Numerous studies show that an investor earns more over time by investing in stocks selling below their intrinsic value by a variety of measures. It’s known as value investing. But most investors aren’t value investors. This article explores why, with the main reason being that investors don’t have long enough time horizons. They focus on the short-term and therefore don’t earn as much as they could
There are plenty of 3-year periods when value investing produces inferior returns, and most market participants don’t or can’t have the time horizon that is sufficiently long to be able to look through that. They will either get fired, lose their clients, or if they are investing their own capital, lose the confidence in their process while they wait for the period of underperformance to end.
In other words: Value investing works over the long-term exactly because it doesn’t work all the time. If it worked all the time, it would have been arbitraged away long ago by people programming computers to invest large amounts of money based on its principles. However, because of intermediate-length periods when value investing doesn’t work, and most investors’ lack of a long-term time horizon, this hasn’t happened and value investing remains one of the few constants in a changing investment landscape. Most people just can’t stomach periods of underperformance.