Here’s a recent article at Forbes which discusses how even though value investing has had an impressive long term record, has the strategy finally stopped working? Here’s an excerpt from the article:
Historically, in the U.S. buying cheaper stocks helped improve performance. Over the past decade or so it generally hasn’t. Yes, there have been some bargains out there and the past three months have been reasonable for value. Still, in aggregate over many years, value hasn’t delivered on his historical return prospects. What’s going on?
It’s important to dig in here. If value, one of the more tried and true investment strategies, is indeed dead, then, it makes sense to abandon it. However, if we’re seeing a situation like the run-up to the dot com bubble in 2000, when value did poorly only to come back with real force, then maybe we should potentially be backing up the truck on value stocks in preparation for a future period of outperformance.
Value’s impressive track record
First off it’s worth remembering that the evidence for value is about as good as it gets in the factor world. Data such as Fama and French’s historic studies have found value, based on metrics such as price-to-book, outperforming the market by about 2% a year over history. Of course, this is a bit like driving looking in the rear view mirror. Still, few factors have help up over time and across geographies in the way that value has. For example, Clifford Asness find value (and also momentum) to be two of the more pervasive factors across all of investing. Still, a decade run of weak value performance is quite possible, just as we’re seeing now.
What now?
So we’re currently in a period where value has lagged the market for basically all of this notably long bull-market, should we give up on it, or are we poised for a rebound? It seems unlikely that we should give up on value. Or at least not yet. It still has a good long-term track record, near-term history is unlikely to change that.
As an aside, Corey Hoffstein, has an interesting deep dive on this topic. Basically, it would take decades under typical market environments for us to firmly reject that value investing has stopped working. So we shouldn’t reveal in the data too much, value investing is perhaps an article of faith more than we think. Though perhaps the challenge in negating value investing, also points us to the strength of the data behind it.
However, this isn’t just about data-mining. There are various good reasons value investing may work beyond statistics.
As the research referenced above illustrates value has a robust track record over both time and geographies. More than that, we have credible reasons why it works. It’s also pretty easy to implement.
Ease of implementation could prove the biggest problem for value strategies. In the past so-called expert stock-pickers were needed to create a value strategy. Even quality data on valuation was harder to access. Now you can get a credible value strategy via an Exchange Traded Fund (ETF) for a few basis points a year and the associated valuation data is essentially free. Commission are often free now too. The barriers have come down. Perhaps that means value will earn less of a premium going forward. Still that’s a puzzle, if value gets easier and more popular, then in theory maybe returns to the strategy should increase, at least temporarily as it becomes a crowded trade before a lull in performance. It is not clear that happened. It seems like value investing is becoming less popular today, not more. Even if it’s easier to implement.
Still we are having a discussion about the death of value. The last time this happened the discussion was misguided. As Chris Meredith points out value has underperformed for 15 year before in the last century, only to return to form. This time may not be different. Still, that insight is not totally encouraging. We may have a few more years to wait for value to come back.
Value investing is one of the more robust factors in the market, we have multiple explanations for it and robust long-term track records across both time and asset classes. It seems unlikely that value has stopped working. However, as with all factors patience may be required. One of the very reason factors may work is precisely because we have periods such as these, when factors such as value unpredictably and frustratingly lag the market. This is one more reason to consider a multi-factor strategy rather than bet on value, or anything else, in isolation.
You can read the original article here: Forbes, Has Value Investing Stopped Working?
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