There is still value in value stocks, but be patient

— -- Q: Are some of the large "value" mutual funds finding stocks to buy?

A: Buying beaten-down stocks other investors are avoiding has been a solid investment strategy over the long term. But in the short term, it's a good way to get clobbered.

Large-cap U.S. stocks, for instance, declined 18.4% between Jan. 1, 2007 and Dec. 31, 2008, according to IFA.com. And despite their reputation as being safer than the market in general, value-priced U.S. stocks of large companies fell even more, 24%, during that same time.

The beating that value-priced stocks have taken make them a tough sell for investors. Between Jan. 1, 1928 and Dec. 31, 2008, for instance, stocks of large U.S. companies in general returned 9.2% a year with risk, or standard deviation, of 19.3 percentage points. Value-priced large stocks generated a higher average annual return of 10% but with a significantly higher risk of 22.8 percentage points.

Only time will tell if value-priced stocks will outperform by a wide enough margin again to justify their higher risk.

Much of the reason for the recent demise of value-priced stocks is the fact many of them are stocks of financial companies. And given the banking crisis, financial stocks have been especially bloodied.

Experts on value stocks say patience will be rewarded. "You'd have to have some faith the banking system will get to some point of healing and stabilization," says Curtis Jensen, co-chief investment officer of Third Avenue Management.

Investors should be rewarded buying value-priced stocks as long as the companies have enough cash to survive three to five without needing to borrow, he says.

Investors buying value-priced stocks need to be willing to be patient. "One of the risks investors face is time horizon risk, which is how long it will take to get to some point of stability," Jensen says.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns.