Why Most People Don't Succeed in Value Investing

Value Stocks Are Hot —But Most Investors Will Burn Out

By Jason Zweig

"Most people aren't cut out for value investing, because human nature shrinks from pain," the money manager Jean-Marie Eveillard told me this past week. His words are a reminder that making money on cheap stocks—the goal of every value investor—is harder than it sounds and can take years to play out (...).

(...) long-term rewards don't go to people who think value investing is easy. Superior returns can be earned only by those who know that it is hard—and stay put (...). 

(...)The fund industry has long marketed the chimera of "consistency," the idea that a great stock picker can always earn higher returns than the market. Investors who buy into this myth often sell in a panic as soon as the next crash proves that no stock picker can always outperform (...).

(...) Summit Street Capital Management, an investment partnership in New York, recently analyzed a group of value investors with long records of superior returns and found that even the best underperformed one-third to 40% of the time. "It's hard not to get shaken out unless you understand that and have conviction," says Summit Street partner Jennifer Wallace (...).

(...) Since 1926, value stocks have outperformed growth stocks by an average of four percentage points annually (...)

(...) Nowadays, most value managers search for stocks that are cheap relative to current or expected earnings. The bargain stocks in the best-known Fama-French index were selected on a different measure: book value, a basic yardstick of corporate net worth (...).

(...) To be a value investor, it isn't enough to buy cheap stocks or the funds that own them. You have to stick around until the market recognizes their worth. Mr. Eveillard, now 73 years old and an adviser to his old fund, is still finding bargains in Japan and among gold-mining stocks—but he is prepared to "suffer" until the market proves him right (...).