
Value Is Dead, Long Live Value - drocer88
https://www.osam.com/Commentary/value-is-dead-long-live-value
======
hogFeast
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
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.

~~~
hogFeast
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.

~~~
jdsully
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.

------
jandrewrogers
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
Who are these predators? Among FAANG I'd guess only the acquisition of YouTube
has been a success, and only modest at best.

~~~
TimTheTinker
Let’s see...

\- Apple, Samsung, LG, and Google have supplanted a wide range of consumer
products with modern cell phones. Point-and-shoot cameras, some prosumer
cameras, low-end document scanners, household telephones, PDAs, small
flashlights, small voice recorders, portable tape and CD players, car CD
players (via wired or BT connectivity), portable DVD players, boom boxes (via
Bluetooth speakers), car GPS navigation systems, compasses (to some extent),
pocket notebooks, planners (to some extent), a large segment of the wristwatch
and pocket watch market, pocket calculators, professional scientific and
graphing calculators, walkie-talkies and handheld radios (not completely
though), portable electronic games and some game consoles... those are a few
of the big ones.

\- There is no type of brick-and-mortar store in any branch of retail or
auction that hasn’t been hit _hard_ by Amazon and eBay. Additionally, all the
B2B businesses in the retail supply/service chain have been hit hard as either
their clients suffer or they themselves lose business to Amazon.

I could go on. The world is a completely different place than what it was 20
years ago.

~~~
imjk
While you're not wrong, I don't think all (maybe any?) of these are examples
of specifically targeted markets taken over by the companies you mentioned.
Apple probably didn't target the flashlight market and decide to take market
share from Maglite. I think you've just identified products that have
naturally been supplanted by new technologies, many of them falling to the
adoption of smartphones. A more appropriate example may be Amazon moving into
the groceries market. But even that, one could perhaps argue that their broad
market is general retail, with competitors like Walmart and Costco, in which
case it wasn't really that far of an extension at all from their natural
market. I guess Amazon and Apple moving into the realm of Hollywood and film
studios may be a better example. I'd like to see a broader success like Apple
taking market share from Automobile manufacturers, etc.

------
mruts
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
> 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
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.

~~~
kgwgk
It's too early to declare that value is dead, a full market cycle will be
needed at least.

Looking at the Fama/French HmL series value strongly underperformed growth in
the late nineties (the HmL series had a 40% drawdown). The current drawdown is
not as large yet (but it's true that it has been going on for over a decade).

"Are Growth and Value Dead?

"1999 was the sixth consecutive year in which the S&P BARRA Growth Index
outperformed the Value Index. Some investors have questioned whether Value
will ever again be a successful investment approach. Some of them believe this
is a “New Era” in which technology stocks are revolutionizing the way business
is done: “New Economy” stocks will survive while “Old Economy” stocks (mostly
Value stocks) will become extinct."

[https://www.northinfo.com/documents/111.pdf](https://www.northinfo.com/documents/111.pdf)

Edit: see also pages 7/8 in
[https://www.yardeni.com/pub/style.pdf](https://www.yardeni.com/pub/style.pdf)
Those charts confirm what I wrote above, growth crushed value 20 years ago but
didn't quite kill it...

~~~
mruts
Current research from AQR seems to suggest that HmL isn't actually a
persistent factor, just a behavioral bias without any economic basis
(anymore?). Also current research by AQR suggests that that value is more
structural, and is a real risk premia.

I don't think anyone really knows whether value is a real risk premia, and if
it's reason is structural or not. I think it's possible that many of the
classic factors (value, momentum, carry, reversal, quality) are structural and
do exist, but it's going to take a little bit more work than just creating a
dollar neutral L/S portfolio exposed to E/P or whatever.

If I had to guess, I would say that value is a real risk premia. That's not to
say I would have put my money in it for the last 10 years, though..

~~~
kgwgk
> Current research from AQR seems to suggest that HmL isn't actually a
> persistent factor [...] Also current research by AQR suggests that that
> value is more structural, and is a real risk premia.

I'm lost. HmL is the classic "value" factor (as in the 3-factor model of Fama
and French: market, size and value). I don't say that's the best definition
possible (clearly it's not) and I know other definitions exist (but HmL has
the advantage of being available for a century). For what it's worth, I prefer
cash-flow-based metrics and total shareholder yield (dividends + buybacks +
debt reduction).

AQR use an improved definition (using data as current as possible) but I don't
think it's terribly different: "The bottom line is that while the standard
approach to value was a reasonable and conservative choice that has served the
field well, it is not the best possible choice."

[https://www.aqr.com/Insights/Research/Journal-Article/The-
De...](https://www.aqr.com/Insights/Research/Journal-Article/The-Devil-in-
HMLs-Details)

In their latest publication ("Factor Premia and Factor Timing: A Century of
Evidence", that I've not yet read) they say:

"We follow simple value measures used in the literature to capture “cheap”
versus “expensive” securities within an asset class. For individual equities,
we use the book-to-market ratio following Fama and French (1992, 2012) and
Asness, Moskowitz, and Pedersen (2013). For global equity indices, we use the
aggregate 10-year cyclically-adjusted price-to-earnings ratio CAPE (value-
weighted average P/E ratio for all constituent firms in the index)."

~~~
mruts
Sorry, I mean Big minus Small. My bad! I guess I started associating high with
big and low with small!

------
im3w1l
> 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
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.

------
SubiculumCode
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?

~~~
mruts
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

~~~
dade_
Neither P/E or Book value are useful metrics for value investing. Please read
security analysis...

~~~
mruts
Would you prefer book to market? That's what Fama and French used. All of
these ratios are related to the value factor, I didn't say you need/should use
on or another.

------
kgwgk
Related: "VALUE INVESTING: BRUISED BY 1000 CUTS"

[https://www.gmo.com/americas/research-library/value-
investin...](https://www.gmo.com/americas/research-library/value-investing-
bruised-by-1000-cuts/)

Direct link to PDF: [https://www.gmo.com/globalassets/articles/insights/asset-
all...](https://www.gmo.com/globalassets/articles/insights/asset-
allocation/2019/rf_value-bruised-by-1000-cuts_5-19.pdf)

------
H8crilA
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)

------
anonu
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.

------
RickJWagner
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
He's kind of a closet indexer these days:

[https://www.portfoliovisualizer.com/backtest-
portfolio?s=y&t...](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)

------
Ericson2314
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
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.

------
whatshisface
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.

~~~
tryptophan
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
The reasoning often goes the other way, academics find a "factor" that
outperforms empirically and try to come up with a risk-based explanation
backing theoretically what does happen :-)

An alternative explanation is that they are simply mispriced.

