8 ms·

Value Is Dead, Long Live Value

103 points by drocer88 7y ago

pronoiac 7y ago
Wow, I'm not awake yet. I read it took me a solid minute to get that it's about value, not Valve Software.
hogFeast 7y ago
You can't go back and just say "Oh, this period and that period". That is hindsight bias. It is psychologically comforting but provides no guide to the future. It is particularly foolhardy to place the ending point at 1941. If you didn't know, the period directly after this saw high equity returns because the savings of almost everyone was funnelled by the govt into govt bonds. If you look at how companies were being priced, it is clear why value outperformed.You had profitable companies with $10 of cash trading for $5. You have companies buying back stock at $10 whilst earning $10. Is this comparable to today? It is kind of surprising that someone taking the cycle view of history (this is the "hardcore" historian approach) appears to have not looked at any contemporaneous evidence. A theory has been created in hindsight, no evidence from the period has been produced. This is history at its worst, and investment research at its worst. This post should be called: all the things you don't learn in the CFA program.
- jdsully 7y ago
  Ford is hovering around a 1.0 price/book ratio and has dropped below that as early as 2018. Value is still out there. Then as now there are many reasons why people won’t pay more at the present time for these stocks.
  - Hypx 7y ago
    Yes, many value stocks are near the price floor, and have almost no room left to drop further. Of course, some of these companies are that cheap because they are basically the walking dead of companies (e.g. Gamestop). But for the companies that do have a future, now is a good time to invest in them.
  - hogFeast 7y ago
    If you are measuring value with price/book, you have no hope. The conceit of the "value factor" is wrong-headed: trying to measure value quantitatively is like trying to measure the aesthetic appeal of art quantitatively. It just makes no sense. Quant screens turn up the most uninvestable garbage. The only people who invest that way, haven't ever looked properly at the companies they are investing in (I use value quant screens for shorts now, the flow of money into quant means they are usually comically overpriced). More to the point though: value is only determined in hindsight. A company trading on 30x earnings can be cheap. The only "value factor" that is closely correlated to returns is 5yr forward earnings. If you think a computer can predict earnings five years forward...great, but they can't. Also, if you aren't managing $10bn+ you shouldn't be looking at Ford. Don't make it difficult.
    - Hypx 7y ago
      > Quant screens turn up the most uninvestable garbage. The markets right now are filled with uninvestable garbage. It's not a value-only thing. Any viable investment strategy is either a broad based passive investment, or one where you'll have to pick your stocks carefully.
    - jdsully 7y ago
      Value investing as Graham and Dodd described it is a very specific strategy. Future earnings are hard to predict or calculate - but factories, land, and cash exist and have real value that is computable. Right now the market is saying one of two things with a 1.0 price/book: 1) Ford's ongoing business is currently worth $0 OR 2) Ford's capital assets are currently worth $0 It's much easier to make a judgement call on those predicates which are based in the present rather than predict the future.
  - robocat 7y ago
    I think "Value" is virtually meaningless in modern businesses. In the past some businesses perhaps depended strongly on capital (e.g. machinery plus cash). Most modern businesses are simply not dependent on the value of hard capital goods, they depend on the value of their services. The book value of large businesses often contains so many instruments or contracts marked to market, that the book value is largely dependent on market value in disguise. Examples: TSMC, ARM, a local restaurant, PWC, etc. Perhaps an exception is real estate companies?
    - kgwgk 7y ago
      If TSMC is Taiwan Semiconductor it doesn't seem a good example: they have in their balance sheet $35bn (more than half of total assets) classified as "property, plant and equipment" and their financial assets are just one tenth of that.
      - robocat 7y ago
        Book value. If you tried to sell the property, plant and equipment (without staff) then the market value would be a lot less. The plant is almost a sunken cost (e.g. 10nm plant for Intel is a sunken cost). The current market cap of TSMC is 210B - related to the value of its future expected earnings compared with other companies.
