Does Behavioral Investing Make Sense Anymore?

Value investing has faced a crisis of confidence after five tough years. Here’s why we think the behavioral investing principles that underpin the discipline are more relevant than ever.

It's been nearly 80 years since the tenets of behavioral investing were first described by Benjamin Graham and David Dodd, the forefathers of value investing. And over the last four decades, value investing has been highly successful. But perhaps, argue critics, after five years of subpar returns, the fundamental drivers of value stock performance may no longer work.

We think the opposite is true. Traditionally, value opportunities are created when a company faces a controversy that triggers a decline in profits and its share price. Value investors use research to determine whether the market reaction has been exaggerated, meaning the stock is likely to rebound in time, or whether the company’s troubles are likely to continue to push the stock down further into a value trap. Behaviors that create opportunity include:

  • Loss aversion: the pain of losing money is often perceived as greater than the pleasure from making money
  • Trend extrapolation: investors may wrongly conclude that a recent negative trend will have enduring consequences for the future
  • Short-term focus: during times of crisis for a company or for markets, it becomes more difficult for investors to establish confidence in long-term forecasts
Investor loss aversion was heightened by the severe crash of 2008 and the ensuing volatility. An abundance of bad economic and corporate news has made erroneous trend extrapolation even more ubiquitous. And as markets have lurched from crisis to crisis, with recurrent spikes in volatility, investors’ time horizons have become extremely short.

In other words, markets are saturated by behavioral biases that are likely to eventually correct themselves and reward investors who have stuck to their knitting and dared to defy the crowd.

Many things have changed in the markets in recent years. Trading costs have fallen and technology has made it easier than ever to buy and sell stocks quickly. Instant information on economic developments and companies flows around the world, often adding unreliable noise to markets. Since these changes promote emotional reactions by investors, we think that traditional research-driven behavioral investing makes more sense than ever in the 21st century.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio-management teams.

Kevin Simms is Chief Investment Officer—International Value Equities and Joseph G. Paul is Chief Investment Officer—US Value Equities, both at AllianceBernstein.

Kevin F. Simms

Chief Investment Officer—Global/International Value Equities
Kevin F. Simms, an AllianceBernstein Partner, was appointed Chief Investment Officer of Global and International Value Equities and chairman of the Global Investment Policy Group in July 2014. He has held the position of Chief Investment Officer of International Value Equities since 2012, after having served as co-CIO since 2003. He was also the Global Director of Value Research from 2000 to 2012. During his tenure as chief investment officer and research director, Simms has been instrumental in implementing significant enhancements to the firm’s cross-border research process. From 1998 to 2000, he served as director of research for Emerging Markets Value Equities. Simms joined the firm in 1992 as a research analyst, and his industry coverage over the next six years included financial services, telecom and utilities. Prior to that, he was a certified public accountant with Price Waterhouse. Simms earned a BSBA from Georgetown University and an MBA from Harvard Business School. Location: New York

Joseph Gerard Paul

Chief Investment Officer—US Value Equities
Joseph Gerard Paul was appointed Chief Investment Officer for US Value Equities in 2009. He has also served as CIO of the Advanced Value Fund since 1999. Paul was previously CIO of Small & Mid-Cap Value (2002–2008) and co-CIO of Real Estate Investments (2004–2008). For two years he served as director of research of the Advanced Value Fund, a leveraged hedge fund whose genesis he was instrumental in. Paul joined the firm in 1987 as a research analyst covering the automotive industry, and was named to the Institutional Investor All-America Research Team every year from 1991 through 1996. Before joining the firm, he worked at General Motors in marketing and product planning. Paul holds a BS from the University of Arizona and an MS from the Massachusetts Institute of Technology’s Sloan School of Management. Location: New York

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