Analysts on Wall Street believe that Warren Buffett’s value investing strategy is old-fashioned. Buffett’s strategy, based on Eugene Fama’s and Kenneth French’s philosophy, consists of buying stocks with low valuations and selling those with highest, according to a report from Goldman strategist Ben Snider, CNBC reported.
The research report, titled ‘The Death of Value’, states that the value investing strategy generated an average annual return of 5% from 1940 to 2007.
“The disconnect has led investors to question the future viability of value investing, which has been embraced by the academic literature and espoused by investors including Benjamin Graham and Warren Buffett,” Snider was cited by CNBC.
The strategist said that the strategy “realized a theoretical gain in seven out of every 10 years and never spent three full years below its previous high water mark.”
In recent year, this long/short value strategy hasn’t been performing well.
According to Snider, investors that used this value strategy generated a 15% cumulative loss in the past decade and negative returns in 6 out of the last 10 years.
“Value has historically posted its strongest returns during periods of strong economic growth early in the economic cycle. The factor typically wanes late in the cycle as investors search for secular growth opportunities when economic growth slows. Concerns about the possibility of ‘secular stagnation’ in recent years have compounded the investor hunt for growth.”
However, Snider and Goldman aren’t calling for an end to Buffett’s value investment philosophy.
“We believe that value will remain a good long-term strategy, although future returns will likely be lower than the historical average. Behavioral finance suggests that some value premium will persist even as changes in the investment landscape reduce its expected returns going forward,” Snider said in the report.