Value investors lose big on financial stocks

Today's Wall Street Journal reports on the sector that is handing some big losses to value funds: financials.

Companies like Merrill Lynch & Co., Inc. (NYSE: MER) and Citigroup Inc. (NYSE: C) have seen their stocks tank in the wake of the subprime meltdown, and value investors who have liked the low P/Es and attractive yields are holding the bag.

The Journal reports that "The average large-cap value fund is down 2.6% so far this year, according to Morningstar Inc. But that average disguises double-digit losses at a number of well-regarded value funds. Among them, Touchstone Large Cap Value Fund is down 32% and the Hotchkis & Wiley Core Value Fund has lost 15.1%. Investors in Weitz Value, run by veteran value manager Wally Weitz, are down 14.2%. That contrasts with a 0.9% increase in the Standard & Poor's 500-stock index (including dividends) and an 8.2% gain in the average large-cap growth fund."

I consider myself a value investors but the beating that they've taken on some of these stocks underscores one of the pitfalls in the regimens of many investors: over-reliance on ratios and cash flow analysis, without really understanding the fundamentals that drive a company and its industry. A lot of very smart people were predicting subprime trouble, and some had the foresight to short these financial stocks -- but it appears that some mutual funds were blinded by low P/Es and high ROE's.

But in the end, those are just helpful tools for understanding business fundamentals, something many investors ultimately ignored.