        kgwgk 7y ago
        Yes, book value. You said “The __book value__ of large businesses often contains so many instruments or contracts marked to market, that the __book value__ is largely dependent on market value in disguise.” I thought TSMC was supposed to be an example of that, but its assets are cash and old-fashioned capital equipment mostly. Even goodwill is minimal.
- UncleEntity 7y ago
  > It is particularly foolhardy to place the ending point at 1941. Seems a perfectly logical point since after that the gov't took control of the economy to fuel the war effort and dictated what was produced. Also, how may Axis citizens saw high equity returns on their government bonds?
  - hogFeast 7y ago
    It isn't a "perfectly logical point" as I have explained. The study looks at technology, not war (as you are suggesting). It is probably the year in the whole of the century that, in hindsight, explains value returns best...is that coincidental choice? I am not sure what your point is about the Axis either...as with the US and the UK, most people had their savings inflated away. To be totally clear, and this isn't 100% related with the topic: that period is a terrible example because it is reproducible. The assumption with all these studies of long-term returns is that past returns are reproducible. They are not. If you were a normal citizen around 1941, you were forced to invest in govt bonds (banks were forced to buy govt bonds, if you had a deposit you owned govt bonds).
- justin66 7y ago
  > If you look at how companies were being priced, it is clear why value outperformed. You ought to write a paper. Eugene Fama and Kenneth French have always been pretty upfront about not understanding why value outperforms.
- sytelus 7y ago
  You buy stock so you can sell at some future date to convert it into cash. This means you must estimate future value of the stock. The value investing as it gets touted implies that you buy stock given its current value. This is incompatible to the goal of selling stock in future because current value may decline to any arbitrary value. Ford may sell at 1.0 price/book today but it is likely they may to load up on debt down the line OR the value of their assets has lower future value. So value investing doesn't mean great investing as much as several people wants us to believe. Every stock purchase is necessarily a speculation and there is no escape from that.
jandrewrogers 7y ago
This overlooks the longterm impact of a new type of company that has been greatly enabled by technology: predatory revenue omnivores. These are companies that have figured out how to identify large revenue flows outside their current business or sector and systematically capture that revenue successfully, over and over (Amazon is a good example). In the past, revenue growth was not sector-agnostic in this way because sector expertise created insurmountable advantages for incumbents such that revenue growth was more a function of sector growth and competition came from within that sector. Attempts to materially expand outside a company's native sector almost always ended in failure. Now it looks like a repeatable business model that a minority of companies have figured out. More and more, you see alien companies successfully colonizing established sectors and stripping them of their revenue. Few value companies are prepared to handle the scenario when these alien companies show up because historically it has never been a realistic threat. I've seen this play out across several industrial sectors over the last decade and almost without exception, companies retreat to niches that the predator hasn't turned its eyes to yet. That's a strategy for being eaten last. The threat is so far outside their experience that they struggle to see a path forward. If I was going to invest in "value" these days, I'd invest in the revenue predators. They are going to capture much of the best value revenue eventually but this will give them the appearance of "growth" companies in the short term due to the scale of organic revenue growth this business model creates for them.
- paulryanrogers 7y ago
  Who are these predators? Among FAANG I'd guess only the acquisition of YouTube has been a success, and only modest at best.
  - akkartik 7y ago
    I don't think GP is referring to acquisitions. Acquisitions signal failures of predation. Predation here = putting incumbents out of business. Quickly ramping up to competitiveness in a whole new sector. An extreme case of "software eating the world," basically.
