Last year we highlighted what we deemed the “value investing pain train.”

In 2015, cheap high-quality stocks started getting crushed by expensive junk stocks. Here is a recap of the carnage.

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In many respects, value investing is a lot like Terry Tate — the huge “office” linebacker that would crush employees who made mistakes. His nickname: the “pain train.”

SAT answer: Terry Tate is to office employees, as value investing is to investors.

https://www.youtube.com/embed/xc11tskjEGs

The value investing pain train: a visualization

Let’s look at the progression of the value investing pain train.

Here is a link to the source data: Price/Quality portfolio data. We examine value-weight returns for the cheap high-quality quintile and the expensive low-quality quintile. The daily returns run from 1/1/2015 to 1/31/2016. Results are gross of fees. All returns are total returns and include the reinvestment of distributions (e.g., dividends).

 

value pain train
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.
  1. Beginning of summer…value is getting cheap.
  2. End of summer…value is super cheap.
  3. End of the year…value is a stupid strategy.

Fast forward to 2016. Below are the results for January from 1/1 to 1/31. Value started off on the wrong foot, possibly due to redemptions from 2015?

pain train in jan
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Is value ready for a rally? Or is this a head fake?

The value investing propaganda starting coming out hot and heavy in February. Rob Arnott led the charge at Research Affiliates, with a piece with an amazing title, “How Can Smart Beta go Horribly Wrong.” A simple summary is that value investing has gotten destroyed and seems like a great opportunity. Buy RAFI products. Now. The public relations effort on behalf of value investing seems to have worked: February was an epic month for all things that buy cheap out-of-favor firms.

Great news for all of us who traffic in the stock market’s trash can.

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