search strategies for value investor - the anomaly of value (1)
To understand the concept of buying a stock at a price lower than its value is one thing, to put it into real practice is nonetheless another. The first question most value investors encountered is where the undervalued stocks can be found. In "Value Investing: From Graham to Buffett and Beyond ", there are several searching methods discussed by the authors. One that particularly intrigues me is the Anomaly of Value.
It explained that some stocks are persistently undervalued by some biases that are so obvious to not just intelligent and energetic investors but also everyone else. There are several different types of biases described in the chapter.
Let's start with the one that I think may be common to us first and keep the rest for us to enjoy at our future leisure. To the anomaly of value, one explanation is that investors, regardless of the individual or institutional type, always hunt for winners such as those potential growth companies with great stories and bright futures. Losers such as those boring, poor performing, unknown, or unloved companies draw little attention. The investment decision is influenced by the biases, so are the investment returns. Stock prices have usually reflected the stunning performance of companies that are known to be good in the public. On the contrary, if the company performance is not outstanding or the companies underperformed in the industry, their stock price has also reflected the possibility that they can perpetually stumble or foul up. They are undervalued because all they need to do is to get back to normal and they will surprise investors.
Also, many investors predict by extrapolation, the process of estimating the future performance on the basis of the relationship with the stock past performance. However, if we more thoroughly examine the correlation of past performance with future return, we will reveal that stocks that performed poorly yesterday may have been the top performer over the past several years. However, people informally generalize from a few cases that are memorable rather than use the full set of data to analyze, and people remember the recent past better than the distant past. From the recent history, they pick up the winner and loser. Then they select the winner to invest, hoping that they will continue to outperform in the near future.
Greenward et al. also discussed how biases exist thanks to investment institution polices and money manager psychologies. More details will be discussed later in the next chapter review.
Reference:
Greenwald. B. C. N. & Kiviat. B. (2001). Value Investing: From Graham to Buffett and Beyond. Wiley.
