By James Saft
Feb 12 As with food, where fast is synonymous
with junk, so it seems that a "slow trade" movement in
investment may lead to tastier results.
Ben Inker, of value-investing-orientated funds house GMO
LLC, coined the slow trade term to describe a fascinating
phenomenon: if something looks good from a value perspective
now, you usually do better by waiting a year.
"The slightly odd fact is that moving slowly on
value-driven decisions has simply made more money historically
than moving immediately would have," Inker, who is co-head of
asset allocation at GMO, wrote in a note to clients.
"Buying the assets that are cheapest at any given point in
time has been a profitable strategy historically, but buying
the assets that were cheapest on average during the past year,
or odder still, the assets that were cheapest a year
ago irrespective of their valuation today, has done even
First, let's look at the data.
Between December 1978 and June 1999 a portfolio comprising
equal weights of the two cheapest equity markets outperformed
the broad market by 2.8 percent per year in the following year.
Make one little adjustment - hold not what is cheapest today
but what was cheapest one year ago - and you up your
outperformance to a whopping 7.4 percent annually.
Since June 1999 the outperformance is less, just 1.8 percent
annually, as against just an 0.4 percent annual outperformance
if you buy what is cheapest in real time. Quite possibly the
diminished effect since 1999 is because the globalization of
both money flows and policy have cut into the advantages you can
wring from country effects on portfolio construction.
Take it to a stock level and the advantages of buying what
was cheap a year ago still stand out, according to Inker. If you
buy the cheapest 10 percent of the market on a price to book
basis you'll have outperformed the market by 2.5 percent a year
since 1965. Do the same thing lagged by a year and you
outperform by 3.5 percent.
Even more impressive, the slow trade play seems to be able
to help compensate for the general underperformance of cheap
stocks since 1992. If you were to have bought the cheapest 10
percent of the market, measured by price to book, since 1992 you
would have actually underperformed by 1.6 percent a year. Do it
on a one-year delay and you still get a 2 percent
THE WHY AND THE HOW
So why is this happening? Even more importantly, what can we
do with the information?
Inker thinks the phenomenon is partly explained by momentum
within markets. There is a long observed and well documented
tendency for markets to exhibit momentum, meaning that
securities tend to keep going in the direction that they are
currently traveling. As to whether this is due to some law of
nature, or is simply down to a lack of imagination among
investors, I could not tell you, but momentum in markets exists.
Stocks, or countries for that matter, get cheap by
underperforming. If something has underperformed for long
enough, or violently enough, to get to the bottom of the barrel,
it is reasonable to expect it to carry on underperforming for a
"Countries that were cheap a year ago have had time for that
bad momentum to get out of their system, as it were," Inker
At the stock level, it may also be that waiting a year
allows you to buy what has crashed but miss out on those
companies which are also going to burn. Think about it: a
certain number of companies every year don't just fall in value,
they cease to exist, or fall out of the broadest of indices into
penny stock territory. Buying what was cheap a year ago means,
by definition, you will miss a certain number of these depth
charges, because they will no longer be there when you come to
As to what we do with this info, here is where things get
difficult. GMO, in part because we can't fully explain why the
slow trade works, has been loath to use it on a pure basis,
preferring instead to take account of the forecasts for the last
year on a blended, or what they call "sliced" basis, also using
discretionary overrides. That too has shown outperformance.
The broader take-away may be that the value approach has
validity - that buying cheap stuff by and large is the way to go
- but that by not rushing you can avoid fighting part of the
inevitable battle with market momentum.
That sounds like it is worth waiting for.