How to Know if You Are Really a 'Value' Investor

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.

While there is undoubtedly significant "value" within this group, you'll be hard pressed to find any value investors on financial media pitching these names. The reason for that goes back to the idea of herding. How many portfolio managers today would be willing to incur the ridicule of their investors and career risk by showing a significant position in junior gold miners or Indian small caps? Again, few if any -- which is why true value investors are hard to come by.

As we are fast approaching the end of the year, at the very least this is food for thought. If history is any guide, the best investments over the past three years are unlikely to be the best investments over the next three years or even in 2014. Don't be surprised if one year from now some of the most hated investments of today are suddenly back in vogue.

Best Performing Equity Themes (ETFs) over the Past Three Years:

  1. Biotechnology (BBH): +165%.
  2. Small-Cap Health Care (PSCH): +107%
  3. Pharmaceuticals (XPH): +100%.
  4. Homebuilders (XHB): +92%.
  5. Retailers (XRT): +88%
  6. Media (PBS): +84%.
  7. Ireland (EIRL): +83%
  8. Consumer Discretionary (XLY): +82%
  9. Aerospace & Defense (ITA): +82%
  10. Internet (PNQI): +80%.

Worst Performing Equity Themes (ETFs) over the Past Three Years:

  1. Junior Gold Miners (GDXJ): -79%
  2. Gold Miners (GDX): -65%
  3. Global Platinum (PLTM): -62%
  4. India Small-Caps (SCIF): -60%
  5. Silver Miners (SIL): -56%
  6. Solar Energy (KWT): -54%
  7. Rare Earth/Strategic Metals (REMX): -52%
  8. Copper Miners (COPX): -46%
  9. China Materials (CHIM): -46%
  10. Brazil Small-Caps (BRF): -38%

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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