As early as last year, before the tech sell-off, I was reading articles and research papers like: “Is Value Investing Dead?” After the tech sell-off, I read articles like: “Is Value Investing Back From Dead?”
Two-opposite articles within a short period of time reflect the cyclical nature of the market. It is true that value has struggled to deliver returns over the years, and various reasons have been cited for the same, ranging from the rise of intangibles to liquidity-led monetary policy and low interest rates to congested trading. Are included.
Most of such conclusions are based on the return profile of the factor. But are value investing and value factor the same? I do not think so.
Value investing is a philosophy or concept of buying stocks at a price below some reference point (called the underlying or intrinsic value). Waiting for the Black Friday sale to buy the next pair of jeans is value buying. Value factor, on the other hand, is a metric to measure and define the amount of value that is present in that one stock relative to the other (read cross sectional – how much discount is on Diesel on Levi’s Jeans).
Typically, such factors are defined using some form of P/B or P/E or dividend discount model (there may be other fundamental variables at play). Most of these are accounting measures and estimates are prone to errors. Valuation as a concept is close to cash flow. DCF is generally the preferred method for any analyst to estimate the economic value of a company.
Although one can argue that cash flow in DCF is estimated using accounting variables such as EBIT/EBIDTA.
Even if we stick to accounting measurements, the price factor is a way of getting exposure to price in a systematic way. A negative alpha for systematic value cannot be the basis for conclusions on value investing as a concept. Discretionary value, along with systematic value, is a large part of the world of value investing.
While a pure factor portfolio (a long short portfolio with per unit risk of value and zero risk to all other factors), value factor performance may be questionable, there are enough individual value stocks that have performed. PSU stocks, eg.
So while the debate is still ongoing as to whether or not value is dead, it may help to take a look at the definition of systematic value and separate discretionary value from the debate.
The author, Sujit Modi, is WealthBasket curator and founder and CEO of Quantec Capital
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