Why Value Investing Has Been Doing Terribly

Tracy Alloway (0:11)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

So Joe, when you think about value investing, what springs to mind?

Joe Weisenthal (0:25)

I guess probably immediately the image of Warren Buffett floats into my head as soon as I hear that term, or maybe that big Benjamin Graham book that I bought when I was early on in my career and never read, but it's one of the most famous investing books about how to invest like how they did back when they bought like the bonds from Brooklyn railways and stuff like that.

Tracy Alloway (0:46)

At least you're honest about it.

But I think for most people, it's definitely that image of Warren Buffett and someone sort of seeking out these undervalued stocks in the market that are going to generate longer term gains and making loads of money from it. That's sort of the classic value investing paradigm.

Joe Weisenthal (1:05)

Yeah, and I think like when I first became aware of how the world of investing worked, I sort of thought that was essentially the essence of it, that you're supposed to find cheap stocks and look at the stocks that had low PE ratios and low price to book ratios. And if there was a good one that had some nice low ratios, then those were the stocks to buy. And that's basically what investing is. And I know there are a lot of people who are still adherence of that approach, but over the years I've learned that there's sort of multiple approaches to doing well in the stock market.

Tracy Alloway (1:37)

Yes, indeed. And the big headwind, I would say, for value investing over the past, well, it's been more than a decade actually, but basically since the start of the financial crisis, sort of 2007, value investing has massively, massively underperformed a lot of other investing styles. And this means that a bunch of people have been scratching their heads, trying to figure out exactly why this is happening.

Joe Weisenthal (2:03)

Yeah, there's a lot of consternation among people for whom they look at the data and historically it says, oh, if you buy lots of companies, a basket of companies with a low price to book ratio or low P-E ratio, they should eventually outperform, but they haven't. And that's sort of been one of the main stories post-crisis is this persistent underperformance of the so-called value factor. And people keep trying to call the turn. They say, oh, now the Fed is raising rates. Okay, the value factor is gonna outperform. Oh, we're going into a bit of a downturn. This is the moment. And it keeps eluding the adherence of this view. And you have some people saying value is dead or this style is never going to work again. But of course you have people holding out that eventually this approach will come back in vogue.

Tracy Alloway (2:51)

Yeah, exactly. And you sort of alluded to it just then, but there are all these theories about why exactly value has been underperforming. The big one, of course, is central banks and low interest rates. But one explanation that doesn't get as much attention has to do with technology.

And this is a really interesting one, I think. Some analysts have talked about it a bit before, but the notion that big technological discoveries or turns can basically lead to underperformance in value is one that I think is worth exploring.

Joe Weisenthal (3:26)

Right, and you know, it's interesting because obviously I think a lot of people know that the best stocks of the last several years have been these high-flying tech stocks like Amazon or Facebook or whatever, Netflix, which are nobody's idea. Very few people would characterize them as value stocks, at least under the traditional notion.

But I guess, and we're gonna talk about this on today's episode, that this isn't that rare, that there are these periods of times when there can be companies on the vanguard of a new technology, trading at extraordinary multiples, outperforming value, but it doesn't last forever. This isn't the first time, I guess, that we've seen companies like Amazon and Netflix help expensive stocks be the big winners.

Tracy Alloway (4:12)

Yeah, exactly. So I guess without further ado, I should bring on the guest for the episode.

It is Chris Meredith. He's co-CIO over at O'Shaughnessy Asset Management and also a visiting lecturer at Cornell University. Chris, thanks so much for coming on.

Chris Meredith (4:28)

Thank you for having me.

Tracy Alloway (4:29)

So I should just mention the reason we're having you on is actually a suggestion from your co-researcher on a recent paper, Mr. Jamie Catherwood, who was, of course, a previous Odd Lots guest. Lots of people will know him as the Finance History Guy. He helped you look into whether or not there are historic parallels for underperformance in value investing.