The time to buy is when there's blood in the streets. -- Baron Rothschild
NEW YORK (TheStreet) -- Many in the investment world claim to be "value" investors, seeking to profit from the mispricing of securities relative to their "intrinsic" value. While it sounds easy in theory, in practice it is quite difficult because securities that are trading significantly below their intrinsic value are often the least popular.
That is the dilemma. Being a true "value" investor requires a contrarian mindset where you tend to be buying when others are selling and selling when others are buying. But how many of us truly have the stomach or temperament for investing in the most hated of asset classes? The truth is that few among us do, and many so-called value investors are much closer to momentum investing than they would have you believe.
As human beings, we much prefer the safety and comfort of being right and wrong with the crowd than taking the risk of being wrong by going against the crowd, a behavioral bias known as herding. If you don't believe me, compare your current portfolio with the best- and worst-performing equity investments over the past three years (measured using data from Yahoo! Finance). The list is below.
What you're likely to see is a bias toward U.S. equities in general, favoring small caps over large caps. Digging deeper, you are also likely to be favoring health care and consumer discretionary names as well as internet and defense stocks.
What are you unlikely to see exposure to here? Investments that have gone in the other direction over the past three years -- namely, anything related to commodities and/or emerging markets.