Despite media proclamations, value investing still works in the long run GlobeInvestor
. Let’s briefly review how these two factors skew stock prices, helping those who are able to overcome these biases, to outperform.Nobel Prize winner Daniel Kahneman, through experiments, demonstrated that humans are not rational, in the sense that they tend to become risk averse when they win and risk-takers when they lose. The implication of this for investors: They tend to sell their winners too early and hold on to losers for too long.
Investors tend to overreact both on the upside and downside. That is why bull markets tend to be stronger and bear market tend to be weaker than they both should be. Analysts also herd. The low-ability analysts hide in the crowd while the more reputable analysts, who have already made a good name for themselves, are hesitant to take chances.
The interaction of such behaviours causes stock prices to deviate significantly from value, not only over the longer term, but also within a year. For example, portfolio rebalancing is the cause of the “January effect” and “sell in May and go away," and human nature – of both individual and institutional investors – are behind the causes of bubbles in asset prices.
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