Explaining the Recent Failure of Value Investing
29 Pages Posted: 28 Aug 2019 Last revised: 28 Oct 2019
Date Written: October 25, 2019
It is widely believed that the long-standing and highly popular value investing strategy—investing in low-valued stocks and selling short high-valued equities—lost its edge in the past 10-12 years. The reasons for this putative failure of value investing elude investors and academics, making it a challenge to assess the likelihood of the return of value investing to its days of glory. Based on extensive data analysis we show that value investing has generally been unprofitable for almost 30 years, barring a brief resurrection following the dotcom bust. We identify two major reasons for the failure of value investing: (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 (mean reversion) which drove the erstwhile gains from the value strategy. We end up by identifying the type of companies (stocks) that may still generate gains from value investing.
Keywords: Value investing, Growth investing, Hedged portfolio, Intangibles, R&D, Market to book ratio, Credit crisis
JEL Classification: E32, G11, M41
Suggested Citation: Suggested Citation