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The Trouble with 100% Value: Why What Looks Good on Paper May Not Be Great for Real Life

In the world of quantitative investing, value strategies have been a dominant focus since Eugene Fama and Kenneth French published their seminal paper on the three-factor model in 1993. Companies with low Price-to-Book ratios (value stocks), the research demonstrated, entailed extra risk as compared to those with higher Price-to-Book ratios (growth stocks), and thus investors required extra compensation for holding them. (The other two factors in the three-factor model were market, or the risk associated with investing in equities as compared to “safer” assets like Treasury bills; and size, or the risk of owning smaller-capitalization stocks versus their larger-cap counterparts.)

Quantitative strategies based on the value factor have grown in popularity in the ensuing years. At Gerstein Fisher, we embrace value-based investing; historically, value has performed very well.

But there’s a fundamental problem with simply holding a portfolio of 100% value stocks: it is not a realistic expectation since investors are human beings (and not computers or robots) with emotions like fear and greed. If an individual is invested in an all-value portfolio and, as has been the case over the past nine years, growth has actually been outperforming, he may start to question his strategy. He may even panic and sell out of his value stocks and buy growth stocks. Investment-style cycles have been pronounced, but our research has shown that such attempts to time markets and cycles are far more detrimental than beneficial to individuals’ long-term wealth accumulation.

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