When I say I'm a value investor, people often look at me as though I'm crazy. I'm not. I just know how to stack the odds in my favor. And I'm Foolish enough to believe that everyone should include value stocks as a significant part of an investment portfolio.
Value doesn't always lead to quick returns (what investment strategy does?). But over the long term, it works. It's no coincidence that Warren Buffett is both the best-known value investor and one of the world's richest people.
Ibbotson Associates compared the performance of value stocks and growth stocks between 1968 and 2002. The results are clear:
|
Annual Return |
$1,000 Becomes | |
|---|---|---|
|
Growth |
8.8% |
$17,520 |
|
Value |
11.0% |
$34,630 |
Investors who focused on value finished with nearly double the amount of the growthies! That's the difference between dog food and steak.
Beat that
That study mechanically divided the market into value and growth categories, meaning that each included both great stocks and complete garbage. Suppose that instead of just buying them all, you focused only on the best and the cheapest? Avoided the worst performers and focused on the best?
That's what we attempt to do at our Motley Fool Inside Value investing service. We're looking for businesses with the following traits:
- Solid financials.
- Strong competitive position.
- At least 20% undervalued.
We don't care what sector the stock is in -- there are great companies on sale in tech, banking, health care, and more. We love to buy growth, as long as we can buy it at a cheap price.
Such picks can really outperform. Take, for example, a relatively ho-hum company like Waste Management (NYSE: WMI). In 1999 the company took an absolute nosedive, dragging its stock from the $50s to the low teens. While competitors like Allied Waste (NYSE: AW) felt a similar sting, savvy value investors jumped into Waste Management and rode subsequent returns of more than 160% since.
Buffett used a similar strategy with his purchase of Gillette, before consumer giant Procter & Gamble sucked it up from him after an amazing return. He did the same thing with Coca-Cola beginning in 1988, at a dividend-adjusted price of less than $4 per share. Over the next 20 years, that investment has generated roughly 14% annualized returns.
These aren't isolated examples. Opportunities come up again and again to investors who are both patient and alert. I'm thinking of Alcoa (NYSE: AA) in 2003, Sunoco (NYSE: SUN) in 2000, and Texas Instruments (NYSE: TXN) in 2002.
The Foolish bottom line
While it's smart to buy companies with strong growth prospects, they'll only help your portfolio if you can get them at the right price. Such opportunities are out there right now, so make sure you look for them. If you'd like a shortcut, try our Inside Value newsletter. A significant portion of our picks are still trading at what we consider bargain levels. You can browse through the entire list using a free 30-day pass.
This article was originally published on Sept. 20, 2006. It has been updated.
Fool contributor Richard Gibbons doesn't just know about stacking odds -- he knows how to stack chairs and plates as well. He owns no shares of any company mentioned above. Coca-Cola and Waste Management are Motley Fool Inside Value recommendations. The Fool has a disclosure policy.
