“The four most expensive words in the English language are “this time it’s different.” – Sir John Templeton
It’s been over a year, so here is another weekly edition of Blogger Wisdom. As we have done in previous years we asked an esteemed group of finance bloggers a series of (hopefully) provocative questions. Their answers are unedited and the author’s name, blog name and Twitter handles follow. We hope you find something of interest below.
Question: Is value investing dead? Seriously, it’s been quite some time since it had any meaningful outperformance. Josh made the case that maybe the world has fundamentally changed. Or is this just the kind of talk you hear at a turning point? (Answers are in alphabetical order.)
Douglas A. Boneparth, Bone Fide Wealth, @dougboneparth:
I wouldn’t go as far as to say that value investing is “dead“, but’s it’s hard to ignore just how long it’s been since we’ve seen outperformance. I think it further demonstrates why diversification is important. I’ve never leaned one way or the other when it comes to value versus growth for the simple fact that everything is generally cyclical. Maybe it’s different this time, but (you guessed it) only time will tell.
Michael Batnick, The Irrelevant Investor, @michaelbatnick:
I think the world has changed, which explains what has happened in the market over the last ten years. But I also don’t think value is dead. My best guess is that value investing, like every other form of investing, has just gotten harder over the years.
Tom Brakke, the research puzzle, @researchpuzzler:
The best answer is, of course, “I don’t know.” But my guess is that value investing is not dead and that it could come back from its slumber with a vengeance. The longer something works [doesn’t work], the more behavior is shaped to do it [not do it]. (See “The Skinner Box” from Demonetized.) Who knows what might cause a reversal, but it would likely be a powerful one.
Tobias Carlisle, The Acquirer’s Multiple, @greenbackd:
No. Value regularly underperforms in the short term. That’s why it continues to be unpopular and outperform over the long run. Value has underperformed recently because it tends to do poorly in periods of low interest rates and low inflation expectations. This happens because a lower discount rate makes the promise of growth stocks’ future cash flows more appealing than than the fact of near-term cash flows from value stocks. It always ends in tears. Folks gets sober, and value comes back into vogue.
Jeff Carter, Points and Figures, @pointsnfigures, podcast:
No. It is just harder because markets are more efficient. It is also harder because you need to have a vision for the future that is contrarian, and then take more risk to put the investment on. You will probably take heat as the market takes time to see your vision. The other thing that has happened is that since cost of capital is cheap, valuations are higher than normal. Risk preferences have been adjusted. Cheap capital combined with overbearing regulation and the cost to be public has caused many companies to go private, or stay private longer. The PE investor often finds the value companies instead of them being in the public domain.
Justin Castelli, All About Your Benjamins, @jus10castelli:
I doubt value investing is dead; it does seem like it’s getting close to a turning point–almost a capitulation moment for value. There have been numerous periods where value has underperformed, only to eventually recover and outperform. Historically, it’s been able to recoup the underperformance and eek out an advantage over growth…we’ll have to wait and see if this time is different and my take doesn’t age well.
Drew Dickson, Drew’s Views, @AlbertBridgeCap:
Value’s mom, Mrs. Market, is pregnant. She’s going to have the baby, and value investing will be born again. She doesn’t know her gestation period, but one of these days, months, or years, her water will break.
Value will emerge for the reasons it hasn’t worked for ten years, and not for the reasons we thought it worked before Fama-French. It didn’t work before because value stocks were riskier. They aren’t. It worked before because investors got overly excited by growthy, glamourous names which are fun to talk about to our friends. That created overpricing, and opportunity for value investors. For like 80 years.
But when an avalanche of cash is dropped from helicopters around the world, without inflation, and when interest rates effectively go to zero, creating limits to arbitrage, value investing, per se, just can’t work. Consequently, the long-duration, high-multiple, high-quality names got to go on a factor vacation.
The holiday may end tomorrow, and it may last for another ten years.
But it won’t last forever.
Blair duQuensnay, The Belle Curve, @blairhduquesnay:
For ten years, I have told clients that “over the long-term” value stocks tend to outperform growth stocks. It feels like value won’t perform until I give up on it. Ten years is a very long time. But I still believe in reversion to the mean. Perhaps some measures of value, such as price-to-book, will be eliminated and new measures will be used. It seems impossible that higher priced securities should continue to outpace lower priced securities in perpetuity.
