Charles Brandes - Why Value Investing Outperforms (Part 2)
Charles Brandes, founder of Brandes Investment Partners (1974), which today manages over $50-billion in assets, globally, discusses why value stocks outperform growth stocks and bonds over the long term, with Dan Richards, Clientinsights.ca.
If you have not seen or read Part 1, you may access it here.
Dan Richards: If value stocks aren't volatile, and they aren't riskier, why in your view do they deliver superior long term performance?
Charles Brandes: That's primarily behavioural. That's primarily the fear and greed in the stock market and that has not changed for many many years. We can see that obviously, with the way stock prices fluctuate so much more than the actual value of the company.
DR: So you've got that behavioural phenomenon at work, that fear and greed, and you know that particularly, when those glamour stocks hit the headlines and investors get all excited and enthused - they want Apple or Google.
CB: Everybody wants those...It doesn't matter what the price is.
DR: And, the other thing that we look at when we look at stock valuations is stocks are really a price to the function of future earnings. Its the future cash flow that's discounted today, and that's often driven by expectations. But really, when you're buying a share of stock, you're really buying the expectations that the market has over what those future earnings are going to be. Would that be a fair characterization?
CB: Yes, Very much, very correct.
DR: So the interesting question is what happens when a company announces earnings and the actual earnings are different than what the market expected higher or lower? So lets start with those glamour stocks like Apple or Google. What would happen if the earnings came in and they were less than the market expected.
CB: We've done a study of this in the Brandes Institute, and we found on the glamour stocks that if a surprise earning comes in, if its a surprise negative more than the expectations, the stock goes down, very very considerably. If its a surprise positive, because the market in the glamour stocks is always looking for much much positive, it also can go down.
DR: Even if it outperforms...
CD: Even if it outperforms what everybody expects it to do. 'Cause everybody's so enthusiastic about these companies.
DR: How about value stocks? What happens, you know, to those stocks that are relatively cheap, by your standards? What happens... Let's talk first about what happens when there are positive earnings surprises compared to expectations?
CB: Positive earnings surprises in the value stocks; because nobody expects it at all, there's no expectation there of them doing anything good, the stock prices will rise considerably, in those instances. We found in the study in the Brandes Institute, that it is so considerable, that is one of the reasons that value stocks outperform.
DR: So that is what happens if you get a positive earnings surprise. How about a negative earnings surprise? You know, results come in below what the market expects.
CB: This is the part that's really surprising. Even on a value non-glamour stock, if the earnings surprise is even negative, the expectations for these companies is so negative that it makes the stock price go up, because even if they report anything, its amazing, we found this in our study over many years about these earnings surprises.
DR: So when you look at the research that you've done, what would be your one overall conclusion, coming out of that analysis that you've done over the long term impact of results reporting compared to expectations?
CB: It's expectations that are so negative for the value stocks that if you buy them that these prices and anything that is considered positive changes, which it does, quite often, that's why value outperforms the glamour stocks.
DR: Charles, thank you.
END OF PART 2
PART 1
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