By Gabriel Chen
It has been a trying time for investors, with stock markets around the world plunging on every indication of trouble.
Indeed, shares of many financially sound companies have been pounded to unreasonably low valuations.
For value investors, bearish times like these spell opportunity and represent a chance to pick up battered stocks at very cheap valuations.
The late Mr Benjamin Graham - widely regarded as the father of value investing - was the quintessential bargain-hunter who would scour the market for good deals.
'Price fluctuations have only one significant meaning for the true investor,' he wrote in his widely acclaimed book The Intelligent Investor, first published in 1949.
'They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.'
Value investors buy stocks that are cheap relative to some measure of intrinsic worth like a company's earnings.
On the other hand, growth investors look for fast earnings growth and will pay a premium for it.
The stocks they buy into come with high price-earnings or price-to-book ratios, as they believe these stocks indicate superior growth prospects.
When markets are trending up and momentum is good, investors tend to do very well with growth or momentum strategies.
'Growth investing works well in times with burgeoning industries riding an economic cycle,' said Mr Lionel Lee, director of equity investment firm IBS.
Technology stocks of the late 1990s are an example. They exhibited above-average earnings growth rates and often beat earnings estimates.
Numerous studies, however, have demonstrated that value stocks can outperform not just growth stocks, but also the overall market.
This is shown to be true in most years, and in most five-year and 10-year periods or longer.
Dr Mark Mobius, executive chairman of Templeton Asset Management, told The Sunday Times that value investing has the best long-term record.
'It is based on actual earnings records and projections. Earnings drive stock prices,' he said.
Research published by Societe Generale strategist James Montier last year found that a value strategy beats a growth-oriented strategy over a long period.
In Mr Montier's analysis, the cheapest 20 per cent of all stocks - regardless of industry or geographical location - delivered an average return of 18 per cent a year over the period from 1985 to 2007.
But the most expensive stocks over the same period generated an average return of less than 3 per cent a year.
Even in emerging markets such as Asia, value investing works.
In the same study, Mr Montier showed that the cheapest emerging market stocks outperformed the most expensive stocks by over 18 per cent a year and beat the broad market by around 11 per cent a year on average from 1985 to 2007.
The validity of the value approach has been borne out repeatedly.
US-based Brandes Institute showed that value outpaced growth over the 28-year period ending December 2006 for stocks of large and small companies in the United States.
The large-capitalisation Russell 1000 Value Index outperformed the Russell 1000 Growth Index in 57 per cent of the years.
The smaller-capitalisation Russell 2000 Value Index also outperformed the growth equivalent in 64 per cent of the years, the Brandes study revealed.
Given that value investing outperforms growth investing over long periods, should you be leaping into the market now to grab a cheaper blue-chip stock or two?
Mr Richard Jones, director and portfolio manager at DWS Investments, believes the time is right.
'Now may be an attractive buying opportunity as the world and Asia's greatest companies are on sale,' he said.
But before you start nibbling on some of these value stocks, it may be worthwhile to know the pitfalls of value investing.
First, beware of 'value traps', where some companies that are cheap stay cheap for a very long time.
'The reason they appear 'undervalued' is that their price fall is outpacing their fundamental deterioration,' said Ms Daphne Roth, head of equity research in Asia at ABN Amro Private Bank.
'As a result, these industries could stay trapped in this category until an external catalyst takes them out.'
Next, value investing is not for those seeking a quick gain.
'After the severe fall in asset prices last year, value has started to emerge and even Warren Buffett has come out to buy,' said Mr Paul Heng, director of investment analysis at Ferrell Asset Management.
'There may be the possibility of a further fall in prices, but if you buy into good and value assets, they will go back to their true value in the next five years.'
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