multiple story, then chances are you’re buying a newly-overpriced fund. And setting yourself up for the classic buy at the top, sell at the bottom pattern,” says Arnott.
Arnott’s positive long term outlook for value is based on what he calls the relative valuation of factors within the broader market of equities – factors such as value, growth, quality, momentum, low volatility – as well as changing spreads between factors.
Relative valuation provides a way to compare current prices to the median historic performance for a given factor, index or spread. “Valuation is a very powerful predictor of future performance for managers and for strategists,” Arnott says.
An innovator in indexation strategies, Arnott is basing his positive outlook for value on the fact it has gotten increasingly cheaper since 2007 on a relative valuation basis.
As investment factors like value move toward the low end of their historic range, it makes them an attractive investment to purchase as they are more likely to outperform over the long term as their relative valuation reverts to the factor’s mean historic performance, according to Arnott.
Arnott cautions investors on getting too focused on when exactly the market will turn. “So this isn’t good for timing. It’s great for gauging forward-looking returns,” he says.
Taking the plunge into value could also bring some disappointment. It could “hurt in individual years,” he says.
For example, Arnott expected value to move higher after it hit a low in 2015. While it did move up in 2016, the move was short lived. Value returned to underperformance in 2017, 2018, and so far in 2019.
Arnott’s firm introduced the Research Affiliates Fundamental Index (RAFI) in 2005 as an alternative to traditional equity indexes, such the S&P 500 and the Russell 2000.
Rather than relying on market capitalization to weight companies in an index, RAFI weighted companies on fundamental measures of size: book value, cash flow, dividends plus buybacks, and adjusted sales.
According to Research Affiliates’ smart beta interactive website, the RAFI fundamental index for the U.S. should provide a net 2.73% excess annual returns over the Standard and Poor's 500 benchmark over the next five years. This outlook comes with a 3.5% tracking error (for uncertainty). That means annual excess returns could range from minus 2.57% to plus 6.23%
The firm also has an index for value called the RAFI Value Index, as well as similar indexes for quality, low volatility and other factors.
The RAFI Value Factor strategy selects the top quarter of large companies by fundamentals-to-price ratios and weights stocks by the same four measures used in the fundamental index.
The firm projects 4.69% average excess returns over the next five years for U.S. RAFI Value Factor. The outlook comes with a tracking error of 5.8%, which means it could range from minus 1.11% to plus 10.49%
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INTERVIEW WITH ROB ARNOTT
NEW YORK
JUNE 6, 2019
NEW YORK
JUNE 6, 2019
The text from the transcript of the in-person interview has been shortened and lightly edited for readability and flow.
Q: You launched the Research Affiliates Fundamental Index in 2005 and at the time the idea was somewhat controversial. You and your co-authors found that historically weighting the stocks for an index using fundamentals, such as book value, earnings, revenue, sales, and dividends, earned annual excess returns of 1.97 percentage points over the S&P 500 or 2.15 percentage points over a reference portfolio of 1,000 stocks. Could you recount some of the initial response?
A: It is funny how the publication [of that original article titled “Fundamental Indexation” in the March/April 2005 issue of Financial Analysts Journal co-written with Jason Hsu and Philip Moore ] was controversial on so many stupid levels. How dare he use the word index? Last time I looked at the Oxford Unabridged, I don’t remember seeing cap weight as part of the definition of the word index. And how dare he write an article about something he is offering as a live product. Well, when the paper was submitted and accepted, it wasn’t yet a live strategy. And, so what anyway, because if it’s a good idea, what can’t you both publish it and run it?
Q: Since 2007 investors who have put money into Research Affiliates Fundamental Indexes have not earned the excess returns cited in the research published in 2005. How do you explain its performance since then?
A: What’s been fun is that everyone knows RAFI’s got a deep value tilt. So relative to the market, a period of time when value has been getting crushed for 12 years now, it’s just shocking, we’ve actually eked out a small edge over the market against that headwind. When you compare us against the Russell Value [Index], for example, the outperformance is just tremendous. So that’s been fun.
Q: You’re saying the Russell Value Index has underperformed the broader market since 2007?
A: Right. And RAFI is in line with the market in the U.S. and is well ahead of the market outside the U.S. even though value has been decimated in U.S., international and emerging markets.
