Will 2022 finally see value work as an investment strategy?

Value investors believe cheaper stocks outperform more expensive ones. The only problem is, it hasn’t worked for much of the past decade.

In fact, Eugene Fama and Kenneth French who formalized the value premium, even questioned its existence in an article from 2020. It was perhaps a good counter-indicator. In 2021, value investing has seen signs of life. Will it last?

What is value investing?

Value investing has a myriad of different variations, but at its core it’s about buying stocks that are cheaper than others. For example, on metrics like earnings, cash flow, EBITDA, dividends, or book value, investing in value means that you own the stocks that give you more for your invested money.

Yes, other stocks may seem like they have a better outlook, but in the long run it’s hard to predict revenue and earnings growth because it’s easy to go wrong. Stocks that are overlooked by the market may shine, or at least hurt less than feared, while the most valued growth stocks are not delivering as much as expected.

Historical performance

Value has been a robust investment factor from 1800 to 2016. This means that bets on value stocks have tended to outperform the broader market, on average. As such, the historical evidence for value is pretty strong.

The concept of value-oriented investing has persisted over time, asset classes and geographies. This is normally a good sign. However, in recent years, value investing has not produced the returns many had hoped for. Maybe it’s because now he’s too popular. Maybe the value is a cluttered trade. It is also possible that the markets have become more sophisticated. Perhaps better quantitative models now make definitions of value such as book value naïve.

However, if it doesn’t, then maybe the value is about to rebound, and maybe 2022 is the year for it. The January effect suggests that some cheaper stocks could rebound in early 2022, whether or not that happens may indicate how the year might play out for value investors.

However, you also have to be careful about what you want. There is evidence that a value investing strategy tends to perform better during recessions.


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