Is Value Investing Dead or Alive? Exploring Observational Angles

Is Value Investing Dead or not? Tactical Investor Take

Is value investing dead? Is this a million-dollar or just one-dollar question; don’t bother answering that, for it does not matter. Whenever experts state that something is dead, hated or disliked, one has to start viewing that sector or strategy more favourably. This bull market has not been kind to value investors, but it has been very gracious to momentum and growth investors. We don’t think value investing is dead, but one should abstain from purchasing a stock because it offers great value.

There is a reason that stock has a low P/E ratio, so one has to be careful not to fall for the value investing trap. What is a value investing trap? Buying a stock just because it appears to offer value; they are a lot of stocks trading below book value, but they make for a terrible investment. However, if one combines Mass psychology and technical analysis one can find great value plays that make sense. For example, the stock CALM, from July 2016 to roughly July 2017, the stock was in a downtrend, but it started to bottom in July 2017.

The stock was trading in the extremely oversold ranges, it was being shunned by the public, and it fell under the “value category”. If you purchased the stock anytime on or slightly after July of 2017, you would be sitting on gains of over 30% today. Everything depends on your angle of observance; alter the angle, and the outlook is altered.

Value investing can work if you have a strategy.

Though many experts state that value investing is dead, there are just as many that state it’s not dead. The answer lies in between those two. Sadly most finance experts are on par with mules; perhaps mules are even more intelligent than these talking heads, so take what they say with a huge barrel of salt and a shot of tequila. It goes without saying that value investing has lost some of its fire; if you don’t use it in isolation and put the principles discussed above and below into play, it’s still a force to reckon with.

Nothing stays down forever, and one-day value investing will make a strong comeback; for now, the trend favours growth and momentum stocks. If you follow the suggestions above, we used CALM as an example and demonstrated how value investing can still be part of your investment strategy. The two essential elements, Mass psychology and technical analysis, provides one with the tools that will help you determine if that so-called value stock is worth getting into.

Market Sentiment

The small surge in bullishness appears to be short-lived, what remains constant is the number of individuals in the Neutral camp. Until the individuals in the bullish camp surge past 70% for several weeks, the markets are unlikely to put in a long-term top. Corrections ranging from mild to strong are all most investors will have to worry about. Most pullbacks will be in the mild to medium ranges, with the occasional pullback falling into the “strong” category. The odds that the SPX will trade to and past 3000 are now close to 70%.

The trend is still up.

Despite being extremely overbought, the trend for the world’s major indices (Germany, US, Australia, Britain, etc.) is up. The Australian markets are still extremely overbought on the weekly and monthly charts, so, at the least, investors should wait until our indicators on the weekly charts pull back to the oversold ranges.

This market is in sore need of one strong pullback, but it is irrational one cannot expect the market to pull back just because it’s trading in the extremely overbought ranges. Therefore our game plan is to continue opening long positions in stocks that are extremely oversold on the monthly charts. This plan will remain in force until 1-2 major indices like the Dow, SPX, or Nasdaq experience a bearish signal on the monthly charts.

The Markets are overbought, but the internal structure is healthy.

Though the Dow and the SPX are trading in the overbought ranges, the Dow is gearing up to trend higher on the weekly charts. The MACDs have experienced a bullish crossover right at the halfway point (minimal oversold zone). We would not be surprised if the Dow traded to the 23650-23800 range in the near future. Risk takers can use pullbacks ranging from 350-450 points to open long positions. The Dow does not need to pull back 350-450 points in one day. For example, it is currently trading slightly above 23400. Risk-takers could open long positions from 22950 to the 23050 ranges.

So to answer the question, Is value investing dead? The answer would depend on your perspective, but an astute investor would state that an investment strategy is always alive on a long-term basis. Value investing has taken a back seat due to the huge amount of hot money that has flowed into this market, but it will make a comeback. Until then, you can still find value plays with great potential by combining mass psychology with technical analysis.

Is value investing dead; Let’s see what other experts are saying

Sebastien Mallet from T.Rowe

Value investing is not dead; for me, there remains a wealth of opportunities if you do your homework. Importantly, I continue to consider a longer-term view than the market, searching for attractive entry points by looking through what we view as shorter-term, cyclical pressures.

Some may be saying this, while others have been more generous by saying that value investing may be moribund. I am far more positive, though. You may say that is not a surprise as a “Value” investor. Still, I am genuinely enthused by the opportunities out there and continue to find good actionable ideas across countries, sectors, and industries. T. Rowe

The Wall Street Journal had this to say in this article

The U.S. stock market is showing the biggest divergence between cheap and pricey stocks since the aftermath of the dot-com bubble, as investors chase the performance of companies with rising earnings.

