Does Value Investing = Trend Following?

Controversial, isn’t it? The notion that Value Investing and Trend Following are the same things may sound outrageous to some people. Is there any truth in this statement? Let’s investigate.

Value investing incorporates the idea that relatively cheap assets tend to outperform relatively expensive ones. In its traditional version, Value Investing is synonymous with fundamental analysis, whereby investment managers would pore over tons of financial data (e.g. balance sheet statements) to identify the fair value of a security. Fair value is the theoretical price of a security that reflects all available and relevant information. Any price deviation away from the fair value (both on the upside and downside) constitutes an investment opportunity that can be exploited as the price eventually converges back to fair value.

Notice the word “converges” because it is an important one. You see, Value Investing is a convergent strategy – a term coined by our own Mark Rzepczynski way back in 1999 as a description of risk-takers who believe that the world is well structured, stable, somewhat dependable, and knowable. Value investors are indeed convergent risk-takers – they believe they know the right price/fair value and depend on the somewhat predictable tendency of mispriced securities to eventually correct their valuations and close down any value pockets.
Now let’s take a look at Trend Following.

Trend Following is based on the idea that asset prices which have gone up in the recent past will continue to do so in the near future (and vice versa). Trend Following is typically viewed as a quant strategy relying on computers to run and execute an algorithmic trading system. Trend Followers are not concerned with the fundamentals of an asset - in fact, sometimes they don’t even know why a particular asset is going up or down. All that Trend Followers need to know is the price; they don’t know what the correct/fair value of an asset is and don’t even attempt to forecast it.

Trend Following is known as a “divergent” strategy. It is run by risk-managers who profess their own ignorance to the true structure of potential risk/benefits and exhibit skepticism for what is dependable and knowable.

So, yes – Value Investing and Trend Following are indeed two completely different investment styles, and you would be perfectly right in viewing them as two opposing concepts.
However, if you zoom out and look at Value Investing and Trend Following from fifty-thousand feet, something extraordinary starts to happen. You see, from such a high-level, philosophical perspective, all the details and specifics we discussed above that constitute Value Investing and Trend Following begin to blur, and what appears on the foreground are the basic principles of a sound investment approach.

You may be surprised but there is a large number of such overlapping principles which was discussed with Jerry Parker in this week’s episode of the Systematic Investor podcast series.
If you are curious to find out what these principles are, we warmly invite you to tune into this week’s episode and discover yourself. As usual, we promise your time will be well spent!