The prime reasons why value investors have done better over long periods of time are: (1) the intensely competitive environment among companies makes it hard to sustain high corporate growth for the time required to justify very high stock valuations; and (2) investors have a well-documented tendency to overvalue popular, faster-growing companies and undervalue unpopular, slower-growing companies. Investors, amateur and professional alike, sometimes find it emotionally difficult to own unpopular companies—the ones that are more likely to sell at bargain prices—or to refrain from owning glamorous, story stocks (Tesla, for example) that can sell at high price/earnings ratios. Ultimately, value investors take advantage of other investors’ behavioral biases.
May 2017