February 10, 2017

Success of Value Strategy in 2016 no indication for 2017



Last week, I criticized a Swiss Finanz & Wirtschaft article on value markets, concluding that the mentioned markets do not offer preferential investment opportunities, as the F&W postulated. This is because “value markets” do not achieve higher returns than markets with less "value".

However, when it comes to stock selection, the value strategy is a good long-term strategy because it involves anti-cyclical investing and making investments contrary to the general hype, which is a profitable approach in the long run.

Based on this insight, we have developed the Obermatt stock rating method, starting in 2011.

In 2016, Value was in demand. At Obermatt, the Top 10 lists have outperformed the value strategy in 56 markets by an average of 8.6%. Although the growth strategy and the security strategy were better than the fifty benchmark indexes, it was only marginal, and the combined strategy was only 3.1% better than the indexes - which, by the way, is not so bad for a free analysis.

Because of the good performance of the value strategy in 2016, F&W now argues that people should become value investors. This argument would make sense if the success of the value strategy in 2017 could be based solely on its success in 2016. However, this is not the case, and F&W's recommendation for investors is misleading.

At Obermatt, we have been measuring the value strategy in more than 50 markets for years. We can measure whether a good value year is followed by another good value year. It is not always so. The correlation rate is only 4.9%, which does not indicate a strong probability for repeated success in a subsequent year.

What does this mean for you as an investor? First of all, you don’t have to worry too much about this information. This is generally good news because you’ll save time not having to switch from one strategy to another. Choose your long-term strategy once and stick to it until a better strategy comes along, or until you learn something that makes your original strategy even better.

But don’t just look at the successful strategies. With every success, the risk increases that the market direction changes and that these strategies collapse.

Reference: F&W: "Diese Länder sind günstig bewertet", page 17, 18 January 2017.


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