Value Investing: Back to the Future?

BizNotes_Mar20_Rev1

In 1985 Hollywood flick “Back to the Future”, the protagonist needed the time machine to travel back in time. Value investors rarely use such sophisticated machines to back-test in time. Simple travel back in time in memory would do. It was year 2013. Going back there was like travelling to the future of 2020.  It was like setting the clock back to the future. Scanning the headlines in financial dailies back then, it exactly feels like 2019 and 20. What is fashionable now, was fashionable then too. Take for example the headlines that screamed – The Death of Value Investing; Is Bubble Building in Quality? Flight to Safe Haven Stocks etc. – they equally reverberate now in financial and business headlines. But what is interesting is, in the interim between 2014 and 2017, this fashionable theme quietly lost its fancy when small-cap story rose from ashes like a phoenix to dominate the narrative for three successive years.

How does one take the current headlines that are flashing in the financial dailies? As one headline goes, the well-known veteran value investor has succumbed to his self-doubt and become a neo-convert who has fallen for his new found love for quality. Of course, in the social media, there is a huge chatter that yells ills about value investing. That begs the question whether value investing is dead for the second time or forever?

Fundamentally, value investing doesn’t stand in isolation. If it is only value for value sake, it deserves to be deserted. But, if growth is embedded in value, then, that value investing is very much valuable and it will continue to vault, though with hiccups here and there. Similarly, “quality” is not the exclusive possessions of some coveted coffee-can-clubs or the neo-converts or privilege of much fancied large caps. It is equally relevant in small-caps. Nothing to beat the value that comes from trying to buy “quality-cum-growth” at a discount, be it large-cap or small-cap. Of course, in small-caps, such spicy opportunities spurt more often, because the space is under-researched and under-covered (also more volatile).

To borrow a phrase from one of the seasoned stock pickers, value investors are like a group of beasts now that is being hunted to extinction. Why? It is not difficult to fathom the reasons. Value as a strategy has been under-performing for an extended period of time since early 2018, because of flight to safety and polarized market dynamics. Even the last man standing out is being tested for his tenacity. Should the last few standing be worried? No. If one sets the clock back and look at the past 2 decades, one would find that neither this narrative (that value investing is dead) is new nor the crowded trade in quality is new. There has been only one thing that has been constant across cycles. That is, every strategy has a day under the sun and only thing that has always worked all the time is “reversion to mean”. It is a question of time before market takes its fancy to value, though it is difficult to predict the time of the turn.

Seasoned investors understand that every strategy has its time of out-performance and has its time of under-performance. The key is to stick to a strategy and not to flirt around with the flavor of seasons. Stay the course to smell the roses, however hard one is being hounded.

Happy Value Investing!!!

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