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Tuesday, June 9, 2015

Boring stocks

WSJ  in a recent  article noted  the outperformance of "boring stocks"based on theri definition of boring industriesc the data but

 I am not surprised . As noted in the article this is really  subset of value stocks. And it is well know that over long term what are considered value stocks (low measures such as price/earnings or price/book outperform

The article notes:

We find that our predictions are supported by the data: Boring industries are better investments than exciting industries,”

The converse of this finding has been observed for long data periods. High valuation small cap stocks value stocks (low measures such as price/earnings or price/book outperform. It has long been known that categories of stocks that get bid up to high valuations are poor performers long term. These are referred to by observers as "lottery tickets",glamour stocks or shooting stars and usually have high valuations. Within this group the absolute worst performing stocks are those that were recent ipos which can be considered the ultimate lottery ticket since they often have no earnings and certainly no long term track record of financial performance. In fact many of these stocks can be said to have a price/earnings ratio of infinity since they have no earnings.

This a well known outdcme of the many findings of behavioral finance. Investors are attracted to stocks in the news and those that have the potential for quick large gains. There are certainly ipos and small cap growth stocks that generate eye popping returns in the short term although they generally return to reality, but the likelihood of picking one, and particularly picking a successful portfolio of them is low on a statistical basis. But nobody talks about their losers in this category at the cocktail party or barbeque and there are seldom articles about these in the media. So the prospects of “finding another google” seem more likely than they are.

The key is to take advantage of behavioral flaws in the market, .., many investors gravitate toward exciting industries in search of standout returns. That creates opportunities for investors to find undervalued stocks in sectors with less sizzle, Mr. Rudderow says nt.
Not surprisingly the a above quotation comes from "the investment officer of Mount Lucas Management, a firm in Newtown, Pa., that has $1.7 billion in assets under management and offers value funds including the large-cap Mount Lucas U.S. Focused Equityfund.
“It’s hard to be smarter than other people in something like Tesla,” where the potential for big gains is obvious, Mr. Rudderow says, “and it’s easier to be smarter than other people in boring stocks.”
I am particularly skeptical about the long term success of active managers vs. their benchmark in this case active value managers vs value indices or passive investments (not called “smar beta” active manager.
But I would say all the great long term investors have had a value oriented approach particularly when they are likely to have investors willing to view their investments as long term. The classic of this group is Warren Buffett. But many parts of his strategy such as buying non public companies and more recently buying spinoffs of public companies and taking them private indicates he may feel that the days of easy pickings in stocks are gone. Interestingly enough he has stated publicly that whatever money of his left to his wife will be passively invested in the S+P 500 not even it seems in Berkshire Hathaway stock managed by his hand picked successors.
Here is a chart comparing value vs growth indices and the S+P 500 (which is tilted towards large growth stocks).

Small cap value (yellow) Large cap value (green) S+P 500 (blue)
 Large cap growth (blue), small cap growth (red)

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