Buying Losers Might Work for Stocks, but Not for Funds

Fund redemptions don’t knock down net asset values

John Rekenthaler 06 April, 2017 | 9:36
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Over the years, the stock market has rewarded the simplest of investment strategies: buying the downtrodden. The founder of modern security analysis, Ben Graham, did not usually directly seek stocks that had declined in price, but his advice to buy that which cost little had much the same effect.

In the mid-1980s, two academics considered the improbable: Could investors succeed by adopting the brain-numbingly simple tactic of screening for the stock market’s biggest losers, forming portfolios based solely on that information, and then holding for the next three or five years? Yes, concluded Werner De Bondt and Richard Thaler in “Does the Stock Market Overreact?,” they could. Earning excess returns really was that easy.

All right, you may be saying, all this history is fine and good, but show me the money. That I cannot do, not recently. For example, DFA US Large Cap Value, founded by those with an academic bent who wished to put theory into practice, has lagged the S&P 500 over the past decade. It isn’t behind by much—82 basis points per year—but trailing is trailing. The company’s DFA US Small Cap Value fund is another half-percentage point behind. Since the early 2000s, when cheaper stocks far surpassed expensive growth companies during the 2000-02 sell-off, value investing hasn’t been a benefit.

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John Rekenthaler  is vice president of research for Morningstar.

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