  - tiredyam 7y ago
kgwgk 7y ago
Related: "VALUE INVESTING: BRUISED BY 1000 CUTS" https://www.gmo.com/americas/research-library/value-investing-bruised-by-1000-cuts/ https://www.gmo.com/americas/research-library/value-investin... Direct link to PDF: https://www.gmo.com/globalassets/articles/insights/asset-allocation/2019/rf_value-bruised-by-1000-cuts_5-19.pdf https://www.gmo.com/globalassets/articles/insights/asset-all...
anonu 7y ago
Very well written article from a reputable firm. Patrick O'Shag's podcast is pretty good too: http://investorfieldguide.com/podcast/ http://investorfieldguide.com/podcast/ > One should not underestimate the role of regulation in how the Age of Technology plays out. Yes. The US government needs to step in and enhance privacy and the right to be forgotten... following in the footsteps of our EU brothers.
whatshisface 7y ago
Why would anyone think that value investing could ever work? Everyone can easily see the value of a company, because that's a statement about the present, not the future. It's guaranteed to be already priced in when you buy. You will definitely not be the first person to show up after a quarterly is released.
- kgwgk 7y ago
  However it has worked quite well for most of the past century: https://i0.wp.com/thetechieinvestor.com/wp-content/uploads/2018/01/Value-Investing-Track-Record.png https://i0.wp.com/thetechieinvestor.com/wp-content/uploads/2...
- Danieru 7y ago
  Economists would argue that it is impossible to pickup a $20 from the ground. After all if it was truly a free $20 sitting on the ground then someone else must already picked it up. Thus any $20 sitting on the ground you see must instead be trap. Part of my growing up has been to realize that sometimes that person picking up the $20 can be yourself. That perfect competition is a theory, and that the world is in fact always far away from that theory. Businesses can survive despite large in-perfections. Trying to apply efficient market thesis to justify ignoring fundamentals while implicitly claiming growth is not efficiently priced is itself silly. To assume growth is being under priced during an era when all the hype and public attention goes to growth companies is silly. Boring companies with strong fundamentals and good prices are the vehicles which will preserve wealth and return it to shareholders year in year out. The silly pumps into silly growth companies is the exact behavior marking the end times of a boom cycle.
- tryptophan 7y ago
  Its a risk-based idea. These companies are valued lower (which everyone sees) because they are thought to be riskier. Theoretically, because less people invest in them because of this, it should result in higher returns for those who stick with the value companies due to the higher risk they are taking on.
  - kgwgk 7y ago
mruts 7y ago
There are two rational justification for the (seemingly) persistent value factor: 1. It’s just a risk premium. The efficient market hypothesis says that all risk adjusted returns are the same. i.e there is only one Sharpe ratio. Or put another way, there is no excess return without commensurate risk. Using this model, value out performs because of the increased riskiness of the investment. Reward for bearing risk is absolutely persistent so if this first reason is true, it should be persistent forever. 2. Behavioral bias. If this is true, people will wise up and the eventual equilibrium will price value fairly at some point. Either way, value shouldn’t be able to juice your Sharpe ratio forever. Either the first one is true and the Sharpe ratio is unaffected (just the mean returns, which don’t really matter unless you are unable to access leverage), or value is in fact not persistent, because no behavioral bias can ever be persistent, a priori. I’m not sure what the answer is, but value alone isn’t worth very much. AQR and other funds usually pair it with factors that have a negative correlation, such as momentum. This allows them to capture significant excess returns, compared to value alone.
- kgwgk 7y ago
  > no behavioral bias can ever be persistent, a priori Of course it can. Tripping twice over the same stone, etc. Casinos are full of people playing games with negative expected return after all. And if the stock market is like gambling, it’s mostly on the side of “glamour” (as opposed to “boring”) stocks.
  - mruts 7y ago
