There’s been a lot of chatter in recent years about the underperformance of value vs growth. This has led some people to declare that value is dead. But is it? Tadas Viskanta recently asked this question of some influential financial thinkers (and also me). Here’s a link to their answers. And here’s what I said:
”I have never liked the idea of “value investing” as a data traceable “factor”. That is, we are all value investors in the sense that we are all looking to buy assets that we can sell at a higher price in the future. Whether you can use historical data to trace when something is undervalued or not is suspect in my view.
It seems like sometimes Wall Street finds these datasets, assigns causation where there is only correlation and wraps it into a neat narrative to sell for high fees. But to the question – NO! Value investing is definitely not dead.
But the idea that you can predict something that is currently undervalued using academic concepts like price to book or PE ratios might very well be dying because it was never alive to begin with.”
Make no mistake. I am very much a value investor in the sense that I always like to try to buy assets that will appreciate in value. In fact, the whole essence of Countercyclical Indexing is to try to be rebalancing your portfolio so that you’re buying low and selling high. It is very much a value based strategy. You could even say that it relies on a form of the value factor, however, with one important difference – I don’t believe that the asset allocation of our savings should target alpha, or market beating returns. That is, after all, the whole purpose of factor investing.
In my view, we should use factors so that they create returns that generate better behavior and thereby result in greater performance than a counterfactual portfolio. Factors, such as a price to book ratio, used in solitude, can actually increase behavioral risk rather than reduce it. And that is why some traditional value factors are falling out of favor.