Q: There have been many times in the last five years when I thought value would turn and be on the upswing – but each time it has not materialized.
A: I thought [the value cycle would turn] at the end of 2015, when value went into free fall. Once it turned in late January of 2016, I thought OK. Finally, value will get its day in the sun. Well that lasted all of one year. And then in 2017, 2018 and into 2019 – growth, growth, growth. So it’s been fascinating to watch.
As for the asset flows into the fundamental index, obviously the growth slows when you’ve got a headwind. But we’re still seeing inflows. So that’s very reassuring to see.
Q: How much in total assets is under management using RAFI indexes licensed by Research Affiliates?
A: It was $170 billion last tally. And, that’s up modestly from a couple of years ago and sharply from three to five years ago.
Q: In the past how long has value been out of favor before it bounced back and began to beat broad market averages?
A: Usually it’s a little bit like a stock market cycle, peak to trough to peak, tends to go 5 to 8 years. But there are exceptions. From 1986 to 2000 there was a 14 year span of value underperforming. Not every year. But peak to trough, it was 14 years.
Q: Then it entered an upcycle?
A: Yes. And the recovery from 2000 to 2007 earned back the entire shortfall, with ample room to spare. Value reached a new high in cumulative relative performance. So we’ve given up a lot of ground in the last 12 years. But what’s interesting is that’s in the context of value getting cheaper relative to growth. The valuation spread [between value and growth] has widened.
Q: What are the implications for investors when they are choosing asset managers in a climate like today when the spread has widened between value and growth?
A: We’ve written a couple of papers about the topic of how people choose asset managers. One was last fall in the Journal of Portfolio Management, “The Folly of Hiring Winners and Firing Losers.” And in that paper, we pointed out that if a manager is underperforming, you need to draw a distinction. Has their strategy become cheaper [relative to historic norms]? In that case, it is a buy, not a sell. Or, has it become cheaper net of any valuation change? If it has, they have underperformed, in which case, you should probably get rid of them. Valuation is a very powerful predictor of future performance for managers and for strategists.
A: When you talk about valuation, what do you mean?
Q: When a strategy gets cheaper relative to the market or is expensive relative to the market, it will have a natural premium or discount. Such valuations use a price-to-earnings ratio, dividend yields, price to book, whatever you like. [The valuation of] value [as a strategy] always changes [over time]. Quality is always expensive. Momentum is always expensive. The question is – is it cheaper or more expensive than normal?
So value has a normal spread between growth and value [based on historic norms]. When value gets cheaper than that, value is usually positioned to perform very well. That’s where we are now, especially in emerging markets, where the spread is unbelievable. And if the spread is narrower than historic norms, you’re probably not going to benefit by having a value bias.
So we go back to 2007, the spread between growth and value in terms of valuation was the tightest it had been in 30 years. We hadn’t done this research back then. So I can’t lay claim to having made this as a prediction. But, with the spread between growth and value at a historically narrow spread, what a great time (2007) to abandon value.
Our smart beta interactive website tool actually dives into that and makes forecasts about how much output strategies like this will deliver.
Q: Based on that spread?
A: Based on that relative valuation spread. Quality – you always pay a premium for quality. Historically it’s anywhere from 30% -- comparing high quality to low quality stocks – anywhere from a 30% premium to a 100% premium. The norm seems to be about a 60% premium. So if you’re paying a 60% premium, quality will perform like the market. If you’re getting away with buying quality at only 30% premium double down. Because quality is cheap. It may be at a premium historically with the market but it’s cheap, relative to historic norms.
Q: Where are we now?
A: 120% premium.
Q: For quality?
A: Yes. And people are piling into quality strategies.
Q The 120% premium – how is that calculated?
A: The gap is between high quality versus low quality.
Q: How is quality measured?
A: The standard measure for quality is profit margin. And, in constructing factors, the norm is to take the best 30% and the worst 30% and look at that as a long-short portfolio. So the 30 highest profit margin businesses are going to be priced at higher multiples than the 30 lowest profit margin businesses.
Q: Does this mean that if you invest in a quality index today you will likely overpay?
A: Yes. You can overpay. And if you’re paying double for the higher quality, well quality is not going to perform very well. And that’s provable. And where are we now? At slightly more than double. Well over the top of our historical low valuation.
