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The Year of the Value Trap
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The value problems of the last two years were particularly bad because of the outperformance that value stocks had between 2002 and 2007. They won for five years in a row, so that by mid 2007 the value/growth spread was about as unfavorable as possible for value stocks in the U.S. (see Exhibit 1). (We recognize that some value investors disagreed with this data when it was first presented. We were, and still are, puzzled by how they arrived at their more positive conclusion.)
To put a measure on how awful the value trap was during this time, please see the Fall 2007 edition of the Outstanding Investor Digest. This publication concentrates on a dozen or so of the top value investors and is readable, interesting, and chock-full of insight. However, that particular issue is a heartbreaker as one after another of these superior investors put forward the case that – down 30% to 50% – AIG, Lehman, Wachovia, Fannie Mae, etc., were ridiculously underpriced, and represented enormous long-term franchise value that the nervous market was missing.
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The value problems of the last two years were particularly bad because of the outperformance that value stocks had between 2002 and 2007. They won for five years in a row, so that by mid 2007 the value/growth spread was about as unfavorable as possible for value stocks in the U.S. (see Exhibit 1). (We recognize that some value investors disagreed with this data when it was first presented. We were, and still are, puzzled by how they arrived at their more positive conclusion.)
To put a measure on how awful the value trap was during this time, please see the Fall 2007 edition of the Outstanding Investor Digest. This publication concentrates on a dozen or so of the top value investors and is readable, interesting, and chock-full of insight. However, that particular issue is a heartbreaker as one after another of these superior investors put forward the case that – down 30% to 50% – AIG, Lehman, Wachovia, Fannie Mae, etc., were ridiculously underpriced, and represented enormous long-term franchise value that the nervous market was missing.
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