Carolyn Gowen, The Financial Bodyguard, @carolyngowen:
I’m in the camp that believes the value premium still exists. It’s not unusual for certain factors to underperform, often for pretty long periods, but I have yet to see any convincing evidence as to why value stocks would not come back into favour at some point. Although value has underperformed for the last 10 years or so, that’s a blink of an eye in stock market terms. At this point, it’s just random behaviour/noise, not an indication that the value premium has disappeared.
Jake, EconomPic, @econompic:
Lawrence Hamtil, Fortune Financial, @lhamtil:
Without getting into the nuances of how ‘value’ is defined, I would argue that classic value investing isn’t so much dead as it is dormant. The usual catalysts for value – inflation and strong economic growth chief among them – have been missing for a decade. If you assume those two things will not return, then perhaps value investing is dead. I’m not prepared to say that, however.
Corey Hoffstein, Flirting with Models, @choffstein:
It is hard to say that value investing is dead when most active investors try to benefit from re-valuation in some capacity. Traditional value investors try to exploit overreaction and benefit from valuation reversion while growth investing benefits try to exploit underreaction and benefit from further valuation dispersion.
Both exploit the idea of value in some capacity, but the mean reversionary approach has not played well in the past cycle.
But the critique is really more specific. As measured, it is typically a sector-unconstrained, systematic value implementation relying on a price-to-book. This muddies the analysis, because the sector-unconstrained portfolios largely devolve into sector bets. Let’s not even mention the myriad of issues with price-to-book.
This problem is exacerbated when we look at indices that are constructed to bisect the market (e.g. the Russell 1000 Value). Value is not “not growth,” after all.
So, is value investing dead? It probably depends how you look at it. But even if it is, we likely won’t know with statistical certainty until long after we’re all out of this business.
Morgan Housel, Collaborative Fund, @morganhousel:
I doubt it’s dead. But the question is whether the timing of it coming back aligns with how you’re investing today and how long someone running a value fund can remain in business. Let’s say — and I’m making this up — value investing isn’t dead but the discount rate stays low for the next 15-20 years. That is indistinguishable from “dead” for the majority of current value investors.
Phil Huber, bps and pieces, @bpsandpieces:
I don’t think so. While this is certainly an historical rough patch for value investing, it is not unprecedented. There have been tough times for value before and there will be tough times again in the future. As Corey Hoffstein would say, “No pain, no premium.”
Value works because, at extremes, markets tend to overreact. Investors get too excited over glamour stocks and too despondent about cheap stocks. Human nature is pretty sticky over time.
If anything, this past decade has been a helpful reminder that no factor is guaranteed even over long stretches of time and that these historical premiums have been earned, not handed out.
Peter Lazaroff, Peter Lazaroff, @peterlazaroff:
Because markets are complex adaptive systems, definitions and trading rules associated with value investing will evolve over time—if they haven’t already—which makes the question a little trickier. I’d like to think value investing will work again, but I’m not entirely sure what would it take to change my mind.
Brian Lund, The Lund Loop, @bclund:
Yes, dead. Though nobody knew it at the time, the first tech IPOs of the dotcom era were an early harbinger of doom for traditional value investing. However, entrenched dogma dies hard on Wall Street, which is why this realization is only starting to hit now. Value investing will have a resurgence once intrinsic valuation models are redefined to better measure intangibles like brand, IP, competitive advantage – even social cred – but it won’t look anything like it does today.
Nick Maggiulli, Of Dollars and Data, @ofdollarsanddata:
Even if value investing were dead, it would be decades before we could know with high statistical certainty. Based on some of the research I have seen coming out of OSAM, I would argue that value may not be dead depending on how you define it. More time/research is needed.
David Merkel, The Aleph Blog, @alephblog:
That said, types of value investing can go out of favor. Some of that may have happened because quantitative value investing got overdone, leading to a variety of risk-premia common to value investing getting too small. Also, two other things have played havoc with traditional value investing. A) interest rates are too low, and thus every marginal idea can get financing. B) some large companies have found ways to reinvest free cash flow at above average rates of return for a long time.
Traditional value investing assumes that capital is scarce and good organic investment ideas are scarce. During brief periods of time where that isn’t true, traditional value investing will underperform. We have had that in spades for the last ten years, and as such, my performance vs. the S&P 500 has stunk.