Q: You’re saying that right now the outlook for the quality factor funds would be for a poor performance in the coming five years.
A: Right. I wrote a paper in 2016 about how factor investing could go horribly wrong [How ‘Smart Beta’ Can Go Horribly Wrong by Rob Arnott, Noah Beck, Vitali Kalesnick, John West]. And it stirred quite a backlash. A couple of competitors who were offended said that I was suggesting valuation mattered for factors. I thought it was amusing because if I had written the same article about stock picking – how can stock picking can go horribly wrong – [there would not have been a backlash]. If you buy a stock that has performed brilliantly and it’s trading at high valuation multiples, you might be making a mistake. Of course, everyone knows that. But, by saying exactly that message about factors and strategies, folks got mad. It was really quite interesting.
Q: Do you think the backlash came possibly because the halo effect around factor investments had gotten so glowing, as it were, the sponsors had not heard any criticisms of their strategies?
A: They hadn’t heard much criticism. It was seen as a new Holy Grail. The paper portfolio results were amazing. The live experience results were not too bad through 2015. Most factor strategies were in fact beating the market but not by nearly as much as they were supposed to. And so that paper [on how smart beta can go horribly wrong] came along at a time – you’re right – there was a glow and a halo. And yet the basic message was so intuitive and so unexceptional, uncontroversial to somebody who thinks about markets that I thought it was quite hilarious that people took umbrage at it.
We used that methodology in June of 2016 to say the most expensive factors right now are low volatility, momentum and quality. And the only one that’s trading really cheap is value. And six months later value had outperformed growth by about 400 basis points.
And low volatility had underperformed by well over a thousand basis points. In fact, there were low volatility ETFs – not long/short but just by low vol stocks that had underperformed by 800 to 1,000 basis points in six months. So we did a short piece saying alright here’s the evidence it actually does work, meaning the analysis had relative valuation.
We had a low volatility ETF that had huge inflows and they were angry because I singled out low vol as the most overpriced. My response to them was, it’s performed brilliantly and you’ve seen those inflows because it got more and more expensive. People were paying more than twice as much for low volatility companies than for high volatility companies. And you think you’ve got downside protection when you’re paying twice the multiple? And that strategy then underperformed by close to 1,000 basis points in the next six months.
Q: So right now, the spread for value relative to historic norms is very low?
A: In the U.S. it’s in the bottom quintile. In international markets it’s about 35th percentile, cheaper than historic norms but not drastically so. And in emerging markets it’s the cheapest it’s ever been. So that level of cheapness tells me that value should beat growth in emerging markets by a huge margin.
Q: That would be the one segment that is most likely to outperform.
A: And I eat my own cooking. I’ve put close to half my liquid portfolio in emerging markets.
Q: In your own portfolio?
A: Yes. I wouldn’t ever do that for a client. It’s too much maverick risk. Could it underperform a 1,000 or 2,000 basis points before it outperforms? Of course, it could. And if you’re comparing Standard and Poor's 500 versus emerging markets deep value you can have a huge tracking error. For a client portfolio I would go as far into emerging market value as your guidelines will permit. And for most of those, that’s going to about 10 percent.
Q: Should institutional investors allocate additional funds to reach 10 percent in emerging markets value?
A: If you had 10 percent allocation and if emerging markets deep value beats Standard and Poor's 500 by 1,000 basis points a year over the next five years, hypothetically, that’s enough for you to capture – if it’s a 5 percent allocation its 50 basis points a year better performance – if it’s a 10 percent allocation its 100 basis points better performance. It’s enough to make a difference.
Q: This is obviously long term strategy and not a short term strategy.
A: We don’t pretend any expertise in picking when a turn is going to happen. We do think we have considerable skills in identifying which markets are priced best to outperform long term, over a five or ten year horizon.
Q: We’re talking about equities here, right?
A: For asset allocation, not just equities but the whole spectrum of asset classes.
Q: I have heard it is a good time to get into emerging market bonds.
A: Yes. That’s our view. We think the lowest hanging fruit is emerging markets value stocks. We think the lowest hanging fruit on a risk-adjusted basis is emerging markets local currency.
Q: Local currency bond funds?
