Is Value Investing Truly Dead or Just Underperforming in a Changing Landscape?

Value investing, a strategy that focuses on buying companies at a discount to their intrinsic value, has experienced some underperformance relative to growth strategies over the past decade. This raises the question: is value investing dead? The answer is more nuanced and involves several key factors, including market trends, diversification strategies, and the role of market efficiency.

The Decline of Value Investing

In recent years, value investing has not shown the same level of performance that was once anticipated. Historical studies have suggested a slight edge in returns for value-oriented investments, but this has not held consistently over the past decade. Why has this trend shifted? Several factors can help provide insight.

Market Efficiency and Sector Shifts

The concept of market efficiency posits that all known information is already priced into stock prices. In a highly efficient market, it becomes increasingly difficult to consistently outperform the market through traditional value investing techniques. Additionally, market shifts, including changes in sector and factor preferences, can make value-oriented strategies less dominant. For example, the rise of cloud computing has attracted significant investment, leading enthusiasts to overweight growth strategies in this sector.

Bond Yields and Stock Returns

In a low-interest-rate environment, owning bonds has lower expected returns compared to stocks. This further incentivizes investors to allocate more capital to the stock market, where potential growth opportunities are perceived to be higher. The current low-interest-rate environment thus promotes a shift away from bonds and towards stocks, posing a challenge for traditional value investing strategies.

Financial Planning for Retirees

For individuals in the late stages of their financial planning, such as the almost-retirees, the decision-making process involves balancing risk and return. Here is a strategy that aligns with these considerations:

Two Years' Expenses in a Money Market Account: Holding two years' worth of expenses in a money market account provides liquidity and a buffer against market volatility. Diversification with Low-Cost Index Funds: Utilize low-cost Total U.S. Stock Market funds like VTI or FZROX as the primary component of your portfolio. These funds ensure high expected returns and diversification across multiple sectors, reducing sector and factor risk. Some individuals might prefer SP 500 (VOO) or Dividend Appreciation (VIG) for specific strategies, but the Total U.S. Stock Market fund is deemed more superior currently. Overweight Growth Strategies: To capture growth opportunities, allocate a portion of your portfolio to growth funds using VUG and/or QQQ. This helps in capitalizing on the high growth potential present in tech and related sectors. Cloud Computing Sector Focus: Given the trend towards cloud computing, overweight investments in companies like Microsoft (MSFT), reflecting a belief in the high margins and strong competitive moats available in this space. Divestment from other tech giants like Google GCP might be considered to maintain focus and avoid dilution of returns.

Conclusion

Value investing is not dead, but its dominance in the investment landscape has certainly diminished. The current market environment, characterized by low-interest-rate conditions, heightened sector shifts, and the recognition of market efficiency, presents challenges. However, by implementing a diversified portfolio that includes low-cost index funds and strategic growth and sector allocations, investors can navigate these complexities effectively.