That brings up the last point, behavioral aspects: I was at a Baltimore CFA meeting within the last three months, and the speaker asked: “How many of you are value investors?” I stuck my hand straight up, and two others did at half-mast. The speaker said, “Oooh, three! That’s the most I’ve had admit that in a while.” Lots of value investors have given up.
So, there are few practitioners left on the field, and value premia are now fat amid general overvaluation of the market. Is value investing dead? Seems so. Long live value investing!
Andrew Miller, Miller Financial, @millerak42:
No, value investing isn’t dead. The issue is twofold – most value portfolios use P/B as the value metric and P/B value never had (may never have) a premium in large cap stocks (see original Fama & French paper). Value when measured other ways (i.e., P/E, EV/EBIT, etc.) hasn’t had nearly as bad of a run (see a blog post where I got into more depth https://alphaarchitect.com/2019/06/25/large-cap-price-to-book-investing-what-is-dead-may-never-die/) 2) S&P 500 Growth index isn’t the opposite of value (i.e., not cheap stocks) as its actually a multi-factor momentum index as it uses 3 metrics to create the index (3 year earnings growth, 3 year sales growth and 12 month momentum). As the S&P 500 Growth index isn’t the opposite of value then comparing performance to this index distorts if value is actually working or not!
Jeffrey Miller, A Dash of Insight, @dashofinsight:
The definition of value investing ranges widely. Some of the deep value investors want low ratios to book with stocks barely off of historic lows. Let’s be more flexible. I look for stocks that have a reasonable PEG ratio without excessive debt. Some companies (home builders, cable) have large collateralized debt that distorts the cash flow power. Others have levered up to finance growth – which might or might not work out.
These criteria have succeeded for decades, despite occasional fads.
Roger Nusbaum, ETF Maven, @randomroger:
As an RIA I don’t care whether value investing is dead or not. What is more important is maintaining a diversified portfolio that gives clients the opportunity for upcapture and that hopefully smooths out the ride a little when the market rolls over. If this resonates with you then you likely maintain positions in some names that are value and also growth. I’m not sure it is productive for an RIA to try to game the style trade.
Brian Portnoy, Shaping Wealth, @brianportnoy:
No. Buying a dollar for 70 cents will continue to be a good idea.
Robin Powell, The Evidence-Based Investor and Adviser 2.0, @robinjpowell:
I’m not a huge factor enthusiast. Just because something has worked in the past, that doesn’t mean it’ll do so again. That said, it’s not unusual to have to wait for many years for a premium to show up; and when they do, they often present themselves in a very short burst. I would say it’s probably worth hanging in there, but I wouldn’t hold your breath.
Cullen Roche, Pragmatic Capitalism, @cullenroche:
I have never liked the idea of “value investing” as a data traceable “factor”. That is, we are all value investors in the sense that we are all looking to buy assets that we can sell at a higher price in the future. Whether you can use historical data to trace when something is undervalued or not is suspect in my view. It seems like sometimes Wall Street finds these datasets, assigns causation where there is only correlation and wraps it into a neat narrative to sell for high fees. But to the question – NO! Value investing is definitely not dead. But the idea that you can predict something that is currently undervalued using academic concepts like price to book or PE ratios might very well be dying because it was never alive to begin with.
Robert Seawright, Above the Market, @rpseawright:
No. If anything, it’s a buying opportunity but, of course, there is no predicting the market (there are too many variables).
Charles Sizemore, Charles Sizemore, @charlessizemore:
Value investing as Benjamin Graham practiced it has been dead for a long time. Abundant data and cheap computing power have made all of those hidden gems a lot easier to find. That said, the basic premise behind value investing is still alive and well. The market is efficient in the sense that information is distributed almost instantaneously. But efficient doesn’t mean rational. Investors still push the valuations of trendy stocks unreasonably high and the valuations of out-of-favor stocks unreasonably low. The next bear market — and yes, there will be another one — will see value investing return with a vengeance. Value investing was derided back in 1998-2000 just as it is today. And once the tech bubble burst, value investing went on to beat the market for nearly a decade.
Thanks to all the bloggers for their time and effort. Stay tuned for a new Blogger Wisdom question tomorrow.