Five Reasons Why Value Investing May Never Regain Its Appeal

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Here’s an excerpt from an article at The Globe and Mail which discusses five reasons why value investing may never regain its appeal:

There has been a lot of talk about the death of value investing.

The strategy, embraced by Benjamin Graham and Warren Buffett and many followers, has beaten the market over decades going back to the 1930s, but it’s hard to ignore how badly it has fallen behind in this recent 10-year period, eclipsed by the high-growth technology sector.

Still, value investors persist. They undoubtedly find support from like-minded investors. It’s human nature to have a set of core beliefs, flock to others who also believe them and to embrace information that supports those beliefs.

For investors, though, there’s a danger of succumbing to confirmation bias. It’s important to be able to step back and judge an investment strategy objectively, and see the other side of the argument. Here are five arguments why the value strategy might not work as well in the future as it has in the past.

1. Value Is A Bet Against Technology

Unconstrained value strategies tend to gravitate to certain sectors over others. This can vary, but most strategies tend to underweight technology stocks. A sector-neutral approach could reduce some of this risk, but for unconstrained value models, this is a drag on performance.

Over the past decade, underplaying tech stocks has been costly. Value strategies have emphasized sectors that have done relatively poorly, such as financials. Technology stocks, meanwhile, have led the market and continue to do so.

Of course, this can work both ways. Value investors in 2000 were probably happy they were underweight technology stocks when the dust settled on the dot-com bust. But if a new normal has been created and more people believe tech stocks will drive the market going forward, that’s a bad sign for value.

2. Big Data Are Leading To More Value Traps

The more data that are available and the faster they can be processed, the more efficient the market should become. That could mean that more cheap stocks are cheap for a reason. It could also mean that using historical fundamental information to predict the future will be harder.

Let’s say a value investor picks Walmart Inc. shares because they trade at a discount to the market based on several traditional fundamental measures. But other investors have different data that could explain why Walmart shares are cheap and destined to remain that way. They might have access to satellite images of Walmart parking lots demonstrating low customer flow. Or they might have credit-card data that show sales are declining.

For the traditional value investor, information gaps could be masking value traps.

You can read the remainder of the article at The Globe and Mail here: Five reasons why value investing may never regain its appeal.

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