Pzena - Fourth-Quarter Newsletter Commentary
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Value’s periodic underperformance is the flip side, of course, of its main return driver. Bargains generally present themselves only when there’s trouble, what Baron Rothschild described as “buying when there’s blood in the streets.” When a solid business with a record of earnings growth experiences some problems, the market reacts negatively. It’s simple human nature to extrapolate current trends into the future, to expect that what is good will get better and what is bad will get worse. The value investor buys on that weakness, knowing that frequently the problems are actually temporary. Adding to the challenge, however, is that the biggest value opportunities generally come in a period of crisis for the entire market. Figure 3 compares the price-to-book value for the cheapest stocks versus the S&P 500, and the greatest differentials have come during times of the greatest stress. So just when everyone else is running for the exits, the value investor is doubling down.
