Four Reasons Value Investing Might Not be Dead Yet

Episode Summary

Executive Summary: The episode argues that value investing remains compelling despite a long stretch of underperformance. The hosts contend value is historically cheap relative to growth and to its own history, that the classic risk and behavioral explanations for value still apply, and that prior periods of value weakness—especially during technological change—eventually reversed. They frame value as a long-term, not short-term, opportunity.

Main Topics: Why revisit the case for value investing (Priority: 5/5): The discussion centers on responding to an earlier article that argued against value and now presenting the opposing case the host actually believes. Relative and absolute cheapness of value stocks (Priority: 5/5): The speakers argue value is extremely cheap versus growth stocks and also cheap versus its own historical valuation range, especially after the post-coronavirus selloff. Why value works over time (Priority: 5/5): Two core explanations are reviewed: value stocks are riskier, and investors systematically overreact to bad news and underprice cheap companies. Behavioral mispricing and expectations (Priority: 4/5): The episode emphasizes that value works because expectations are too low for cheap stocks while growth stocks often become overvalued by overly optimistic expectations. Historical precedent for long value drawdowns (Priority: 4/5): The hosts cite earlier long periods of underperformance, including times of rapid technological change, to argue current weakness does not prove value is broken. Why the data does not show value is dead (Priority: 4/5): The discussion argues that if value truly stopped working, valuation would lose explanatory power; instead, expensive stocks are behaving like a factor, implying persistent mispricing. Portfolio construction and investor suitability (Priority: 5/5): They caution that value is volatile, can underperform for years, and is best used as part of a broader factor mix rather than as an all-in allocation.

Key Arguments: Value stocks appear extremely cheap relative to growth, with percentile-based valuation measures near historical extremes. Value is also cheap on an absolute basis after the coronavirus-related pullback, strengthening the long-term opportunity. The two main reasons value works—risk and behavioral mispricing—still appear intact, so there is no clear evidence the factor has been structurally broken. Extended underperformance alone does not invalidate value; history shows similarly long drawdowns in prior eras. Technological change can hurt old-economy companies temporarily, but incumbents often adapt and eventually re-rate. If value were truly dead, valuation would have no predictive power; instead, expensive stocks are acting like the rewarded side of the factor, which suggests the factor relationship still exists. Value should not be treated as a short-term timing tool because its edge typically emerges over five- to ten-year horizons. Value investing is difficult to hold through because of volatility and long slumps, so it is more suitable as one component of a diversified factor approach.

Data Points: Article count: about 100 articles - Used to describe the host’s writing history and the article’s popularity in context. Article count: 40 or 50 articles - The co-host estimates his own writing volume when discussing the popularity of the value-investing article. Underperformance start: around 2007 - The episode suggests value’s relative slump began around the 2007 period. Price-to-book percentile: 100th percentile - From Cliff Asness/AQR valuation analysis cited to show relative cheapness of value versus growth. Price-to-earnings percentile: 100th percentile - From the same valuation analysis, indicating extreme relative cheapness. Forward price-to-earnings percentile: 99th percentile - Another valuation measure showing value near its cheapest relative levels. Composite factor percentile: 100th percentile - Broad composite valuation metric cited to reinforce the case that value is extremely cheap. Long-term outlook horizon: 5 to 10 years - The hosts stress that value’s attractiveness is a long-horizon proposition, not a timing signal. Historical value drawdown period: 1926 to 1941 - Referenced as an earlier period of value underperformance during rapid technological change. Late-1990s value underperformance: 1995/1996 to 1999 - Cited as another example of a prolonged stretch when growth beat value before the reversal in the 2000s. Factor horizon: next 6 months to 2 years - The hosts explicitly say value metrics do not predict returns over these short horizons.

Pivotal Quotes: "Besides just an inherent discomfort with randomness, part of the issue is confusion about why value works at all." — Cliff Asness (quoted by Jack): Used to explain the behavioral basis of value investing and why investors misunderstand its mechanism. "If I want to argue value is dead, then I want to argue why these things are broken." — Jack Forehand: Introduces the idea that any claim that value is broken must refute the risk and behavioral foundations of the factor. "It’s important to understand that this is not telling you anything about what’s going to happen in the short term." — Jack Forehand: A concluding caution that valuation extremes are a long-term signal, not a market-timing tool.

Implications: For patient investors, value may be unusually attractive after a long slump, but it remains volatile and unpredictable in the short run. The episode suggests using value as part of a diversified factor approach, with expectations set for multi-year horizons rather than near-term outperformance.