Valuation of growth companies-those able to show rising earnings, typically priced at a premium-have soared this year even as price/earnings ratios of cheap, so-called “value” stocks slid, an unusual separation.

Growth and value stocks in the U.S. returned the same from the start of the post-Lehman recovery in 2009 until January this year, thanks to a surge in cheap stocks after the U.S. election a year ago. Since then, the 19 percentage-point outperformance of growth stocks is the most in such a short period aside from the last year of the dot-com bubble

Is value investing dead? David Einhorn seems to think so

“The market remains challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy,” Einhorn wrote in an investor letter Tuesday obtained by CNBC.

“Given the performance of certain stocks, we wonder if the market has adopted an alternative paradigm for calculating equity value,” he wrote. “What if equity value has nothing to do with current or future profits and instead is derived from a company’s ability to be disruptive, to provide social change, or to advance new beneficial technologies, even when doing so results in a current and future economic loss?”

“Our view is that just because Amazon can disrupt somebody else’s profit stream, it doesn’t mean that Amazon earns that profit stream. For the moment, the market doesn’t agree,” he wrote.

“Tesla had an awful quarter both in its current results and future prospects. In response, its shares fell almost 6%,” he wrote. “We believe it deserved much worse.”

Value Walk on the question; Is value investing dead?

However, value investing is not without its flaws, as well. The problem with value investing lies in what it’s typically based on–rumours, hearsay and superficial analysis. Value investors believe the market overreacts to good and bad news, resulting in sharp stock price movements that don’t actually correspond with a company’s intrinsic value and long-term chances of success. Thus, investors can make a profit while the price is deflated.

What’s more, value investing is highly subjective. Some investors only consider present assets and earnings and do not place any value on future growth. While other investors base their entire strategies only on estimating future growth and cash flows.

The decline of value investing

Goldman Sach’s June 2017 report titled “The death of value?” recently dubbed the strategy as fading ineffectiveness. They’ve even gone as far as proclaiming that implementing the value investing approach has resulted in investors in a cumulative loss of 15 per cent over the past decade.

Even the legendary value investor Jeremy Grantham voiced his concerns with value investing in his first-quarter letter to investors for 2017. He stated, “This time seems very, very different”, and finally succumbed to the idea that the rules of value investing may no longer apply.

His reasoning? Like many investors, he claimed both corporate profit margins and, consequently, valuations are permanently higher and that his patience has dwindled in waiting for the divergence to resolve.

Although it’s true that sound value investing has generated remarkable wealth for some (ahem… Warren Buffett), implementing value investing principles is not as easy as you might think. Or at least, that is the message conveyed by U-Wen Kok, Jason Ribando and Richard Sloan in their paper “Facts about Formulaic Value Investing,” recently published in the “Financial Analysts Journal.” Value Walk

David Trainer On the Is value investing dead question.

As valuations grow more and more stretched, this level of diligence becomes increasingly necessary. Investors have made much easy money in this market over the past several years. The easy-money trend could persist for a little while longer, but eventually, economic reality will prevail, especially as investors become more rigorous. We recommend that investors focus on companies like Hasbro that can thrive in this extended bull market while lowering risk. It has the underlying economic earnings power to survive the eventual rationalization between price and economic value. Full Story

The chart below seems to indicate that value investing might be dead

If you look at this chart it seems to indicate value investing is dead. The Russell 1000 growth has handily outperformed the Russell 1000 value. Remember, everything you see has to be taken with a grain of salt. If you apply the concepts we discuss below, you would not buy a stock just because it falls under the “value” category but also look at other mitigating factors. Most value stocks are not soaring upwards because they have very little to offer; the market is a forward-looking beast, so it has priced the growth potential of that stock. Don’t buy a stock just because its P/E ratio is low. Focus on other factors such as quarterly earnings and revenue growth rates, insider ownership and the stock’s technicals.

Is Value Investing Dead? The Broken Leg’s Views

Don’t make the same mistake. All strategies underperform from time to time, but eventually, they recover. This has happened before to value investing, and it will happen again. Going back to 1997-2000, you can see that growth outperformed value massively. The market was crazy for everything that looked internet-ish. Warren Buffett was ridiculed during the dot-com bubble, but he didn’t let that affect his investment strategy — and he got his revenge when the market crashed by realizing hefty profits.