A: Yes. And the reason for that is really simple. Emerging markets debt currently has a higher yield than U.S. junk bonds, even though the majority of emerging markets debt is investment grade. This investment grade has a higher yield than U.S. junk bonds. That’s interesting.
Q: Yes.
A: Because of narratives relating to trade war and uncertainty in emerging markets, currencies are also cheap. [Emerging markets] currencies have fallen sharply relative to the dollar. What a great time to buy non-dollar. In fact, one of the things I find interesting is that I get a ton of questions about do you currency-hedge your risk. That question rises most typically after the dollar has soared. And it’s an interesting anecdotal market timing matter, but it seems when I get the question a lot – and I’m starting to get it a lot – the turn is usually not that far off.
Q: What message do you have for investors reviewing their portfolio for new asset allocation or even shifts in their allocation?
A: I wrote a paper in the Journal of Portfolio Managementlast fall called “The Folly of Hiring Winners and Firing Losers.” And in that paper, I pointed out – and this works just as well in asset allocation – I pointed out that if you buy a mutual fund because it’s performed well – if you haven’t checked whether it did well by dint of having become more expensive, by dint of the valuations multiple story, then chances are you’re buying a newly-overpriced fund. And setting yourself up for the classic buy at the top, sell at the bottom pattern.
Q: Do you find that institutional investors appreciate that analysis?
A: I think in general yes. You get push back from some because the easiest time to sell a product is when it’s performed brilliantly. So institutional sales people aren’t going to point to this kind of analysis. They just aren’t – because the funds they can sell most easily are the ones that have done well. Most of them did well by getting overpriced. But if you want to be a successful investor, buying low and selling high works a lot better than buying high and selling low.
Q: No kidding.
A: So we’re having fun with this. We’re doing some interesting work. If a consulting firm that helps people choose funds, even someone like Morningstar, if they were to publish information on how the funds performed 1, 3, 5 and 10 years and how its relative valuation has changed 1, 3, 5 and 10 years, now you’ve got a more complete picture.
Q: No one does that, do they?
A: And it’s beat the market by over 20 percent over the last 5 years but it’s gotten 30% more expensive, that’s a strategy that just got lucky. Not a strategy we want to embrace.
Q: You’re saying that institutional investors can see how relative valuation works as an analytical tool when you talk to them about it. Do they normally put relative valuation into their calculations?
A: Normally, no. I’d love to see a consultant present to their clients that tier of information. How has it performed and what happened to the relative valuation? Because what you want is material performance that is materially better than change in valuation. RAFI has outperformed over the last decade in an environment that has been brutal for value, at a time when it’s gotten cheaper. That’s good news. And for most people, you’ll look at the performance and say it’s only added a few 10s of basis points.
But not only that, it was bucking the fact it was a value oriented strategy. It has as much value as the value indexes did. And value indexes underperformed growth by 400 basis points a year for the last 10 years and we’ve been able to shrug that off and add value. That’s pretty cool.
Q: Over last few years I’ve interviewed several fund managers who say they keep thinking at some point that value investing would be coming back soon because the gap has gotten so wide the potential turn was there. But that hasn’t happened.
A: That’s been my view. The gap has gotten wide and it’s more likely to revert to the mean than get wider. And in 2016 that was correct. But in 2017 and 2018 not so much. So this isn’t good for timing. It’s great for gauging forward-looking returns. Relative valuation, when value gets as cheap as it is now in the U.S., historically on average it’s beat growth by 4% a year over the next four to five years. With about 5% uncertainty. Which would mean somewhere between zero and 10%. Oh, I’ll take that bet. The low end of the spectrum of the range is zero. But I could be hurt by it in individual years, including the first year after I make that bet.
And in emerging markets it’s cheaper. The expected outperformance is 8% a year with 5% uncertainty. I’ll take that risk anytime.
Q: This person said they wanted to wait until they see a major investor get into value and see the price move into value and see value respond, then people will pour in.
A: Now that will be after the turn.
Q: So they will have missed the turn?
A: They will have missed the turn. Because the flows in aren’t going to happen until after.
Q: Right. But the ones who benefit the most will be those who had the foresight to be there first before the turn.
