Hire an Advisor

What We Do

Resources

About Zoe

Find an Advisor

Investing

Value Investing: A Planner's View

Zoe Team

Feb 26, 2020

5 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

Value investing focuses on finding stocks trading below their intrinsic value.
Patience and disciplined research are core tenets of a successful value-based strategy.
Market volatility often provides opportunities for investors to buy high-quality assets at lower prices.

Frequently Asked Questions

What is value investing?

A strategy of picking stocks that appear to be trading for less than their actual, intrinsic value.

Why is it attractive?

It allows investors to potentially buy quality companies at a discount, favoring long-term growth.

Is it difficult to execute?

It requires significant research, patience, and the emotional discipline to wait for market corrections.

Why Value Investing is Attractive to Investors

Perhaps you’ve been lucky enough to see someone in the airport thumbing through a copy of The Intelligent Investor. While it wasn’t the first book on value investing ever written, its impact on the culture of value has been immense. The snapshot of this book is that if you are dedicated enough to comb through the financial statements of a lot of stocks, you ought to be able to find some that are effectively trading for less than the net assets listed on their balance sheet. We’ll call that “Price to Book” or “P/B,” an essential concept in value investing.

Value investing means trying to buy cheap stocks trading for less than what they are worth. One might compare it to thrift shopping. Sometimes Goodwill has brand new Lululemon Athletica clothes for sale — a deal compared to the price they’re normally sold for in-store. Can the stock market allow for the same type of upside for an enterprising investor?

To take that metaphor a little further, think about TLC’s Extreme Cheapskates dumpster diving in search of “value.” Even reputable value investors have described their strategy as “searching in the trash bin” for performance.

One theoretical explanation of value is “overreaction.” For example, a company (or several) may report bad or shocking news. Perhaps their pension is underfunded, sales are slowing, an unexpected virus is on the loose, or there’s been a change in executive leadership. The market reacts and the stock drops dramatically at price.

A value investor may notice this stock and conduct an objective evaluation of the prospects of the business. The investor might realize that despite the negative news, they still have a strong balance sheet and perhaps even ongoing earning power.

The story here is that the market overreacted. That theme captures a lot of the possibilities of the value approach.

Why is Value Attractive To a Lot of Investors?

Who doesn’t love a bargain? Value is psychologically powerful (“I’m getting things for cheap!”) and backed by university libraries full of research. Some of the most popular are by Eugene Fama & Ken French, who still publish their results on Dartmouth University’s site.

One cannot discuss value without touching on the idea of backtests. A backtest is an after-the-fact “what would have happened” simulation of asset returns that have turned plenty of prudent skeptics into googly-eyed gluttons for higher returns.

The backtests for value are plentiful. Fama & French have data going back to 1926 that’s helped asset managers raise a whole lot of money. If researching Fama-French value investing and you see HML, that stands for “High-Minus-Low” referring to the Price to Book ratio we mentioned earlier.

Sidetrack: “Factors”

Factor is a word you might start to hear when you’re diving into value investing research. A factor is a data point, like the ratio of a company’s sales to its share price. It’s used to compare many different companies across a single characteristic.

Here’s a handy graphic that helps illustrate factors:

As you can see, “Value” is characterized as a factor theme, a composite of multiple individual data points around a given stock and its financials.

This is an important point because tons of value investing enthusiasts spend hours arguing on the internet about nuanced differences in specific factors. Majority of the time, these factors fall under the “value” umbrella.

What Does Value Bring to the Table?

Theoretically, value investing is likely to increase your stock portfolio’s return, as well as its volatility. Estimates vary widely as to just how much excess return value might give you.

Research Affiliates, who publish a website around factor investing, estimate their value factor to give 4.69% excess return over the large-cap benchmark. Just how they might achieve such precision is impossible to say or predict.

A pure value approach is demonstrated in “The Little Book That Beats The Market” by Joel Greenblatt. Greenblatt estimates somewhere in the mid-teens returns for his concentrated value strategies. Importantly, over the past ten years, it has destroyed investors’ returns, while still hitting them with higher volatility.