There is so much noise and speculation in the media and social media today. You need to learn to ignore it. Various strategies are promoted with promises to outperform massively, but the truth is that few investment strategies have been backtested so thoroughly and extensively as value investing. The result is clear — value investing does outperform in the long run. Tune out the noise and focus on true value. It doesn’t matter if you implement a low P/B, low PE or negative EV model — it will all work out because buying a stock for less than what it is worth is the best strategy.

Don’t let the latest hiccup in the value indexes affect your investment strategy. Stick to your chosen value strategy, and you will outperform in the long run. That is what matters the most. Full Story

Value investing appears to be dead. Dec 2019 Update

Many subscribers have asked us why we don’t focus or pay more attention to fundamentals. One of the main pieces of data EPS can and is being easily manipulated via share buybacks, putting the whole concept of value investing or investing based on fundamentals into the toilet. Secondly, the data is provided in a standardised format, which means that almost every investor that uses it will more or less arrive at the same conclusion.

Move to mass psychology; very few have even heard of this topic, and there is no standardised book or formula to follow. There are very few books that even cover the topic adequately, and almost none of these books apply the topic of MP accurately when it comes to investing. Technical analysis is also interesting, based on an individual’s interpretation of a given pattern. You must see the pattern; no two traders will see the exact pattern. Furthermore, we take an out-of-the-box approach to technical analysis, and for the most part, we customise all our indicators. That is why we don’t pay too much attention to fundamentals, and this is not a new approach; we have maintained this stance for over 17 years.

FAQ

Q: Is value investing dead or not?
A: Value investing is not dead but requires careful consideration and a strategic approach. While some experts argue for its demise, there are still plenty of opportunities for value investors who do their homework and analyze stocks from a longer-term perspective.

Q: What is a value investing trap?
A: A value investing trap is when investors buy a stock solely based on its perceived value without considering other crucial factors. Stocks trading below book value may seem appealing but may not necessarily be good investments. Combining mass psychology and technical analysis can help identify value plays that make sense.

Q: Can value investing still be a part of an investment strategy?
A: Yes, value investing can still be a part of an investment strategy if approached cautiously and complemented with other principles. While growth and momentum stocks may dominate the current market trend, value investing can offer opportunities combined with mass psychology and technical analysis.

Q: What do experts say about value investing?
A: Experts have varying opinions on value investing. Some, like Sebastien Mallet from T. Rowe Price, believe many opportunities still exist. However, David Einhorn and Goldman Sachs have expressed concerns about the effectiveness of value investing. It’s important to consider multiple viewpoints and conduct a thorough analysis.

Q: How does market sentiment affect value investing?

A: Market sentiment plays a role in value investing. Currently, the market favours growth and momentum stocks, which have impacted the performance of value investing strategies. However, value investing is not dead and can offer potential returns when combined with other analysis techniques.

Q: What factors should be considered in value investing?
A: In value investing, factors such as earnings, revenue growth rates, insider ownership, and technical indicators should be considered. Simply relying on low price-to-earnings (P/E) ratios may not be sufficient. A comprehensive analysis considering various aspects of a stock’s value is crucial for successful value investing.

Q: How has value investing performed historically?
A: Historically, value investing has shown the potential for generating wealth in the long run. While it may experience periods of underperformance, it has delivered significant returns over time. Warren Buffett is a notable example of a successful value investor who has demonstrated the effectiveness of this strategy.

Q: Is there an alternative perspective to value investing?
A: Some alternative perspectives argue that value investing is not as effective due to factors like manipulated earnings per share (EPS) through share buybacks. These perspectives suggest focusing on mass psychology and technical analysis, which can provide unique insights and help identify investment opportunities.

Q: Should investors stick to their value investing strategy?
A: It is advisable for investors to stick to their chosen value investing strategy despite short-term fluctuations or underperformance. Value investing has proven successful in the long run, and it’s important to avoid being influenced by market noise and speculation. Patience and a focus on true value are key to outperforming over time.

Article summary

Whether value investing is dead requires a thorough examination from different perspectives. While value investing has faced challenges in the current market climate, dismissing it entirely might be premature.

Instead of blindly following perceived value, it’s important to approach value investing strategically by incorporating principles of mass psychology and technical analysis. While some experts argue that value investing is dead, others believe it still presents opportunities when approached with a longer-term view.

The decline of value investing should not discourage investors, as every investment strategy experiences periods of underperformance. It is crucial to consider various viewpoints, critically analyze alternative paradigms, and look beyond traditional valuation metrics when assessing the potential of value stocks. Value investing remains a viable strategy that can yield long-term benefits when combined with other analytical tools and a discerning approach.