The open secret: why does value investing still works

Why does value investing still work despite being such an open secret? To answer that, I quote Professor George Athanassakos in the extract below.

The short answer, for those who desire instant gratification is this - the stock market is dominated by i) humans which are fallible and ii) fund managers who act in ways that serve their self interest rather than their clients and in doing so lead to irrational outcomes. This causes mispricing in the market which allow value investors to come out ahead.

Note that I did not quote the entire article because I do not necessarily agree with it in its entirety, especially the point that value investors are contrarian. Nonetheless, you could access the article, in its entirety, in the link below.

www.i3-institute.com
www.facebook.com/i.invest.institute

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http://www.ftadviser.com/2013/08/12/investments/global/the-human-psychology-behind-value-investing-QaFquIhxGCx7eyXvI1QORL/article.html

"If the evidence in favour of value investing is so overwhelming, why isn’t everyone a value investor? Why does a value premium (that value, on average, beats growth investing) still exist? Shouldn’t it be eliminated? Not necessarily, because the forces behind the value premium are psychology and institutional biases
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Human and institutional behaviour bias stock prices in such a way that give rise to the value premium. Individuals are subject to irrational behaviour. They are overly optimistic, they overreact and most importantly they herd. They herd to protect their jobs. If the group loses and a portfolio manager is in the losing group, his job is protected as he lost as everyone else – but if he is wrong and others win while he loses, then his job and reputation are at stake.

At the same time, individuals working for institutions have their own agendas that may conflict with those of their clients or investors. They act on these agendas to benefit themselves, rather than those who hired them. They rebalance their portfolios throughout the year to earn their Christmas bonus, they window dress to look better than they are to their clients.

Weaknesses of human nature and institutional biases are not going to go away – just as portfolio managers do poorly not due to lack of stockpicking abilities, but rather due to institutional factors that encourage them to over-diversify to protect their jobs and assets under management, investors will also continue to believe the promises that growth (glamorous) stocks make, overbidding them, and giving rise to the value premium."