Value Investing: The Pain Train has Arrived…and it Sucks.

Wesley Gray |

These are the times that try men’s souls."

– Thomas Paine

A few months ago, we highlighted a surprising result: cheap high-quality stocks were getting crushed by expensive junk stocks.

The spread at the end of June was around 18%.

_100_Invested_Growth_YTD___10__15.jpg

100 Invested Growth - YTD - 10-14

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Logical conclusion: Buy Value!

Fast Forward 2 Months…

Here we look at the updated YTD performance comparing expensive junk stocks to cheap high quality stocks.

·         Price/Quality portfolio data

We examine value-weight returns for the cheap high-quality quintile and the expensive low-quality quintile. The daily returns run from 1/1/2015 to 8/31/2015. Results are gross of fees. All returns are total returns and include the reinvestment of distributions (e.g., dividends).

Specifically, here are the two portfolios:

  1. Cheap, High Quality = Value-weight returns to the cheap high-quality quintile.

  2. Expensive, Low Quality = Value-weight returns to the expensive low-quality quintile.

Expensive Junk Stocks are Killing High-Quality Value Stocks, YTD

100_Invested_Growth___YTD_II___10_15.jpg

100 Invested Growth - YTD II - 10-14The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

An 18% spread was bad enough–how about we double down on that? The generic cheap quality versus expensive junk spread is over 30% YTD. Just when we thought things couldn’t get any worse – they got a whole lot worse! The results are driven by a horrific July that looks anomalous, but still…Wow!

Logical Conclusion: Buy value?!

Hmmm…maybe it’s time to get rid of those value stocks and try something else? It’s not working now, so maybe value doesn’t work anymore?

But be careful with "logical" conclusions. As we've said time and time again, active value investing has been digging manager graveyards since 1900...but that is the nature of the active value investing game...long horizons are required and volatility relative to the standard benchmarks can be expected.

The original article was posted by Wesley R. Gray at Alpha Architect. Please read the Alpha Architect Disclosures at your convenience. 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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