Cliff Asness (billionaire systematic quant based fund manager/investors) defends systematic value investing taking on two arguments, amongst a few:
-Value investing is too well known a strategic and so it’s now efficiently priced
-Accounting metrics used by these strategies don’t reflect “value” - mostly as companies now own intangible assets both on balance sheet
and off balance sheet (eg human capital)
Asness does this by looking at different slices of the market:
-Value within industries
-The market excluding certain industry sectors
-The market excluding mega-cap size (largest companies)
Asness seems to argue that an important reason why this type of strategy works over time is the behaviour of humans - then tendency of humans to over/under react. (I would note practitioners still hotly argue over why this strategy has worked over time and why there are periods - like recent years when it fails) He argues:
“...Besides just an inherent discomfort with randomness, part of the issue is confusion about why value works at all. It does not depend on getting big events or trends right. It does not depend on having perfect accounting information.
Certainly, it does not require a lack of massive technological change over time. No matter what the situation, it simply needs investors to net overreact. Companies that are cheap need to tend to be a bit too cheap for whatever set of facts exists at that time, and expensive companies need to tend to be a bit too expensive.
For instance, it’s OK if there’s more monopoly power for a few firms today than before (or any other thing being different this time), as long as humans will still tend to overdo estimates of how powerful and long-lasting those monopolies will be, and vice versa for cheap stocks that lack these advantages. We see no evidence that humans are now much more rational and less error-prone than they used to be.
Furthermore, the systematic version of value almost always relies on extreme diversification. Therefore, stories that apply to a handful of stocks start out unlikely to be driving the overall factor performance or the cheapness of the factor we see today. But that is exactly what we need to prove or disprove below…”
The results are very much worth pondering.
Now many market participants end up with the view that well traded and contested markets (liquid markets as practitioners say) are mostly efficient, much of the time. But the flip side is that occasionally they are not efficient - or properly priced - and there may be liquidity, behaviour, structural and regulator reasons for this.
This view is in a way behind the saying “if the price looks too good to be true, it probably is”
A properly contested market has fairly efficient prices. And so too low a price must have a false (or maybe illegal factor) behind it or be false itself. The mispricing doesn’t hand around long otherwise.
It’s also a force behind the rise in “passive” investing where investors and savers simply buy a large diversified index of companies and benefit from the “market” rate of return in that asset. It’s typically the advice Warren Buffet gives for individual investors. He advises to buy america: (Ie a S&P 500 tracker index fund, and a little cash). If you don’t have time to professional dedicate hours a week at thinking about investing you are unlikely to beat the market and even then many professionals don’t beat the market either.
Back to Asness. He’s a very smart man with a whole team of super smart quantitative researchers along side him.This discussion on value has been noted by many investment people and is a known phenomena. This makes it intriguing as the more a feature such as “death of value” because established consensus - then if there is a behavioural element to the strategy - and it’s quite a big IF - then the greater a chance it may become true. Huh. ... Second - third order and beyond thinking….
A link to Cliff Asness’ paper: Is Value Investing Dead.
Here’s an item on what the mental mindset for ceiling with uncertainty of COVID can teach you.