Out Of Style Since 1934

Value investing has never been in style — This allows the value factor to persist — Being unfashionable is a requirement for outperformance.

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VALUE INVESTING: OUT OF STYLE SINCE 1934

In 2022, as growth stocks, recent IPOs, and digital assets crashed, allocators briefly wondered if value investing was “in style.” The moment was short-lived as growth is once again prevailing.

2022 was the latest in a long list of failed value comebacks. Taper tantrums, tariffs, pandemics: for the last decade, growth investing has always been the right allocation. With each failed value resurgence, the mental barrier to allocating to the style grows. Which is why the factor will continue to work.

Any investor requiring a factor to be in style will never find justification for value investing. To be in style, a factor must show consistent returns. But consistent returns are the siren song of the market.[1] When value works, it operates quickly and violently. There is no time to be deemed stylish.

So value investing has never been in style. This serves to limit fund flows into value-oriented managers, ultimately preserving alpha generation for those contrarian investors willing to take the leap.

The Beginning of Value Investing (1930’s—1940’s)

Benjamin Graham’s publishing of Security Analysis in 1934 is a good starting point to review value investing’s popularity. This 725-page tome, featuring chapters such as “A Proposed Canon of Common-Stock Investment” and “Reserves For Depletion, Other Amortization Charge and Contingencies”, was not initially a best seller. In fact, after over 50 years on the market, the book had only sold 250,000 copies.[2]

Nonetheless, Graham began to educate students at Columbia and ultimately published The Intelligent Investor in 1949 to slightly broader acclaim. Still, value investing was hardly fashionable.

Buffett’s Beginning (1950’s—1970’s)

Warren Buffett took Graham’s course in 1950 and began his historic value career working with Graham in 1954. While Buffett was setting the stage for his success, including the acquisition of Berkshire Hathaway in 1965, the stock market certainly ignored Graham’s instruction.

Philip Fisher published his growth-oriented Common Stocks and Uncommon Profits in 1958, at the time the Nifty Fifty was heading to the moon. Growth, technology, and outsized investment gains were the norm.

Value investing was not only out of style, but, astonishingly, out at Columbia – “in 1978, the course and the tradition disappeared from the formal academic curriculum.”3 Despite the tangible success of Warren Buffett and other alumni, value investing was decidedly outside of the mainstream.

The Efficient Market Anomaly (1980’s—1990’s)

Value investing reached academia in the early 1980’s, with Stattman (1980) and Rosenberg, Reid, and Lanstein (1985) identifying the outperformance of US equities trading at low book values.[4,5] Eugene Fama and Kenneth French quickly followed with their paper identifying both the size and value factors as anomalies under the CAPM theory.[6]

In addition, Jeremy Siegel published Stocks for the Long Run, heralded as “One of the Top 10 Best Business Books of 1994” by Business Week. Analyzing similar data from 1962-1989, Siegel found outperformance based on price-to-cash flow, price-to-book, and price-to-earnings.[7]

Despite the widespread academic support for the value style, investors stampeded into the tech bubble. The era was capped off with Baron’s now famous “What’s Wrong, Warren” article in late 1999, nearly calling the peak of the bubble.

Never In Style (2000’s—Present)

Value investors, the few that remained, protected capital during the tech bubble, substantially outperforming benchmarks. During this time, not only was value well-documented as a source of excess return, but by 2007 value had a multi-year track record of outperformance. What more could an investor want to deem the philosophy “stylish?”

Alas, value has not caught on, and instead investors have pulled funds from the value style since 2008.  By 2021, less than 10% of AUM in Global and US large cap mutual funds was invested with a value manager, down from nearly 20% prior to the GFC.[8]

OUT-OF-STYLE OUTPERFORMANCE

Academically speaking, the value factor should have been competed away long ago. In an efficient market no excess return should exist so conclusively and for such a long period. But for the factor to be eliminated funds must be invested in the value style.

Ultimately investor allocations determine the longevity of excess return factors. Value investing delivers outperformance specifically because it is never in style.

Notes:

[1] See Taleb's "Turkey Problem"

[2] NYT (https://www.nytimes.com/1988/09/20/obituaries/david-dodd-93-dies-professor-of-business.html)

[3] Bruce Greenwald, Value Investing from Graham to Buffett and Beyond, 2001

[4] Stattman, Dennis, 1980, Book values and stock returns, The Chicago MBA: A Journal of Selected Papers 4, 25-45

[5] Rosenberg, Barr, Kenneth Reid, and Ronald Lanstein, 1985, Persuasive evidence of market inefficiency, Journal of Portfolio Management 9, 18-28

[6] Fama, French, The Cross-Section of Expected Stock Returns, The Journal of Finance, June 1992

[7] Siegel’s “Returns to Valuation Factors” 

[8] JP Morgan (https://am.jpmorgan.com/ch/en/asset-management/adv/insights/value-vs-growth-investing/