Don’t be like Warren Buffett — avoid value stocks for now

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Many prudent investors are gravitating toward value investing, the strategy of finding and buying undervalued stocks. On the surface this makes sense, given that the economy is in terrible shape.

However, before following a value strategy, look at the charts linked below. You may find it’s best to avoid concentration in value stocks at this time.

Two charts

Please click here for an annotated chart of the Dow Jones Industrial Average ETF DIA, +1.60%, which tracks the Dow Jones Industrial Average DJIA, +1.56%.

Please click here for a chart of the S&P 500 ETF SPY, +1.92%, which does the same for the S&P 500 SPX, +1.87%, compared with eight popular stocks and ETFs.

Note the following:

• The first chart gives a long-term perspective. It shows that the stock market in May has been slightly below the low band of the resistance zone but is now threatening to penetrate the resistance zone.

• The second chart shows five big tech stocks — Amazon AMZN, +0.91%, Apple AAPL, +2.67%, Microsoft MSFT, +2.65%, Facebook FB, +2.07% and Alphabet GOOG, +3.33% GOOGL, +3.34%. Please see “Investors have $5.1 trillion hiding out in the shares of five companies, which will be tested this week.”

• The second chart shows stock of Berkshire Hathaway BRK.B, -0.55%, Warren Buffett’s company. Buffett is known for finding value in the stock market.

• The second chart shows the large-cap value iShares S&P 500 Value ETF IVE, +1.37%.

• The second chart shows the SPDR S&P 600 Small Cap Value ETF SLYV, +1.03%.

• The second chart shows that Buffett has underperformed Apple stock by 18% even though he is a major shareholder. This also shows how poor the performance of the rest of Buffett’s portfolio has been. Still, Buffett is not buying stocks. Please see “Warren Buffett says to ‘bet on America’ — here’s one prudent way to do it.”

• The second chart shows that the large-cap value ETF has underperformed Amazon stock by about 44%.

• The second chart shows that as bad as the performance of the large-cap value ETF has been, the small-cap ETF has performed worse — it’s underperformed by about 12%.

What does it all mean?

Consider the following:

• The White House cites coronavirus forecasts by the University of Washington’s Institute for Health Metrics Evaluation. The model is forecasting the number of deaths could reach 135,000 by early August.

• As more states open up, the death count could rise.

• The U.S. government is set to borrow an unprecedented $3 trillion this quarter.

• The Federal Reserve is printing money at an unprecedented rate.

• Millions of Americans have lost their jobs.

• Many businesses are being destroyed.

• Momentum investors see only one outcome — a quick V-shaped recovery and rising stocks.

Prudent investors see a wide range of outcomes. Don’t be locked into a one-outcome theory. The level of arrogance and greed has almost reached that of January and February, when stocks peaked. Please see “How the coronavirus scare has driven dangerous arrogance and greed in the stock market.”

Investors should consider a wide range of outcomes and position their long-term portfolios and short-term trades accordingly. It is important that in formulating this plan, investors should avoid concentrations in value stocks based on the hard data from the charts shown above. The concept of buying value in this stock market seems attractive, but the facts say otherwise. Investors should consider a more sophisticated plan. Please see “Stock market investors are asking ‘should I buy or sell?’ Here’s how to decide.”

Answers to your questions

Answers to some of your questions are in my previous writings. Please click here for details.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is the founder of The Arora Report, which publishes four newsletters. He can be reached at Nigam@TheAroraReport.com.

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