Why would you invest now, if many investors worry they’ve missed most of the upside?
Gerry Paul, co-CIO and Global Head of Value Equities: Well it’s still a good time to invest in stocks we believe. Compared to other alternatives, they’re cheap, interest rates are low and the yield on stocks today is quite high. I think there is also a strong future for earnings growth that is supporting many stocks today. The leverage we’re seeing companies deliver even in a weak environment from modest increases in revenue is incredibly impressive.
We all know the benefits of value, but how do you actually create value?
Gerry Paul: The opportunity to invest following a value discipline actually has its roots in human behavior. There’s a great body of psychological research that tells us a number of things. The first is that individuals tend to get anchored in the most recent bit of information. They place a great deal of emphasis on what just happened and believe that the future will look very much like the recent past. The second thing we know is that people are really loss averse; there’s a lot of research which says that individuals dislike losses about three times as much as gains satisfy them.
The combination of these two things—overreaction to recent bad information and loss aversion—causes investors to sell things below their true value. Therefore, I think there is an opportunity for investors who look at a longer-term horizon and have a less emotional perspective to harvest value for the benefit of their clients.
What is different about your specific approach to investing that adds true value for investors?
Gerry Paul: We take a longer-term point of view and use very deep fundamental research that is routed globally to look beyond the anxiety and problems that cause that dispersion.
We know that these cycles don’t last forever, so when does this strategy work best, and over what sort of time period?
Gerry Paul: The cycles don’t last forever, but they typically last in the order of four to five years. If you look back over the past 50 or 60 years, value cycles have been on that order of magnitude, and we’re only about a year into this one. However, you don’t buy stocks just based on how long they’ve run; it also matters how far they’ve run. When you look at how far they’ve run we believe there’s also a continued opportunity to invest in a value style, because the difference in price between what’s expensive and what’s cheap in the marketplace is quite wide by historical standards.
What are the driving forces in the current environment?
Gerry Paul: There are a number of questions on investors’ minds at the moment. Will housing recover, and if so, when? Will the consumer ever be able to spend again? Will certain companies restructure? Will companies spend on capital equipment again? If you focus on those individual controversies that are making stocks attractively priced, that’s where you can find opportunity.
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Why Value Works: The Case for Investing in Undervalued Stocks
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