Portrait of a Value Investor - The Role of Social Pressure

Value investing vs. growth investing is a topic that has been in the financial news lately, as a number of articles calling for/predicting the rotation from growth to value have popped up. (See here, here, here, and here for recent examples.)

Value investing is about more than performance - though that is of course of importance - it's also a matter of understanding and fit.

Is this something worth doing for your clients? If so, which ones?

Let’s reflect for a moment on the psychology of value investing and the role that Investing Personality plays in it. While an investor can be attracted to both strategies (as well as others), there are identifiable qualities inherent in value investors.

First a couple of simplified, but useful, operational definitions (courtesy of Wikipedia):

Growth Investing: An investment strategy that “invest(s) in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios.”

Value Investing: An investment strategy that “invest(s) in companies that appear underpriced relative to some form of fundamental analysis.”

Let’s take a closer look at what differentiates value investors.

Less Influenced by Social Pressure:

There is a famous scene in a science fiction movie in which a scout party of astronauts land on an uncharted planet. They exit their landing craft and begin searching for signs of life. Finding none, the astronauts declare that the planet is uninhabited. And safe. Then the camera pulls back to reveal the landing party has been conducting their search inside a giant footprint.

This is how I think of social pressure in investing. It’s not about keeping up with the Jones’s, fear of missing out (FOMO!) or chasing the performance of a FAANG stock. Social pressure is a giant footprint. You’re always in it.

If you consider that a stock price reflects the collective opinion of a stock (and you should, because it's true), these disparate approaches reveal two very different sources of investing motivation:

Growth investors like a stock because other people like it.

Value investors like a stock because other people do NOT.

The stocks that value investors are drawn to are underperforming, unpopular, and relatively ignored (interrelated characteristics, FWIW).

Thus, value investors are fundamentally less influenced by social pressure than most investors.

Typical/growth-oriented investors like to "go with the flow". The trend is their friend.

Value investors consciously resist the flow. And the trend is more like their "frienemy". (I.e., They don't really like the trend, but occasionally the trend comes over and hangs out --as long as it's completely on the value investor's terms.)

There is a streak of non-conformity that is part and parcel of the value investor's make up. This characteristic takes root in a set of values that include logic, frugality, and prudence.

Are you clients value investors at heart? How do they react to the ubiquity of social pressure in investing?

MarketPsychInsights is a service that helps you discover and elicit these traits in clients, via psychometric assessment and subsequent conversation.

NEXT: Constrained Risk/Reward Preferences

And as always... Hey, let's be careful out there.

  • Dr. Frankenstocks

Frank Murtha, Ph.D.