The Value premium: companies in low demand are better than companies in high demand
If a product is in high demand it has a high price as compared to the same product in a low demand scenario. Conversely, if a product is in low demand, the price is lower than if that same product was in high demand. Got it?
Investing is similar.
Stocks are priced based on supply and demand. Stocks that tend to be in high demand are priced accordingly. Companies like this have a strong record of dividends, job creation, high earnings, and catchy brand messaging that accompanies good products or services.
Other stocks are in low demand and are priced accordingly. Why? Because the company is in distress. Earnings have come in below expectations for three years in a row. Their debt/earnings ratio is high. They have had layoffs. They have stopped innovating.
Ironically, over the past 92 years it is the second group, the distressed stocks, that have outperformed their stronger partners. This is probably due to the incessant human need to survive, coupled with a capitalist economy and our American obsession with buying things. That distressed company hires a better CEO and starts innovating again. Consumers buy their things. Their share price rises, and the prudent investor profits from having owned some of those shares through the distressed period.
This is one of the Three Factors, the Value Premium.
Ugly truth: you cannot claim the value premium if you are buying individual value stocks: not everyone innovates, and you are forgetting Prudence. (Remember Kodak?)
Beautiful truth: it is not complicated to employ the value premium—it just takes coaching.
Simon Joshua is a licensed investment advisor representative at Cornerstone Wealth Partners in Michigan. He has structured his practice around investor coaching and committed himself to leading communities in establishing a legacy of fulfillment.