Value Investing: Requiem, Rebirth or Reincarnation?

Abstract

For much of the last century, value investors considered themselves to be the winners in the investment world, a result they attributed to their patience, maturity and good sense. That view, at least on the surface, was backed up by evidence that “value” stocks, defined as stocks that trade at low multiples of earnings and book value, earned higher returns than “growth” stocks, defined loosely as companies that trade at high multiples of earnings or book value. It was reinforced by the mythology of great value investors, with Warren Buffett and Charlie Munger taking center stage, as deep thinkers, with profound insights on how markets work. In the last two decades, value investing lost its edge, and a debate has revolved around whether this is a temporary phase, and the result of an unusual macro environment, or a reflection of a permanent change in economies and markets. In this paper, we argue that value investing, at least as practiced today, has become rigid and ritualistic, and that while some of its failures can be attributed to external factors, many can be traced back to practices and rules of thumb that have outlived their usefulness. We argue that if value investing is to be successful in the future, it needs to develop a more dynamic view of value and a greater willingness to live with and invest in the face of uncertainty.