A: The trouble with being a contrarian is that it is profoundly uncomfortable and uncomfortable for clients. Because if you buy what’s cheap, you’re buying what’s out of favor. You are buying what people are loathe to buy. There is no such thing as a bargain in the absence of bad news. Every bargain has a narrative of why it deserves to be cheap and why things could get worse. It’s a truism. You have to have those conditions to have a bargain.
This means that when you buy, chances of picking the bottom tick are slim to none. When you buy, chances are it’s going to get cheaper before it gets expensive.
So you look like an idiot until the turn happens. And when the turn happens, you were there with maximum exposure at the low because you’re averaging in a bigger position as it gets cheaper. We know contrarian investing works but we also know it’s profoundly uncomfortable and that it requires patience.
Q: That is working against people making that decision.
A: Correct. Early 2015, or no early 2016 I was getting a whole flurry of calls saying why are you in emerging market stocks – they are in free fall? And my response was the share is actually under 10 and that’s for the market. The value is under 6. The U.S. stock market was under 6 only one time in the last 10 years for one month, end of May 1932. My response was if you wait until conditions are less scary, you’ll have missed the opportunity. And, of course, emerging markets value stocks nearly doubled in the next couple of weeks.
Q: That’s where this person was describing most institutional investors would be, ready to make the move but not making the move.
A: Right.
Q: And the longer that goes on the more likely the turn is going to happen.
A: Yes.
Q: If you analyzed it properly then you would be more inclined to make the move. Right?
A: Right. And you’d more inclined to make the move but in the context where clients hearing this constant narrative of why things are going to get worse and worse. If you have true bargains you don’t need good news for the strategy to work. All you need is an absence of worse news than expected. Because the market is already priced to reflect an expectation that terrible things are going to happen. So they have to be more terrible than expected for things to get cheaper. If they are less terrible than expected, you’ve got a bull market.
Brazil – when Dilma Rousseffwas under investigation for corruption, it was getting cheaper and cheaper and cheaper. And then they announced the impeachment hearings [around September 2016] and that was the bell for the turn of that market. All of a sudden nobody would expect Brazil to suddenly become a country under the rule of law with no corruption. But, all of a sudden there was a clear path to less corruption, a clear path to change in leadership – and a change in leadership to what? Uncertainty. People hate uncertainty, so it was still cheap but getting less and less cheap. So Brazil more than doubled in 12 months. The turn was almost exactly on the day the impeachment hearings started.
Q: Now among all the emerging markets, where do you put Russia?
A: Russia is both at the top of the risk spectrum and one of the best of bargains. The P/E ratio for Russia is about 5 times, about 5 to 6. So you can buy the Russian stock market at about 5 to 6 times its 10-year smoothed earnings. That’s pretty cool. What are the risks? Well, that’s just valuation. That doesn’t have a Putin component.
When Vladimir decides to engage in foreign adventures that dissipate cash and treasury and blood, alright, you aren’t going to see earnings grow. And if he gets angry about sanctions and says OK, I’m expropriating all foreign ownership then you have minus 100% returns. So both of those are possibilities, one is higher odds than the other. But they are both possible. So it’s that narrative that creates the chance.
But if at the other extreme, Putin is succeeded by somebody who wants to reinstitute some rule of law and wants to turn to the global markets for capital and therefore wants the rule of law to apply particularly on capital markets, then you could see it go to 10 times earnings, 12 times earnings with earnings being higher.
And if that happens, you got a market that just tripled. So the bad news is that there are some low odds scenarios that involve a minus 100%. And then there are some low-ish odd scenarios that involve plus 100% or plus 200%. Do I want to invest in Russia? Yes. Do I want to be overweight relative to the market? Yes. Do I want a big commitment, a big part of my portfolio, in Russia? Heavens, no.
Q: Well, he’s very unpredictable.
A: Yes.
Q: How big a part of emerging markets is Russia?
A: That’s where it gets interesting. As a share of the earnings of publicly traded companies in emerging markets, Russia represents 8 percent. As a percent of market capitalization, it’s 3 percent. So the RAFI weighting is 8 percent. And it looks like it is massively overweight. But is it massively overweighed? Or is the cap weighted index massively underweighted?
The other one that’s pretty cheap is Turkey. Poland and South Korea are both moderately cheap. And then you have some countries that are kind of expensive in the emerging markets. They’re two-thirds of the U.S. valuation.
