empirical evidence that patience is a virtue and “value” always outs…

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3 mins. to read

There is a saying that “good things come to those who wait”. Trouble is, most people can’t, or won’t, stick around for long – at least not when it comes to their money, and particularly so in the quick-fire arena of spreadbetting where instant riches are ‘expected’.

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The above table is particularly interesting as it illustrates that when the ultimate value invester – Warren Buffet – underperforms against the S&P, that he ultimately materially outperforms in the ensuing 3 years – confirmation not only of Mr Buffet’s investing prowess but also that patience is required during periods of market madness – one could argue strongly that we are currently indeed in such a situation too.

This also helps explain a great mystery of investing—why, despite the hundreds of millions of dollars spent each year on advice and management fees, a free lunch of sorts has persisted in the form of value investing.

For example, Brandes Institute sliced U.S. stocks into 10 deciles by value characteristics. From 1980 to 2010, the cheapest outperformed the dearest by 575%. That’s some advocation for value investing.

Such an opportunity shouldn’t persist, but it does. That is probably because there are bad periods for value stocks of three or more years interspersed among the good ones. Those are long enough for fickle fund investors to dump their managers, often forcing them to sell holdings.

The bipolar years since the financial crisis have been one of those dry stretches with either everything languishing or “risk-on” rallies mainly lifting growth stocks. With Greece coming to a boil with a crucial election next month, value stocks may once again get the attention they deserve. The years after long periods of poor relative performance are some of the best for patient value managers. 

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Billionaire investor Warren Buffett

Value investors have dubbed this opportunity “time arbitrage,” and it is high time for it to work its magic. Russell Investment ranks the relative performance of its five main growth and value indexes each year. The last time a value index ranked on top and a growth index on bottom was the awful year of 2008. From 2009 through 2011, and so far this year, a growth index was the best performer and a value index came in last.

Consider value investor Warren Buffett’s Berkshire Hathaway Inc. Its three worst years of investment performance relative to the broad market came in 1967, 1980 and 1999. Its cumulative outperformance relative to the S&P 500 over the following three-year periods as the table above shows was 49%, 102% and 48%, respectively. Any hedge fund capable of producing these types of returns is welcome to the 2 & 20 fee structure, problem is very few can do this with consistency and the reason for this is because very few use a simple value based strategy.

In times like these, with value in the doghouse, it isn’t only the likes of Mr. Buffett who can rack up gaudy numbers. Individuals with no impatient investment committee to answer to also have an edge over fund managers. Time is on their side and for spreadbetting and CFD clients where a modest (note modest!) amount of leverage is applied then the potential returns for the patient trader over the next 12 – 24 months will likely be very substantial in our opinion.

A portfolio comprised of the Oil Explorers as detailed in this blog on wednesday will probably pay very handsome dividends through either take-overs, re-ratings or further succesful strikes. Applying only 30 – 50% gearing to this will enhance returns materially without crucifying you in a downdraft. 

From a true value perspective, our monies on Research in Motion, Cable & Wireless Comms, Heritage Oil, Kazakhmys, Gulfsands Petroleum, Xcite Energy, Bumi & Bowleven.

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