Quote of the day by Jean Marie Eveillard: "If you are a value investor, every now and then you lag, or experience what consultants call tracking error. It can be very painful. To be a value investor, you have to be willing to suffer pain."

Value investing is often associated with patience, discipline and a willingness to look beyond short-term market trends. But for renowned investor Jean-Marie Eveillard, there is another important requirement: the ability to endure periods of underperformance.

“If you are a value investor, every now and then you lag, or experience what consultants call tracking error. It can be very painful. To be a value investor, you have to be willing to suffer pain,” Eveillard said.

Why value investors can lag

The quote highlights one of the central challenges of value investing. Stocks that appear inexpensive based on their fundamentals may not immediately attract investors, particularly when market sentiment favours faster-growing companies, popular sectors or momentum-driven trades.

As a result, a value-oriented portfolio can underperform the broader market for extended periods. This divergence can test an investor's conviction, especially when strategies that appear less expensive continue to lag more fashionable investments.

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The importance of a long-term view
Eveillard's observation underscores the importance of having a long-term investment framework. Value investors typically focus on factors such as valuation, earnings, cash flows and the underlying strength of a business rather than short-term price movements.

The approach, however, requires investors to accept that being right about an asset's underlying value does not necessarily mean being rewarded immediately. Market prices can take time to reflect an investor's assessment of intrinsic value.

Staying with the investment philosophy
For value investors, periods of underperformance are not necessarily evidence that the strategy has failed. They can instead be part of the process of following an investment philosophy that may move out of favour from time to time.

Eveillard's message is ultimately about temperament which means that investing based on value requires the patience to withstand periods when the market disagrees with you.


(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)