    Well, you would expect the markets to reward the people who didn't have these biases, and hurt the people who still had them. The people with the bias will get poorer and poorer, and the people without it will get richer and richer. Those who get poorer and poorer will increasingly have less influence on the world economy, and those getting richer and richer will have out-sized influence. Eventually, the pool of suckers will disappear and the market will move onto some other bias to stamp out. You can see this very thing happening in capital markets. I work as a quant and many very simple strategies like value, momentum, quality, etc used to work remarkably well, just 15-40 years ago. Nowadays, you need more sophisticated factors, or combine these simple factors together in unique and interesting ways. There might be a sucker born every minute, but the sucker will never accumulate enough capital for anyone to ever care about him.
RickJWagner 7y ago
Value has taken a beating for over a decade, and predictably there are pundits crawling out of the woodwork explaining how Warren Buffet's day is long past. I imagine after the next economic cycle Buffet will again be lauded as a genius.
- H8crilA 7y ago
  He's kind of a closet indexer these days: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=2003&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=BRK.A&allocation1_1=100&symbol2=SPY&allocation2_2=100&total1=100&total2=100&total3=0 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
- dade_ 7y ago
  Benjamin Graham was the genius...
im3w1l 7y ago
> As of June 30, 2019, the Russell 1000 Value has underperformed the Russell 1000 Growth by a cumulative -136%, This is some pretty fishy math right here
- H8crilA 7y ago
  It depends on whether you divide the larger by the smaller, or vice versa. Say X went from 100 to 50, while Y went from 100 to 100. It can be seen as 50% reduction in X's value or 100% underperformance vs Y. The 100% number is kind of more useful because it is the extra return on the decision to switch to Y back then.
H8crilA 7y ago
When it comes to value one thing that bugs me is the premium one has to pay for American equities. Like I get it, it's a good market, but it is consistently 30% to 100% more expensive across various metrics. American equities can't be this good. CAPE is a good case in point here: https://mebfaber.com/wp-content/uploads/2019/01/capeys.jpg https://mebfaber.com/wp-content/uploads/2019/01/capeys.jpg
SubiculumCode 7y ago
For someone that is not an investor, would someone please explain the difference between growth and value stocks? My initial guess is that value stocks are underpriced, while growth stocks are priced correctly for current value, but has significant growth potential How close is that?
- H8crilA 7y ago
  Value investing: you try to come up with an intrinsic valuation of a security and buy if market price is, say, 60% or lower of that valuation. Famous examples: Benjamin Graham, Warren Buffet, Michael Burry. Growth investing: buy whatever grows (earnings, revenue, even DAU are all flavors of growth investing). VC investing/startup investing is classic growth investing. PG on the topic: http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html Growth stocks are usually overpriced because of hype (looking through rose glasses), but can still be good, as the last 10 years shows.
  - H8crilA 7y ago
    Just to throw some data into the mix: the biggest difference is not between growth or value. It's between US and ex-US equities: https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&benchmark=VFINX&asset1=LargeCapValue&allocation1_1=100&asset2=LargeCapGrowth&allocation2_2=100&asset3=IntlDeveloped&allocation3_3=100&total1=100&total2=100&total3=100 https://www.portfoliovisualizer.com/backtest-asset-class-all...
- mruts 7y ago
  Yeah that's a pretty good guess. Growth generally means a company is expensive relative to it's earnings, profits, or book value. Ratios like P/E (price to earnings), and P/B (price to book) can be used to identify/classify a growth company. Higher these ratios, the higher the stocks exposure to "growth". A value company is the exact opposite, a stock with low ratios. As you might have suspected, value has been clobbered in the last 10 years, and a bunch of Chicago school economists are pissing their pants (Fama, French, etc). V
Ericson2314 7y ago
Maybe much of the US economy is pointless jobs and pointless economic activity, but the system is viscous enough that the inequilibrium isn't readily apparent.
karmakaze 7y ago
OT: Is FAANG now used to refer to FAAMA (MS, Alphabet)? I never understood why Netflix was in there with such a small comparative market cap.

