Value Investing, Human Behaviour and Why You Should Ignore the Market
Eric Kirzner: Many of us have been surprised by how well the market has responded to Donald Trump’s presidency thus far. How do you account for it?
Charles Brandes: What is so interesting to me is, all of the expert opinions and polls turned out to be wrong — and we should keep that in mind, as far as investing goes. Expert opinions are something you have to be very careful about. As we have seen over history, in many cases, they are worthless.
Whether people have been surprised by the results of Trump so far or not, the fact is, nobody really knows what effects his presidency will have on the market. Having said that, we do know a few things: Since 2008, value investing has not performed as well as it usually does in comparison to growthstock investing, and there are a couple of reasons for that. First, in periods of declining interest rates, the type of value stocks people buy are from industry categories that don’t do as well as growth stocks. Also, when you’re value investing, what you are buying is present earnings and present cash flows; and when you’re investing in growth stocks, you’re buying earnings potential in the future. So, if you discount that at a low interest rate, you could pay more for growth stocks than you would for value stocks when interest rates are low.
Now, it looks to me like interest rates are starting to reverse, and historically, in periods of rising interest rates, value stocks do quite well. That’s because rising interest rates usually mean that the economy is growing, and when economies grow, value stocks perform better. Historically, starting in the early 1970’s during a period of rising interest rates, our value stocks did quite well; and the same was
