Value investing has faced a crisis of confidence after five
tough years. Heres why we think the behavioral investing
principles that underpin the discipline are more relevant than
Its been nearly 80 years since the tenets of
behavioral investing were first described by Benjamin Graham
and David Dodd, the forefathers of value investing. And over
the last four decades, value investing has been highly
successful. But perhaps, argue critics, after five years of
subpar returns, the fundamental drivers of value stock
performance may no longer work.
We think the opposite is true. Traditionally, value
opportunities are created when a company faces a controversy
that triggers a decline in profits and its share price. Value
investors use research to determine whether the market reaction
has been exaggerated, meaning the stock is likely to rebound in
time, or whether the companys troubles are likely to
continue to push the stock down further into a value trap.
Behaviors that create opportunity include:
Loss aversion: The pain of losing money is often
perceived as greater than the pleasure from making money.
Trend extrapolation: Investors may wrongly conclude
that a recent negative trend will have enduring consequences
for the future.
Short-term focus: During times of crisis for a
company or for markets, it becomes more difficult for investors
to establish confidence in long-term forecasts.
Investor loss aversion was heightened by the severe crash of
2008 and the ensuing volatility. An abundance of bad economic
and corporate news has made erroneous trend extrapolation even
more ubiquitous. And as markets have lurched from crisis to
crisis, with recurrent spikes in volatility, investors
time horizons have become extremely short.
In other words, markets are saturated by behavioral biases
that are likely to eventually correct themselves and reward
investors who have stuck to their knitting and dared to defy
Many things have changed in the markets in recent years.
Trading costs have fallen and technology has made it easier
than ever to buy and sell stocks quickly. Instant information
on economic developments and companies flows around the world,
often adding unreliable noise to markets. Since these changes
promote emotional reactions by investors, we think that
traditional research-driven behavioral investing makes more
sense than ever in the 21st century.
The views expressed herein do not constitute research,
investment advice or trade recommendations and do not
necessarily represent the views of all AllianceBernstein
Joseph G. Paul is chief investment officer of North
American Value Equities and Kevin Simms is chief investment
officer, International Value Equities, both at