103 points by drocer88 7y ago

Wow, I'm not awake yet. I read it took me a solid minute to get that it's about value, not Valve Software.

You can't go back and just say "Oh, this period and that period". That is hindsight bias. It is psychologically comforting but provides no guide to the future. It is particularly foolhardy to place the ending point at 1941. If you didn't know, the period directly after this saw high equity returns because the savings of almost everyone was funnelled by the govt into govt bonds. If you look at how companies were being priced, it is clear why value outperformed.You had profitable companies with $10 of cash trading for $5. You have companies buying back stock at $10 whilst earning $10. Is this comparable to today? It is kind of surprising that someone taking the cycle view of history (this is the "hardcore" historian approach) appears to have not looked at any contemporaneous evidence. A theory has been created in hindsight, no evidence from the period has been produced. This is history at its worst, and investment research at its worst. This post should be called: all the things you don't learn in the CFA program.

jdsully 7y ago
Ford is hovering around a 1.0 price/book ratio and has dropped below that as early as 2018. Value is still out there. Then as now there are many reasons why people won’t pay more at the present time for these stocks.
- Hypx 7y ago
  Yes, many value stocks are near the price floor, and have almost no room left to drop further. Of course, some of these companies are that cheap because they are basically the walking dead of companies (e.g. Gamestop). But for the companies that do have a future, now is a good time to invest in them.
- hogFeast 7y ago
  If you are measuring value with price/book, you have no hope. The conceit of the "value factor" is wrong-headed: trying to measure value quantitatively is like trying to measure the aesthetic appeal of art quantitatively. It just makes no sense. Quant screens turn up the most uninvestable garbage. The only people who invest that way, haven't ever looked properly at the companies they are investing in (I use value quant screens for shorts now, the flow of money into quant means they are usually comically overpriced). More to the point though: value is only determined in hindsight. A company trading on 30x earnings can be cheap. The only "value factor" that is closely correlated to returns is 5yr forward earnings. If you think a computer can predict earnings five years forward...great, but they can't. Also, if you aren't managing $10bn+ you shouldn't be looking at Ford. Don't make it difficult.
  - Hypx 7y ago
    > Quant screens turn up the most uninvestable garbage. The markets right now are filled with uninvestable garbage. It's not a value-only thing. Any viable investment strategy is either a broad based passive investment, or one where you'll have to pick your stocks carefully.
  - jdsully 7y ago
    Value investing as Graham and Dodd described it is a very specific strategy. Future earnings are hard to predict or calculate - but factories, land, and cash exist and have real value that is computable. Right now the market is saying one of two things with a 1.0 price/book: 1) Ford's ongoing business is currently worth $0 OR 2) Ford's capital assets are currently worth $0 It's much easier to make a judgement call on those predicates which are based in the present rather than predict the future.
- robocat 7y ago
  I think "Value" is virtually meaningless in modern businesses. In the past some businesses perhaps depended strongly on capital (e.g. machinery plus cash). Most modern businesses are simply not dependent on the value of hard capital goods, they depend on the value of their services. The book value of large businesses often contains so many instruments or contracts marked to market, that the book value is largely dependent on market value in disguise. Examples: TSMC, ARM, a local restaurant, PWC, etc. Perhaps an exception is real estate companies?
  - kgwgk 7y ago
    If TSMC is Taiwan Semiconductor it doesn't seem a good example: they have in their balance sheet $35bn (more than half of total assets) classified as "property, plant and equipment" and their financial assets are just one tenth of that.
    - robocat 7y ago
      Book value. If you tried to sell the property, plant and equipment (without staff) then the market value would be a lot less. The plant is almost a sunken cost (e.g. 10nm plant for Intel is a sunken cost). The current market cap of TSMC is 210B - related to the value of its future expected earnings compared with other companies.
      - kgwgk 7y ago
        Yes, book value. You said “The __book value__ of large businesses often contains so many instruments or contracts marked to market, that the __book value__ is largely dependent on market value in disguise.” I thought TSMC was supposed to be an example of that, but its assets are cash and old-fashioned capital equipment mostly. Even goodwill is minimal.
UncleEntity 7y ago
> It is particularly foolhardy to place the ending point at 1941. Seems a perfectly logical point since after that the gov't took control of the economy to fuel the war effort and dictated what was produced. Also, how may Axis citizens saw high equity returns on their government bonds?
- hogFeast 7y ago
  It isn't a "perfectly logical point" as I have explained. The study looks at technology, not war (as you are suggesting). It is probably the year in the whole of the century that, in hindsight, explains value returns best...is that coincidental choice? I am not sure what your point is about the Axis either...as with the US and the UK, most people had their savings inflated away. To be totally clear, and this isn't 100% related with the topic: that period is a terrible example because it is reproducible. The assumption with all these studies of long-term returns is that past returns are reproducible. They are not. If you were a normal citizen around 1941, you were forced to invest in govt bonds (banks were forced to buy govt bonds, if you had a deposit you owned govt bonds).
justin66 7y ago
> If you look at how companies were being priced, it is clear why value outperformed. You ought to write a paper. Eugene Fama and Kenneth French have always been pretty upfront about not understanding why value outperforms.
sytelus 7y ago
You buy stock so you can sell at some future date to convert it into cash. This means you must estimate future value of the stock. The value investing as it gets touted implies that you buy stock given its current value. This is incompatible to the goal of selling stock in future because current value may decline to any arbitrary value. Ford may sell at 1.0 price/book today but it is likely they may to load up on debt down the line OR the value of their assets has lower future value. So value investing doesn't mean great investing as much as several people wants us to believe. Every stock purchase is necessarily a speculation and there is no escape from that.

