It has not been a good year(s) for value investors.
Well, it's been a good year but not as great as it's been for trend followers betting on growth stocks. I guess we're not true value investors, because we've had a pretty good year but certainly we could have done better holding our noses and buying more MoMo stocks. Most of Q2 earnings are behind us and there aren't too many red flags – other than the great big one that shows value to be at an all-time low, and I don't mean value investing, but the VALUE of the stocks we're investing in.
Just because you buy and expensive stock and it gets more expensive, doesn't mean it was worth what you paid for it. This is part of the "greater fool" theory that marks stock bubbles – you can always find someone to be a greater fool than you were – until you can't – then the bubble pops.
We don't know when these sky-high valuations will come to an end, which is why we rely on hedging, more so than shorting. With hedging, we maintain our long positions but we use some of the long profits (about 25%) to lock in our gains without sacrificing any additional upside to come (or, at least not 75% of it).
What's really annoying about this stage of the rally, however, is that stocks that look cheap relative to traditional fundamental metrics such as profit or cash flow have fallen so far out of favor that Goldman Sachs in June questioned whether the markets are witnessing the death of value investing.
Since that call, the market has gained another 2.5% but, as you can see from the chart, we're back at levels we haven't seen since the 4th quarter of 2015 and the S&P topped out then at 2,116 but fell precipitously to 1,810 by Februray. That's 306 points or just shy of 15% in 3 months but we're only just getting to the top – we may drift here for a while or, maybe this time is different and the people dumping value stocks (ie. stocks that are a good value) in favor of "growth" stocks (ie. stocks that don't actually have earnings to…