What Does Value Investing Mean for a Financial Plan?

Modern financial plans demand inputs around expected returns, volatility, as well as correlations between assets.

An unfortunate reality is that it’s impossible to beat the market and predict returns in advance. We have to do our best given the information currently available.

A combination of value, the insane library of backtests, researchers publishing their work online, and academic focus ultimately gives investors a massive toolbox with which to work.

Ultimately, it comes down to these two notions:

Higher volatility increases our range of outcomes in the plan

Higher expected return increases our chances of success in the plan

Weigh those two carefully against one another while considering an allocation to value.

A Financial Planner’s Takeaways on Value Investing

Value investing is a great reminder of the notion of no pain, no gain. Value, unless it is dead, has a place in the prudent planner’s portfolio. Value can shift the efficient frontier with diversification benefit s and can also potentially underperform for multiple decades. Different iterations of value might work in different contexts. Ultimately, any planner relying 100% on the value factor to deliver returns for a retirement plan is timing the market for a quick pay-day, instead of focusing on your long-term financial success.

Ready to Get Started?

Real financial planning should pay off today, and in 10 years’ time.

Why Value Investing is Attractive to Investors

The story here is that the market overreacted. That theme captures a lot of the possibilities of the value approach.

Why is Value Attractive To a Lot of Investors?

Sidetrack: “Factors”

Here’s a handy graphic that helps illustrate factors:

As you can see, “Value” is characterized as a factor theme, a composite of multiple individual data points around a given stock and its financials.

What Does Value Bring to the Table?

Theoretically, value investing is likely to increase your stock portfolio’s return, as well as its volatility. Estimates vary widely as to just how much excess return value might give you.

What Does Value Investing Mean for a Financial Plan?

Modern financial plans demand inputs around expected returns, volatility, as well as correlations between assets.

An unfortunate reality is that it’s impossible to beat the market and predict returns in advance. We have to do our best given the information currently available.

A combination of value, the insane library of backtests, researchers publishing their work online, and academic focus ultimately gives investors a massive toolbox with which to work.

Ultimately, it comes down to these two notions:

Higher volatility increases our range of outcomes in the plan

Higher expected return increases our chances of success in the plan

Weigh those two carefully against one another while considering an allocation to value.

A Financial Planner’s Takeaways on Value Investing

Ready to Get Started?

Real financial planning should pay off today, and in 10 years’ time.

Disclosures: Zoe Financial, Inc. ("Zoe Financial") is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Zoe Financial provides investment advisory services and access to independent registered investment advisers through its platform. The information provided by Zoe Financial is for educational and informational purposes only and should not be construed as personalized investment advice or as an offer to buy or sell any security. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. Clients should consult with their own financial, tax, or legal professionals before making any investment decisions. The material presented by Zoe Financial is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Material presented has been gathered from sources believed to be reliable, however Adviser cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Past performance is no guarantee of future results. Zoe Financial does not provide legal or tax advice, and nothing contained in these materials should be taken as legal or tax advice. SEC Registration does not constitute an endorsement of Zoe Financial by the SEC nor does it indicate that Zoe Financial has attained a particular level of skill or ability. The sole purpose of this material is to inform, and it in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or service, or to attract any funds or deposits. Investments mentioned may not be appropriate for all clients. Before making any investment, each investor should carefully consider the risks associated with the investment, as discussed in the applicable offering memorandum, and make a determination based upon their own particular circumstances, that the investment is consistent with their investment objectives and risk tolerance. Lower expenses do not guarantee better investment performance. Certain information contained herein may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or the performance of a fund may differ materially from those reflected or contemplated in such forward-looking statements.

Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.

The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.

Explore the Zoe Wealth Platform with AI

Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.
In certain situations, you may be required to disclose that the content was “generated by AI.” Please confirm any specific disclosure or labelling requirements with Compliance.

(646) 680-9244

support@zoefin.com

666 Third Ave, 6th Floor
New York, NY, 10017