jandrewrogers 7y ago

This overlooks the longterm impact of a new type of company that has been greatly enabled by technology: predatory revenue omnivores. These are companies that have figured out how to identify large revenue flows outside their current business or sector and systematically capture that revenue successfully, over and over (Amazon is a good example). In the past, revenue growth was not sector-agnostic in this way because sector expertise created insurmountable advantages for incumbents such that revenue growth was more a function of sector growth and competition came from within that sector. Attempts to materially expand outside a company's native sector almost always ended in failure. Now it looks like a repeatable business model that a minority of companies have figured out. More and more, you see alien companies successfully colonizing established sectors and stripping them of their revenue. Few value companies are prepared to handle the scenario when these alien companies show up because historically it has never been a realistic threat. I've seen this play out across several industrial sectors over the last decade and almost without exception, companies retreat to niches that the predator hasn't turned its eyes to yet. That's a strategy for being eaten last. The threat is so far outside their experience that they struggle to see a path forward. If I was going to invest in "value" these days, I'd invest in the revenue predators. They are going to capture much of the best value revenue eventually but this will give them the appearance of "growth" companies in the short term due to the scale of organic revenue growth this business model creates for them.

paulryanrogers 7y ago
Who are these predators? Among FAANG I'd guess only the acquisition of YouTube has been a success, and only modest at best.
- akkartik 7y ago
  I don't think GP is referring to acquisitions. Acquisitions signal failures of predation. Predation here = putting incumbents out of business. Quickly ramping up to competitiveness in a whole new sector. An extreme case of "software eating the world," basically.
- tiredyam 7y ago

kgwgk 7y ago

Related: "VALUE INVESTING: BRUISED BY 1000 CUTS" https://www.gmo.com/americas/research-library/value-investing-bruised-by-1000-cuts/ https://www.gmo.com/americas/research-library/value-investin... Direct link to PDF: https://www.gmo.com/globalassets/articles/insights/asset-allocation/2019/rf_value-bruised-by-1000-cuts_5-19.pdf https://www.gmo.com/globalassets/articles/insights/asset-all...

anonu 7y ago

Very well written article from a reputable firm. Patrick O'Shag's podcast is pretty good too: http://investorfieldguide.com/podcast/ http://investorfieldguide.com/podcast/ > One should not underestimate the role of regulation in how the Age of Technology plays out. Yes. The US government needs to step in and enhance privacy and the right to be forgotten... following in the footsteps of our EU brothers.

