Is Value Investing Dead?

Episode Summary

Executive Summary: The episode examines whether value investing is truly “dead” and concludes that the long-term case remains intact, even if recent relative performance has been poor. Guests and hosts argue that value still works through risk, behavioral mispricing, and return components like earnings growth, dividends, and valuation re-rating. While some note that metrics may need updating for a more intangible, tech-driven economy, the consensus is that value’s struggles look more cyclical than terminal.

Main Topics: Why value investing has historically worked (Priority: 5/5): The discussion starts with two classic explanations: value stocks are riskier and therefore earn a premium, and investors systematically underprice them due to behavioral overreaction to bad news. Relative underperformance vs absolute returns (Priority: 5/5): Several speakers stress that value has lagged growth on a relative basis, but long-only value investors have still made money; the debate is often confused by comparing long-only and long-short implementations. Return decomposition of value (Priority: 5/5): Wes Gray breaks value returns into earnings growth, dividend yield, and valuation change, arguing that none of these mechanisms has been eliminated and that value can still earn returns even if one component weakens. Evidence against the 'value is dead' thesis (Priority: 4/5): Nir Kassar and Jim O'Shaughnessy argue that a 10-15 year drought is not enough to dismiss a long-established premium, comparing the debate to the equity risk premium and emphasizing long-term evidence over recent performance. Short-term disruption vs long-term structural change (Priority: 4/5): Tobias Carlisle and Kai Wu discuss whether COVID, low rates, technology, and intangible assets have broken value. The view is that these may explain near-term pain, but not necessarily the disappearance of value altogether. The need to evolve value metrics (Priority: 4/5): Kai Wu and Vitaly Katsenelson suggest traditional mechanical ratios like price-to-book may be too static for an intangible-driven economy and that future value investors may need more creativity and broader definitions of cheapness. Factor life cycles and mean reversion (Priority: 3/5): Adam Butler explains how factor premiums can decay as more capital arbitrages them, but argues they can later stabilize at a smaller equilibrium premium once capital exits and adoption resets.

Key Arguments: Value has not become less risky; volatility and long drawdowns still characterize value stocks, supporting the risk-premium explanation. Behavioral mispricing still exists because investors continue to overreact to bad news in value stocks, leaving room for future outperformance. The recent debate often confuses long-short value with long-only value; long-short spreads may be extreme even if long-only value remains viable. Value returns can come from three sources: earnings growth, dividend yield, and valuation expansion; none has disappeared structurally. Even if valuation multiples do not re-rate, value can still produce returns through carry and earnings growth. A 10-15 year underperformance period is not sufficient evidence that a long-term factor premium has vanished, just as a temporary bond-vs-stock reversal does not kill the equity risk premium. Claims that low rates, technology, or COVID have permanently broken value require proving that these factors are fundamentally different from prior regimes. Traditional value screens may be too mechanical; a company like Microsoft or Google can be 'cheap' relative to intrinsic value despite high headline multiples. In a more intangible and technologically complex economy, value investors may need to adapt their metrics rather than abandon the philosophy. Factor premiums may shrink as capital crowds in, but the process can cycle through adoption, over-allocation, underperformance, and eventual equilibrium.

Data Points: Period of value underperformance: 10-15 years - Repeatedly cited as the recent stretch used to argue that value is dead. Equity risk premium reversal: 20 years - Nir Kassar notes that from roughly 2000 to June 2020, bonds beat stocks, yet no one concludes the equity risk premium is dead. Long-term historical data span: 100+ years - Used to argue that value, like the equity risk premium, should be judged using long-run evidence. Possible valuation spread: P/E 5 to P/E 10 - Wes Gray uses this example to describe how value may earn returns through multiple expansion over time. Dividend yield example: 3% vs 1.5% - Wes Gray illustrates value’s carry advantage by comparing a higher-yielding stock basket to the market. DCF front-end contribution: ~5% - Tobias Carlisle notes the first years of a discounted cash flow are relatively unimportant to valuation compared with the terminal value. Price-to-book / P/E thresholds: P/B > 1.5, P/E > 10 - Partha Mohanram criticizes rigid mechanical definitions of value that exclude great businesses without considering intrinsic value. Value cheapness level: 2 sigma cheap - Kai Wu says standard value measures look historically inexpensive on a cyclical basis.

Pivotal Quotes: "It seems like value stocks still are more risky than the market, and it seems like investors still are potentially overreacting to this bad news with value security." — Jack Forehand: Summarizing why both risk-based and behavioral explanations for value still appear to hold. "I don't think the people who are trying to make that case... if you want to make that case, I think that's going to be a very difficult case to make." — Nir Kassar: Arguing that the burden of proof is on those claiming the value premium is permanently dead. "You can buy an incredible collection of stocks right now at insanely low prices. The prospects for their business haven't changed materially." — Jim O'Shaughnessy: Explaining why value still looks compelling despite recent underperformance.

Implications: Listeners should view value’s weakness as a possible cycle, not proof of extinction. The debate suggests value investors may need more flexible metrics and a longer time horizon, but the long-term case for buying assets below intrinsic value remains credible.