Will Value Investing Return to Prominence?

Before I start, let me mention what I thought about returning to blogging. When I briefly wrote for The Balance, I kept coming up with ideas that I could not easily post there, and so I started keeping a list for future blog posts. I also found that many of the articles I was being asked to update needed serious work, to the degree that it was the equivalent f writing a whole new article. In the end, the level and type of work there just did not fit me. I didn’t write enough for their requirements, so they fired me.

I was fine with that. I was not impressed with them, and they were not impressed with me. I am thankful that they gave me the opportunity; we learn more when we fail than when we succeed.

Now, I have roughly 40 ideas to write about. That doesn’t mean I couldn’t use some more of them. My email is still listed on the contact page. Feel free to drop me a note. My rule is that I read everything that comes to me, but I only have time to give replies to less than half of what I receive. If a question is of more general interest, I often turn it into a blog post.

Anyway, I’m glad to be back writing. I missed it, though I needed some rest in order to make me want it again. On to tonight’s post.

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In mid-summer, Tadas Viskanta of Abnormal Returns asked bloggers to opine on a variety of questions. The first on was on Value Investing. Here was the question:

Is value investing dead? Seriously, it’s been quite some time since it had any meaningful outperformance. Josh made the case that maybe the world has fundamentally changed. Or is this just the kind of talk you hear at a turning point?

https://abnormalreturns.com/2019/07/08/blogger-wisdom-the-death-of-value/

Here was my unredacted answer:

Value investing can’t die.  Saying that value investing can die is like saying that ordinary principles of running a good business can change, and that’s ridiculous.
 
That said, types of value investing can go out of favor.  Some of that may have happened because quantitative value investing got overdone, leading to a variety of risk-premia common to value investing getting too small.  Also, two other things have played havoc with traditional value investing.  A) interest rates are too low, and thus every marginal idea can get financing. B) some large companies have found ways to reinvest free cash flow at above average rates of return for a long time.
 
Traditional value investing assumes that capital is scarce and good organic investment ideas are scarce.  During brief periods of time where that isn’t true, traditional value investing will underperform.  We have had that in spades for the last ten years, and as such, my performance vs. the S&P 500 has stunk.
 
That brings up the last point, behavioral aspects: I was at a Baltimore CFA meeting within the last three months, and the speaker asked: “How many of you are value investors?”  I stuck my hand straight up, and two others did at half-mast.  The speaker said, “Oooh, three! That’s the most I’ve had admit that in a while.”  Lots of value investors have given up.
 
So, there are few practitioners left on the field, and value premia are now fat amid general overvaluation of the market. Is value investing dead?  Seems so. Long live value investing!

Tadas left out the first paragraph of my answer. It reminded me of the brief period of time where I wrote for Minyanville. The first and only piece I shared with them was Buy-and-Hold Can’t Die. Minyanville renamed it to: Four Reasons Buy-and-Hold Investing Is Not Dead.

I really wanted to make the point in the title that buy-and-hold investing is a fundamental strategy that anyone could easily pursue, and as such, it can’t die. Performance comparisons are usually done to an index that is bought and held.

I wanted to say the same thing about value investing. Yes, it is having its worst period of underperformance EVER. But buying assets that are temporarily out of favor is a simple and fundamental strategy. It can’t go away permanently.

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So, what of the current market? I value looking a little better? Maybe. Who can tell?

There’s been a little bounce, which has gotten more ink than it deserves. Even a year of outperformance would not be enough — 2013 came and went — a blip in a growth wave. There are strong businesses throwing off significant cash flow yields, and are growing their earnings as well. Many face limited competition. That’s what I have bought and continue to buy.

Eventually the growth in underlying value will pay off. Eventually the high-fliers will hit the inflection point of the S-curve of their growth as opportunities to deploy capital for high returns dries up. But when those will happen is uncertain. I keep following my rules because they make sense, and the time to switch your strategy is when it is going well, but the improvement is flatlining. Changing when your strategy is doing badly is a recipe for getting whipsawed.

And so I soldier on… waiting for value investing to return to prominence. It will happen — just not on schedule.