Q: What about China?
A: That is moderately cheap now for the first time in a long time. Now China the worry is – if you look at earnings growth in China, it’s been pretty relentlessly negative. And that’s because shareholders get diluted. There’s new share issuance all the time, raising money from the Chinese citizenry. And the consequence is you’re diluted historically by 10% to 20% a year.
So if there’s that much new issuance, there’s not 10% macroeconomic growth, so the growth doesn’t make up for it. So earnings per share goes down, not up. And so that’s an issue. But China is at a cheaper valuation level than its true historic norms. It’s all trade war related of course.
One of the things I love is when you see a dramatic event in the global economy or geopolitics and it’s moving markets and it’s got everyone’s attention. Ask this very simple question. How much will this matter in ten years? Take the Trump-Xi trade wars. Ten years from now will it have materially affected the growth size of the economy for the U.S. or for China? I kind of doubt it. In which case the price moves affected by this issue create buying opportunities.
Q: Of course, if you want to minimize your exposure to a single country you buy a basket of assets.
A: That’s what I do. I don’t take concentrated country risk. I take that back. My one biggest bet is a concentrated country bet – and that’s away from the U.S.
Q: Is that in your own portfolio?
A: Yes. And for in our asset allocation for our portfolios. Our asset allocation strategies are severely underweight U.S. – stocks, and to a lesser extent, bonds.
Q: Because the valuations are so high?
A: Yes. So the U.S. is priced for perfection. Things have to go very, very well just to keep valuations where they are. We’ve got headwinds in the next ten years. We’ve got headwinds from demography. The baby boomers are a big cohort. Right now, we’re all working. If our age cohort is sensible, they are saving aggressively for retirement because you can’t really trust Social Security. And if you’re saving aggressively for retirement, you become a valuation indifferent buyer. You’re happy to buy no matter what the price is. You have to.
Well, ten years from now most boomers will be valuation indifferent sellers. Because they’ll be in retirement. They have to sell in order to buy goods and services in retirement. And they have to take whatever the market place offers them. So then the question is – are the millennials a big enough generation to have buying enthusiasm to match boomer seller enthusiasm. In our analysis that’s not likely. The natural valuation of U.S. stocks will be less than it is today.
Q: Even more reason to diversify away from U.S. securities.
A: If we get inflation, a lot of it will come from imports becoming more expensive. If that happens, you will want non-U.S. investments. It’s kind of interesting. European stocks are cheap. European bonds are miserably expensive. Japanese stocks are moderately priced, not cheap. But Japanese bonds are miserably expensive. In emerging markets stocks are very cheap. Value is exceptionally cheap. And their bonds are kind of cheap. Their yields spreads are better than [our junk] bonds. That’s a good situation. I’ve been called a perma-bear because I say markets are expensive. Right now there are markets that are cheap and kind of interesting but they are just not the markets most people are investing in.
Q: Right now I guess people fear emerging markets more than usual.
A: In the case of a flight to safety, that means a flight to further benefit their bias against emerging markets.
Q: But in all of that, there are institutional investors who see the opportunity and are willing to increase their allocation to emerging markets value. But basically, it’s a view that doesn’t come naturally and they resist that idea like everyone else.
A: And I get it. I can understand why. It’s painful to be wrong for very long if you are investing in something that is out of favor. If it gets cheaper, you look and feel like an idiot. If you’re a committed contrarian you buy more. But it goes against human nature. And your clients might not like it.
Q: I guess that’s why it is lone investors who typically act on this kind of understanding.
A: Right. You get rewarded for being a contrarian alone if you’re right. However, you get more rewarded if you have a very conventional, comfortable strategy and you’re right. It doesn’t happen very often. If you’re conventional and you are mainstream in your thinking and your process, and you underperform, you have a ton of company. Everyone around you is underperforming. So you can collectively lick your wounds and commiserate. You aren’t going to get fired nearly as fast as if you were a contrarian and temporarily wrong.
Q: The world of investing can be very interesting and one where you need to be constantly learning.
A: Ah, yes. Endlessly fascinating. I’m 64 and I’m still a student.
Q: Thank you for sharing your thoughts about investing.
A: You’re welcome. It’s been my pleasure.
END
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