whatshisface 7y ago

Why would anyone think that value investing could ever work? Everyone can easily see the value of a company, because that's a statement about the present, not the future. It's guaranteed to be already priced in when you buy. You will definitely not be the first person to show up after a quarterly is released.

kgwgk 7y ago
However it has worked quite well for most of the past century: https://i0.wp.com/thetechieinvestor.com/wp-content/uploads/2018/01/Value-Investing-Track-Record.png https://i0.wp.com/thetechieinvestor.com/wp-content/uploads/2...
Danieru 7y ago
Economists would argue that it is impossible to pickup a $20 from the ground. After all if it was truly a free $20 sitting on the ground then someone else must already picked it up. Thus any $20 sitting on the ground you see must instead be trap. Part of my growing up has been to realize that sometimes that person picking up the $20 can be yourself. That perfect competition is a theory, and that the world is in fact always far away from that theory. Businesses can survive despite large in-perfections. Trying to apply efficient market thesis to justify ignoring fundamentals while implicitly claiming growth is not efficiently priced is itself silly. To assume growth is being under priced during an era when all the hype and public attention goes to growth companies is silly. Boring companies with strong fundamentals and good prices are the vehicles which will preserve wealth and return it to shareholders year in year out. The silly pumps into silly growth companies is the exact behavior marking the end times of a boom cycle.
tryptophan 7y ago
Its a risk-based idea. These companies are valued lower (which everyone sees) because they are thought to be riskier. Theoretically, because less people invest in them because of this, it should result in higher returns for those who stick with the value companies due to the higher risk they are taking on.
- kgwgk 7y ago

mruts 7y ago

There are two rational justification for the (seemingly) persistent value factor: 1. It’s just a risk premium. The efficient market hypothesis says that all risk adjusted returns are the same. i.e there is only one Sharpe ratio. Or put another way, there is no excess return without commensurate risk. Using this model, value out performs because of the increased riskiness of the investment. Reward for bearing risk is absolutely persistent so if this first reason is true, it should be persistent forever. 2. Behavioral bias. If this is true, people will wise up and the eventual equilibrium will price value fairly at some point. Either way, value shouldn’t be able to juice your Sharpe ratio forever. Either the first one is true and the Sharpe ratio is unaffected (just the mean returns, which don’t really matter unless you are unable to access leverage), or value is in fact not persistent, because no behavioral bias can ever be persistent, a priori. I’m not sure what the answer is, but value alone isn’t worth very much. AQR and other funds usually pair it with factors that have a negative correlation, such as momentum. This allows them to capture significant excess returns, compared to value alone.

kgwgk 7y ago
> no behavioral bias can ever be persistent, a priori Of course it can. Tripping twice over the same stone, etc. Casinos are full of people playing games with negative expected return after all. And if the stock market is like gambling, it’s mostly on the side of “glamour” (as opposed to “boring”) stocks.
- mruts 7y ago
  Well, you would expect the markets to reward the people who didn't have these biases, and hurt the people who still had them. The people with the bias will get poorer and poorer, and the people without it will get richer and richer. Those who get poorer and poorer will increasingly have less influence on the world economy, and those getting richer and richer will have out-sized influence. Eventually, the pool of suckers will disappear and the market will move onto some other bias to stamp out. You can see this very thing happening in capital markets. I work as a quant and many very simple strategies like value, momentum, quality, etc used to work remarkably well, just 15-40 years ago. Nowadays, you need more sophisticated factors, or combine these simple factors together in unique and interesting ways. There might be a sucker born every minute, but the sucker will never accumulate enough capital for anyone to ever care about him.

RickJWagner 7y ago

Value has taken a beating for over a decade, and predictably there are pundits crawling out of the woodwork explaining how Warren Buffet's day is long past. I imagine after the next economic cycle Buffet will again be lauded as a genius.

