Let Thousand Bubbles Bloom – Value Investing Will Be Better for it

Have we not learned anything from history?

This time it is different. How often have we heard this and how often has it turned out not to be different? Capital markets and investing have been around for decades, and there is not really much new to see or learn. The problem is that even the so-called savvy investors get caught up in the heat of the moment and have to keep re-learning the basic precepts of investing that have stood the test of time.

Case in point: Wall Street Journal reports on the recent surge in momentum investing. The conventional wisdom states that an investor is much more likely to get burned buying the latest hot stock. The “new wisdom”, arising from the recent few years of volatile and unpredictable markets (really!), and the general inability of the professional money managers to find good investments, states (and I am paraphrasing from the WSJ article):  we have entered into an era of multiple mini-bubbles and the way to take advantage of them is to buy stocks that have been doing well and move on to the next bubble when this one goes kaput.

Apparently, patience, due diligence and sound investing methods are no longer the key.

There are but two problems with this hypothesis

  1. Bubbles do not announce themselves in advance. If we, or the smart professionals on the Wall Street knew how to figure out the beginning and end of the bubble, than we would not have endured such a horrid last two years. The reality is that most investors who invest in momentum stocks, get on the ride too late, and get off too early (or get burned) and as a result cannot translate their crystal ball into long term sustained portfolio growth
  2. The very fact that so many are jumping on the momo investing bandwagon should make value investors smile. Why is that? It is because when there are multiple bubbles in the market and the dumb money is chasing quick returns, invariably many good company stocks start languishing. This is where a savvy value investor swoops in and than waits for the market to realize its folly. Value stocks are inherently less risky as they are already undervalued

When a momentum inspired investment sours, it can hurt really bad since the fall can be precipitous and there are usually no visible signals of impending doom. A value investment, however, is one where the risks are known and understood and the investor has ample time to take evasive action if necessary.

So if you are looking for stock investment advice in the actions the wall street herd takes, you may not find any. There are lessons however, and we will all do well to heed them.

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