Greenwald sees three psychological factors that best explain why certain stocks
become undervalued. Psychological Factors by Bruce C. Greenwald
First, as Buffett himself said, value stocks don’t tend to have big payoffs. Their success is incremental; you won’t strike it rich overnight. They are in every sense the opposite of lottery tickets. And people love lottery tickets. Lotteries are successful in every country in the world, despite their horrible odds as investments. Value stocks unlike lottery tickets, or growth stocks, don’t hold
out the promise of a dream. Because they are boring, with real but limited growth, the market discounts them and they fall in price.
“Second, as behavioral experiments have proven repeatedly, humans are loss averse. A loss is more painful than a gain is pleasurable. And not only to do value stocks not promise an out sized gain, they often do seem to have the real potential for some sort of immediate loss. A cloud hangs over these companies and stocks, Greenwald puts it this way: ―Stocks that are cheap are ugly stocks, with depressing stories. People irrationally dump them because they want to dump the ugly stories.”
Finally, people are over-confident. For Greenwald, the link to value stocks is the fact that investors are overconfident a certain scenario will occur, and this applies to both the upside and the downside. We think a growth stock will continue to grow and a value stock will only continue to go down. Possible scenarios are interpreted as certain scenarios. When people think stocks are going to do well, they overbuy those stocks. And stocks that look bad, that might be facing trouble, are priced as if that trouble is certain.
Why isn’t everyone a value investor?
There are, of course, lots of rational reasons. It can take a very long time for cheaply priced value stocks to return to fair value. As I keep emphasizing. The stock market and investing are faddish, and cycle through value as well as growth fazes. Although Buffett didn’t lose money because he sat out the tech bubble, it means he couldn’t make it there either, and a lot of people got very rich through Internet stocks.
Also, before you get bitten by the value bug, keep in mind that value investing usually gets killed during severe market downturns. The success of value investing in the last decade, before the recent crisis, was driven largely by private equity managers who scoured the market for undervalued companies to snap up. If private equity becomes sidelined because of problems obtaining credit,
value stocks won’t have the same solid support levels
Nonetheless, study after study proves value works. Also remember that value investing isn’t buying stocks that merely look bad, it always means using some sort of formalized evaluation process to determine if stocks are under priced. To become a successful value investor, you have to overcome your hardwired aversions and intuitions.This is my new website for joke and shayari www.jokenshayari.com This isn’t the story of Black Swans, anticipating some unimaginable, essentially unthinkable random event with huge consequences. Value investing is much easier and more predictable than that. All you have to do is find the cygnet everyone else has ignored and written off that will turn into a White Swan.