H8crilA 7y ago
He's kind of a closet indexer these days: https://www.portfoliovisualizer.com/backtest-portfolio?s=y&timePeriod=4&startYear=2003&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&showYield=false&reinvestDividends=true&symbol1=BRK.A&allocation1_1=100&symbol2=SPY&allocation2_2=100&total1=100&total2=100&total3=0 https://www.portfoliovisualizer.com/backtest-portfolio?s=y&t...
dade_ 7y ago
Benjamin Graham was the genius...

im3w1l 7y ago

> As of June 30, 2019, the Russell 1000 Value has underperformed the Russell 1000 Growth by a cumulative -136%, This is some pretty fishy math right here

H8crilA 7y ago
It depends on whether you divide the larger by the smaller, or vice versa. Say X went from 100 to 50, while Y went from 100 to 100. It can be seen as 50% reduction in X's value or 100% underperformance vs Y. The 100% number is kind of more useful because it is the extra return on the decision to switch to Y back then.

H8crilA 7y ago

When it comes to value one thing that bugs me is the premium one has to pay for American equities. Like I get it, it's a good market, but it is consistently 30% to 100% more expensive across various metrics. American equities can't be this good. CAPE is a good case in point here: https://mebfaber.com/wp-content/uploads/2019/01/capeys.jpg https://mebfaber.com/wp-content/uploads/2019/01/capeys.jpg

SubiculumCode 7y ago

For someone that is not an investor, would someone please explain the difference between growth and value stocks? My initial guess is that value stocks are underpriced, while growth stocks are priced correctly for current value, but has significant growth potential How close is that?

H8crilA 7y ago
Value investing: you try to come up with an intrinsic valuation of a security and buy if market price is, say, 60% or lower of that valuation. Famous examples: Benjamin Graham, Warren Buffet, Michael Burry. Growth investing: buy whatever grows (earnings, revenue, even DAU are all flavors of growth investing). VC investing/startup investing is classic growth investing. PG on the topic: http://www.paulgraham.com/growth.html http://www.paulgraham.com/growth.html Growth stocks are usually overpriced because of hype (looking through rose glasses), but can still be good, as the last 10 years shows.
- H8crilA 7y ago
  Just to throw some data into the mix: the biggest difference is not between growth or value. It's between US and ex-US equities: https://www.portfoliovisualizer.com/backtest-asset-class-allocation?s=y&mode=1&timePeriod=4&startYear=1972&firstMonth=1&endYear=2019&lastMonth=12&calendarAligned=true&initialAmount=10000&annualOperation=0&annualAdjustment=0&inflationAdjusted=true&annualPercentage=0.0&frequency=4&rebalanceType=1&absoluteDeviation=5.0&relativeDeviation=25.0&benchmark=VFINX&asset1=LargeCapValue&allocation1_1=100&asset2=LargeCapGrowth&allocation2_2=100&asset3=IntlDeveloped&allocation3_3=100&total1=100&total2=100&total3=100 https://www.portfoliovisualizer.com/backtest-asset-class-all...
mruts 7y ago
Yeah that's a pretty good guess. Growth generally means a company is expensive relative to it's earnings, profits, or book value. Ratios like P/E (price to earnings), and P/B (price to book) can be used to identify/classify a growth company. Higher these ratios, the higher the stocks exposure to "growth". A value company is the exact opposite, a stock with low ratios. As you might have suspected, value has been clobbered in the last 10 years, and a bunch of Chicago school economists are pissing their pants (Fama, French, etc). V

Ericson2314 7y ago

Maybe much of the US economy is pointless jobs and pointless economic activity, but the system is viscous enough that the inequilibrium isn't readily apparent.

karmakaze 7y ago

OT: Is FAANG now used to refer to FAAMA (MS, Alphabet)? I never understood why Netflix was in there with such a small comparative market cap.