When it comes to value investing or buying out-of-favor stocks, patience is a virtue. These days few are more virtuous than Richard Pzena, Chairman of Pzena Investment Management, a $20 billion assets money management company whose New York Stock Exchange listed shares are down more than 38% in the last 12 months.
Investors fear a massive unwinding of debt will undermine the world’s economies. But the data indicates deleveraging doesn’t equal disaster.
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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In his presentation at last November's Value Investing Congress - and in a subsequent update - Pzena Investment's Rich Pzena described why he believed the market was overestimating the negative impact the subprime mortgage crisis would have on Freddie Mac. At $25.52 the day before the presentation, Freddie Mac shares closed yesterday at $27.14.
These are the times that try value investors’ souls, to paraphrase Tom Paine. Our Value and Large Cap Value strategies were each off by more than 12% for the year and our global strategy was down nearly as much. In the second half alone, the declines in our U.S. portfolios exceeded more than 18%. Our newest clients have felt the biggest sting, but even longtime clients have felt the pinch. They know that value is cyclical – Figure 1 highlights the unpredictability of short-term returns – and they also know that over time, the return pattern can smooth out and value investing can be a very rewarding strategy (Figure 2). But the interim periods are no less painful for all that.Direct Link - Pzena Investment Management Fourth-Quarter Newsletter Commentary.
IT'S BEEN A DREADFUL YEAR FOR NOTED VALUE MANAGER Rich Pzena, whose funds lost money in 2007, while shares of his newly public management company (ticker: PZN) sank to 12 from more than 22. Blame it in part on the manager's fondness for financial stocks, which had an even more dismal year -- and which account for 40% of Pzena Investment Management's assets. Then there's a shareholder lawsuit, charging Pzena failed to disclose outflows from the John Hancock Classic Value Fund (PZFVX), which he also manages, when the firm went public. Pzena says the suit has no merit.
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Graham and Doddsville Newsletter is an investment newsletter from the students of Columbia Business School.
