The Validity of Value Investing

Are you having second thoughts about the validity of value investing? In this market, you're probably not alone.

Ben Steverman, at BusinessWeek, recently penned an article asking whether it was time to rethink Buffett's strategy.

The past year has sometimes looked like a practical joke that the stock market is playing on value investors.

Disciples of the value strategy, like Berkshire Hathaway's (BRKA) Warren Buffett, focus on the long-term intrinsic value of a company, hoping to buy shares in good companies at reasonable prices. By focusing on value, they avoid fast-growing firms with expensive stocks, and, by thinking long term, they try not to worry about the fickle gyrations of the market from month to month or day to day

Hasn't helped them much lately, Steverman points out. In fact, they've been downright abused by the market. And that sweeping statement includes Buffett too--who held on to Wells Fargo, UBS and American Express shares as they plunged lower.

Thankfully, the article puts the most recent time-frame (being used to judge a strategy) in a more proper perspective:

Value investors are insistent on a long-term focus, so it's not exactly fair to judge them on one or two years. (Even if this is a momentous time, when stocks, represented by the Standard &Poor's 500, have lost almost half their value in a year and a half.)

A value investor like Buffett has an "extremely impressive" long-term track record, says Lawrence Creatura, the portfolio manager of several value-focused investment funds at Federated Clover Investment Advisors. This appears to be one of those times when the value style has underperformed. "That doesn't mean that Warren Buffett or value investing are broken," he says.

In fact, many value managers insist the market is full of opportunities. "The selling at times has been so incredibly irrational that there is a high probability that some stocks are mispriced," Creatura says. "The value investor's job [is] to identify those mispricings."

For more, continue reading the article. It's a good one, and worthy of being read. But don't let the focus on short-term results of different managers take up too much of your time, okay?

As we pointed out in a previous post, the top investors don't worry too much about such things--they are focused instead on improving their investing method (which looks at the long-term value of the company's they may invest in).