What is value investing?
It is an investment style that places an emphasis on Stocks and REITs with lower-than-average price to book ratios and higher dividend yields.
Investopedia defines Value Investing as an investment strategy where stocks are selected that trade for less than their intrinsic values, so they actively seek stocks they believe the market has undervalued.
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The strategy is built on the belief that the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company’s long-term fundamentals.
The strategy to invest in these undervalued stocks originates from investor irrationality and the objective is to profit from holdings in stocks with lower-than-average:
– price-to-book ratios
– price-to-earnings ratios and/or higher dividend yields.
However, calculating the intrinsic value of a stock is challenging with investors deriving differing valuations despite acting on the same information.
For this reason, another central concept of value investing is that of margin of safety. Benjamin Graham, who is seen as the father of value investing, in his 1949 book The Intelligent Investor wrote that: The function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future.
Renowned value investor Seth Klarman, in his book Margin of Safety states that a margin of safety is achieved when securities are purchased at prices sufficiently below underlying value to allow for human error, bad luck, or extreme volatility in a complex, unpredictable, and rapidly changing world.
Klarman further stated that: The disciplined pursuit of bargains makes value investing very much a risk averse approach.
The greatest challenge for value investors is maintaining the required discipline.
Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds.
This statement seems even more true for REITs, where the generally accepted investment principles of equities seem to reverse.
REITs with value characteristics TEND to underperform their sector peers Research by Greenstreet Advisors demonstrates that contrary to conventional wisdom, it is REITS with lower: – dividend yields, – leverage and – capitalisation rates who are the top performers. However, the mean reverting nature of REITs needs to be exploited to achieve the greatest level of out performance.
We at Reitway have a philosophy of benchmark agnosticism which we believe allows us the opportunity to select REITs with greater opportunity to outperform based on sound fundamentals.
Our style is Growth At a Reasonable Price (GARP), in which we look for companies that are showing consistent earnings growth above broad market levels (a tenet of growth investing) while excluding companies that have very high valuations (central principle value investing). We also actively seek to deliver returns with a reasonable Margin of Safety.
We apply Reverse Momentum, as shown in the Cumulative out performance by Factor graph, to our investment considerations and, as can be seen in the graph, it is a significant contributor to out performance.
The overarching goal is to avoid the extremes of either growth or value investing, as this typically leads GARP investors to growth-oriented stocks with relatively low price / earnings (P/E) multiples in normal market conditions.
We believe that our approach provides the best-balanced investment approach, specifically tailored to the unique sectoral realities of global REITs, in order to deliver superior investment returns to our investors.
– Kirby, Mike and Rothemund, Peter. “The Factor Tracker.” Greenstreet Advisors – Heard on the Beach Series. 2018-01-11.
– Graham, Benjamin. “The Intelligent Investor.” Harper Business, 1949.
– Klarman, Seth. “Margin of Safety: Risk-Averse Value Investing Strategies for the Thoughtful Investor.” Harper Collins, 1991.
For more information about Reitway Global, please visit our website at www.reitwayglobal.com