Looking in the scary places for value

by Michael Tarsala

The stock market is getting scarier.

The S&P 500 has just closed below the important 1,340 threshhold we had been watching. The CBOE Volatility Index (chart below) is at its highest point since January. And mutual funds had $18 billion in outflows in April — the most since at least 1984.

Source: Stockcharts.com

I won’t get started with commodity-related investments, but let’s just note that the widely-watched CRB Index is at levels not seen since 2010. That doesn’t bode well for energy or commodity stocks.

Yet if you consider yourself a value investor, fear can bring opportunity.

By no means should someone run out and buy the stock or the sector that is down the very most on every dip. Historic levels of fear, however, could be a time to act.

There is a reason why value investing works. Tadas Viskanta from Abnormal Returns puts it in context, in a guest post at OldSchoolValue:

most people don’t want to be value investors. Even value investors find it difficult to invest in those situations that are the “ugliest” and therefore the most ripe with opportunity. Hence the under-peformance of value fund managers.

To paraphrase, the best opportunities are often in the scary places where others fear to tread.

For me, that speaks to the value of active value investing, and looking for long-term mean reversions. For investors, now is the time to be listening to conference calls, performing channel checks and digging for new ideas among the list of new 52-week lows — to zig when everyone is zagging.

Or to find someone who can do that for you.

Not every stock follows along with the broader market. An active manager can help you find the stocks that are beaten to the point where they’re unlikely to be beaten much longer. The best managers will perform, of course. But there are some with the skill to perform over time without taking on wild volatility swings.

We offer a range of value investing options at Covestor, all with a long-term perspective. Contact us if you would like to learn more.