Is The Slowdown In Mean Reversion The Reason That Value Investing Has Lost It’s Edge?

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Late last year Baruch Lev from the New York University and Anup Srivastava from the University of Calgary wrote a paper titled – Explaining the Recent Failure of Value Investing, which provides their explanations on why value investing has lost it’s edge in the past twelve years. One of the main reasons in their thesis is a slowdown in mean reversion. Here’s an excerpt from the paper:

It is widely believed that the long-standing and highly popular value investing strategy—investing in low-valued stocks and selling short high-valued equities—lost its edge in the past 10-12 years.

The reasons for this putative failure of value investing elude investors and academics, making it a challenge to assess the likelihood of the return of value investing to its days of glory. Based on extensive data analysis we show that value investing has generally been unprofitable for almost 30 years, barring a brief resurrection following the dotcom bust.

We identify two major reasons for the failure of value investing: (1) accounting deficiencies causing systematic misidentification of value, and particularly of glamour (growth) stocks, and (2) fundamental economic developments which slowed down significantly the reshuffling of value and glamour stocks (mean reversion) which drove the erstwhile gains from the value strategy.

We end up by identifying the type of companies (stocks) that may still generate gains from value investing.

You can read the entire paper here: Explaining the Recent Failure of Value Investing.

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