During his recent interview on the Excess Returns Podcast, Wes Gray was asked about his thoughts on value investing going forward. He discussed his views on a long only value strategy versus a long short value strategy. Here’s an excerpt from the interview:
A few things I would say is the one thing is when people say value has gotten destroyed it’s always a relative statement to expensive growthy type things and that’s definitely a factual statement.
On a relative basis, especially US value, obviously US growth has crushed it and US value has relatively not crushed it. But when you kind of step away from that lens value as a long only strategy it’s still been making a lot of money.
It’s just that the most expensive kind of tech laden securities, like the quote unquote growth stocks, have just whooped it on so hard right.
It’s not that being a value investor’s been a bad thing, at least in a US-based sense, you’ve still made money, these firms have grown etc. It’s just that your return relative stunk and what’s interesting about that is when you look at like an argument like what Asness made recently it tells you one story.
He says look at the long short spread is insane right now and that’s crazy and if you believe in any form of mean reversion you might want to bet on that. I mean long-short value right and that’s a reasonable argument.
But most people don’t invest in long short value they invest in long only value. Well guess what long only value ain’t that cheap, it’s actually had PE inflation over the last 10 years arguably right.
Because the overall stock market has gotten so expensive and drifted down in… I always think in yield terms. I’ll flip the PE to make it less confusing but it’s drifted up in a valuation sense.
So although even the cheapest stocks have also drifted up. So even dirt-ball value securities have enjoyed a valuation bump right and so if you look at on an absolute basis relative to time value stocks are kind of mid-range cheap if you’re a long only value person.
Do I believe that they’ll relatively outperform the rest of the market because the overall spread is rich? Sure! But that doesn’t tell you anything about the absolute performance right.
It’s just going forward, because valuations are just overall so high, I would expect that value as a long only strategy, how most people implement it, will be relatively good but overall shitty right!
If you’re happy with that, that’s cool, but it’s probably just something to highlight because there’s been a lot of these crazy debates on what Asness says versus what other people say, and Asness obviously speaking to that very specific long short bet and I would agree with them.
That one’s probably pretty compelling just overall because now you don’t have to worry about the beta component of it.
You can watch the entire interview here:
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