Factoring Boredom into the Market
Recently we’ve seen several investors discuss how “boring” stocks have underperformed as investors have become fixated with the “glamour” of the magnificent seven.
Some seem to equate “value” with “boring”. Though we believe that “boring” can be high growth, and “value” can be exciting. Boring is not a quantitative factor that can be easily measured or analysed.
As a quick caveat: when I refer to “value” I am referring to classic value which can be measured as a factor and quantitatively measured. To us, value is buying at a discount to intrinsic value – and this often requires in depth analysis to ascertain as the value is not always optically apparent. Therein lies the opportunity!
We started thinking much more about “boring” stocks after we looked at a list of the top performing stocks over the last 20-30 years and realised that only 15% of these stocks were “glamourous” or “exciting” tech stocks. Most of them were very “boring” indeed!
There were stocks that sold ovens, leased heavy equipment, sold tractors, homebuilders, sporting goods stores – all quite “boring” as my daughter informs me!
However, in the stocks that had a total return of over 20% CAGR over 20 years, the range of growth varied from 5% to 20% CAGR in these “boring” businesses.
This is important because when we look at which factors have underperformed over the last year or two, we (and many investors with a similar approach to us) believe the common theme is that these “boring” businesses have underperformed. Although this is not easily measured, as “boring” is not as quantifiable or ‘screenable’ as other factors.
Hence, we look at history to make inferences.
We know that most of the time great but “boring” businesses perform very well; in bull markets and especially in bear markets. Where history tells us “boring” stocks do not do well is during extremely strong markets and especially when bubbles are being formed.
During bubbles speculative investors withdraw capital from “boring” stocks to invest into “glamour” stocks. It creates a vicious cycle as it drives momentum for the exciting stocks and negative momentum for the “boring stocks”. This leads to more and more investors capitulating on their investment strategies and speculating on “glamour”.
And whilst this is a very profitable trade for those early to it – it is a very dangerous trade for those who are not.
The best investors I have met are those that can keep their cool whilst the market bubbles up around them; those that can bear the short term pain of underperformance. Those that can withstand the boredom and stay invested in their “boring” businesses.
Disclaimer: Investors should be aware that with investing, capital is at risk. Past performance is not necessarily a guide to the future and that the price of shares and other investments and the income that is derived from them may fall as well as rise and the amount realised may be less than the original sum invested.
The opinions expressed are not personalised advice. If you are uncertain as to the suitability of an investment for you, please consult an independent financial adviser.
