Pzena says there were only eight years in the last 40 when you would've been down 20% using a simple value approach. (For purposes of his discussion, he used a simple value strategy of buying stocks only in the lowest quartile of the market ranked by price to book. But the point applies to all us cost-conscious investors.) We just suffered through one of them - with the S&P 500 and Dow Jones industrial average dropping 20% from top to trough.
One obvious conclusion from looking at the data, if you are a value-minded sort like me, is to shrug off the bad times and say, "Who cares?" It's no accident that most people can name the big bottoms (1974, 1982, 1990...). It's because they are relatively infrequent. Plus, the long-term return on value stocks over the full 40 years more than made up for them.
"The problem is," as Pzena says, "when you're losing 20%, it doesn't feel very good." You start to question what you're doing. You start to wonder, Can I avoid those 20% down periods? Should I avoid them?"
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