Traditional value investing is dead. It is unlikely that value investors will ever see the kind of returns achieved by value investors in the middle of the last century. That’s the conclusion of a new study compiled by researchers at NYU’s Stern School of Business and at Calgary’s Hasakayne School of Business.
The researchers, Baruch Lev and Anup Srivastava, suggest that value investing has been a much worse strategy than many market participants truly appreciate.
They also say that it has been on a much longer losing streak than many participants realize.
Since the Financial Crisis, value stocks have underperformed other styles of investing quite substantially. Growth and momentum investing has achieved the best returns as investors have piled into the most exciting stocks.
Value stocks, on the other hand, have been largely ignored. Since the beginning of 2009, growth has outperformed value by 141% as measured by the iShares Russell 2000 Value ETF and iShares Russell 2000 Growth ETF. Over the past five years, the performance gap is even starker. Growth has more than doubled the performance of value over this time frame.
Yet, going back to 2000, which is as far as the figures will allow, value has outperformed growth by around 100%. Once again, I am using the iShares Russell 2000 Value ETF and iShares Russell 2000 Growth ETF as proxies to measure performance.
However, Lev and Srivastava assert that this is not the case. “Despite the headlines about the recent demise of this strategy, it has been an inconsistent performer for almost 30 years now,” the authors wrote in their Aug. 28 paper, “Explaining the Demise of Value Investing.”
The two researchers gave two reasons they believe that value has been an unprofitable strategy to follow for the past three decades. These reasons are:
“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 which drove the erstwhile gains from the value strategy.”
Lev and Srivastava believe that many young investors have been brainwashed by the performance of value strategies in the mid- and early 1900s.
The excellent performance of the strategy “looms large” in the minds of “relatively young investors,” making it hard to appreciate the demise of value since 2007, they wrote. “The value strategy had already lost its potency in the late 1980s, and yielded negative returns in the 1990s.”
The researchers concluded that accounting changes are the primary reason value investing has lost its potency. Specifically, they suggested that the expensing of intangible assets had a significant impact on book values from the late 1980s.
“This book value mismeasurement was a major contributor to the demise of value investing which started in the late 1980s,” Lev and Srivastava concluded. More recently, the sudden “contraction of bank lending” has had an impact on banks stocks as well as an “indirect effect on low valuation firms which rely on bank lending to finance investment in innovation and growth.”
Meanwhile, “glamor” companies in high-growth sectors have enjoyed easy access to capital and rising profitability.
This paper offers interesting insights into value investing and how the strategy has changed over the past few decades. However, I would argue that because all investing is value investing, it misses the point.
Most investors buy stocks because they believe the stocks are trading at a discount to intrinsic value, and intrinsic value is different from book value. I agree with the authors that the construction of book value has changed over the past few decades, thanks to accounting shenanigans, but this is something that should be in reflected in intrinsic value calculations. It is no longer acceptable to rely on published book value in value calculations.
Traditional book value might be dead, but the idea of buying a company at a discount to intrinsic value certainly isn’t.
Disclosure: The author owns no share mentioned.
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This article first appeared on GuruFocus.