Marc Gerstein

What's Wrong with Today's Value Investing?

Dawdler,

I’m with you; fundamentals are critical. Look how much heat Bill Miller took (back in the days when he was still going strong) for owning Amazon in a value fund. His attention to fundamentals (which turned out to be sound) was widely unappreciated. And how many times do you see investors turning bearish on stocks that rally to higher valuations without any discussion of whether fundamentals have proportionately improved. Unfortunately, many pay lip service to fundamentals but don’t really do it, and many more don’t even bother paying lip service. Upside omissions such as those mentioned are annoying. Downside omissions, such as the ones we are more exposed to now given what’s happening today, are worse.

What's Wrong with Today's Value Investing?

Dirk,

I appreciate your points. Eliminating stocks with less than $250 million market cap leaves us with about 1550 Russell 2000 stocks. I do think it’s more reasonable to compare such a universe with the 2000; I think a $250 million market-cap threshold is too low to make the S&P 500 or Russell 1000 valid bogeys.

Even so, I decided to alter the tests to address the issues you raise.

Interestingly, dropping the market cap test altogether made the screen performance about 100 basis points worse meaning that value investing looks even more in need of repair.

Going back to the $250 million market cap test and comparing the results with the S&P 500 and the Russell 1000, again the value screen fared even worse. This should be no surprise. Remember the S&P 500 Value ETF underperformed the SPYDR.

What's Wrong with Today's Value Investing?

Thank you for your thoughtful comment. I went back to portfolio123 to check on the approach. Eliminating Financials as a whole helped a bit (matching the Russell 2000), but still didn’t produce the sort of results we’d seen in the past.

Note that this, and many other, value approach is based on the profit stream of a going concern, as opposed to a point-in-time snapshot of the asset base. Omission of financials helps now because their earnings trends have turned unfavorable (a manifestation of the bad things happening to the asset bases). I got pretty much the same result when I turned the estimate revision rank upside down: instead pursuing highly-ranked stocks, I omitted low-ranked issues. I still had some financials, but they were the better ones; in this version, eliminating financials didn’t help.

So essentially, we’re back to the notion of looking at stocks the way other investors do, that being the main part of the analysis, and then adding a value layer.