E EC What If Value Investing Is A Little Bit Dead?

I am not sure that it is, but I would like to explore some of the arguments that it may be. I have come across enough articles over the last year or so to suggest it could be broken, or even dead. If it is does that just mean as value investors we may need to tweak our approach slightly?

On the one hand, you don’t want to abandon your investing approach all of a sudden. Then again you don’t want to have your head in the sand and not be open to slight tweaks.

Now let’s get one thing out of the way before I delve into this post. I realize value and growth investing may be “joined at the hip” as many would say. For simplicity now let’s just think of value investing more about some simple metrics such as low price to book or price to earnings ratios. Debating the differences in styles is a whole other topic!

This topic came to mind as I recently read an article discussing the underperformance of value investing strategies. It was from “The Economist” so one thing that came to mind is the theory that major news publications may emphasize market trends at key turning points.

I also thought that plenty of the points made about value investing having a rough trot could have been made in exactly the same way in early 2000. I re-read the article asking myself at the same time could this exact piece have appeared just before the dot com bust?

Now, this article is far from saying value investing has stopped working. It is fair to say it reflects that it is out of fashion. I don’t think the article discusses anything different from what I tended to read in 1999 / early 2000.

Why am I using this date as a reference point? Well after early 2000 the dot com bubble burst and for the next decade so-called value investing trounced the returns of growth investing.

Another article I came across this year I thought was an excellent read because it came from an investor trying to avoid confirmation bias. That is a value investor trying to debate the case against value stocks.

I still wonder whether similar arguments here were also made in the dot com bubble. Although I may think the arguments may be similar, I think the author makes some very good points though. In particular, as to why the arguments could have become more compelling now.

Should we be asking is it different this time? Maybe value investing won’t rebound from its slump like it did after the tech boom ended?

The case against value stocks

I shall quickly note the 5 headings in the post above on why value investing may not work so well going forward. Were the same arguments around in 1999, and have these 5 key arguments become more compelling now?

If we subscribe to the theories made, are there some tweaks that value investors can make to put the odds more in their favor?

[1] The World is Different

The argument here is that central banks are now interfering in an unprecedented way. This is a game changer in encouraging speculation so who knows when value may come back into fashion.

My thoughts - There is no doubt the level of central bank intervention is far more apparent than in 1999. Having said that though I recall similar arguments being made back then. The “Greenspan put” was a reason at the time why you should shun value investing. There were no shortage of critics arguing the Fed kept monetary policy too easy after certain events. These included the ’87 crash, the Asian financial crisis, LTCM crisis, and Y2K threat. This was supposedly a reason that speculation would continue and favor growth investing.

How can value investors respond? – I see the best response here is at the margin to not to be too cute in waiting for the ultimate dirt cheap level to enter in a stock you like. In 2009 I remember many compelling arguments why the market had much further to fall. It centered around the chart of historic CAPE ratios in the US.

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Moon Kil Woong 2 years ago Contributor's comment

Value investing is not dead, but one must take growth prospects into mind. Likewise, quite the contrary, many old value stocks are so popular their prices no longer sport "value" in their price. Thus the argument is better stated, now that value investing has become mainstream is there any real hidden pockets of "value" left? There are, but they are increasingly hard to find and usually revolve around undervalued growth more than undiscovered value.

Remember buffet had this problem before finding good value chasing down people who 's significant others died with a business to rip them off. That's why he got into insurance in the first place. Value investing can be hard. It is getting very hard again because too many people know how to do the basics.

Steve Green 2 years ago Author's comment

Thanks for the thoughtful reply and I agree.

What I would add is I think trying to find that undervalued growth story is only going to get harder going forward. I say that because it seems to me Buffett’s style tilt over the last few decades is what everyone wants to copy cat nowadays. That is buying a wonderful company at a fair price. That usually involves extrapolating some solid growth numbers over the medium to longer term. I typically see that as the marketing angle for most funds management firms. Rarely now do I see them marketing their strategy around say buying “cigar butts”.

The idea that you can find a good company that will grow earnings at a greater rate for 5-10 years than the market thinks seems to me to be an ultra competitive area. Hence multiple expansion and the risk of errors if you aren’t quite up to the talent of Buffett and those that are trying to emulate his more recent style.

That makes sense I think as this is what sells well if your are trying to start up a fund and manage hundreds of millions.

Many individual investors don’t have that problem so perhaps shouldn’t dismiss looking for buying average companies that are dirt cheap. They have the chance liquidity wise to sell them when necessary and move onto the next opportunity as they see fit. That is trickier for Buffett now of course as he manages a tad bit more money than say in the 50s / 60s! I see this area as far less fashionable right now and possibly offers the individual investor greater potential.

It depends a lot on your skill set though. Many are far better than me at identifying the future growth trends and may well do better with a more “growth” style. But as you point out be sure to find the value behind the investment proposition.

Philip Brown 2 years ago Member's comment

Good thoughts.

Leslie Miriam 2 years ago Member's comment

Great read.