Critical Finance Review > Vol 11 > Issue 2

Explaining the Recent Failure of Value Investing

Baruch Lev, Stern School of Business, New York University, USA, blev@stern.nyu.edu , Srivastava Anup, Haskayne School of Business, University of Calgary, Canada, anup.srivastava@ucalgary.ca
 
Suggested Citation
Baruch Lev and Srivastava Anup (2022), "Explaining the Recent Failure of Value Investing", Critical Finance Review: Vol. 11: No. 2, pp 333-360. http://dx.doi.org/10.1561/104.00000115

Publication Date: 03 May 2022
© 2022 Baruch Lev and Srivastava Anup
 
Subjects
 
Keywords
E32G11M41
Value investingGrowth investingHedged portfolioIntangiblesR&DMarket-to-book ratioCredit crisis
 

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In this article:
1. Introduction 
2. The Value Strategy in Brief 
3. The Recent Failure of the Value Strategy 
4. Accounting Deficiencies Adversely Affected Value Investing 
5. Reversing the Expensing of Intangibles 
6. From Market-to-Book to Price-to-Earnings 
7. The Value Strategy and Mean Reversion 
8. The Surprising Slowdown of Stocks’ Mean Reversion 
9. What Caused the Slowdown of Stocks’ Mean Reversion? 
10. Glamour Firms’ Different Experience 
11. Escaping the Value Predicament 
References 

Abstract

The long-standing and highly popular strategy of investing in low-valued stocks and selling short high-valued equities is widely believed to have lost its edge in the past 12 to 14 years. The reasons for this putative failure of value investing elude investors and academics, so assessing the likelihood of a return of value investing to its glory days is challenging. We show that value investing has generally been unprofitable for almost 30 years, barring a brief resurrection following the dotcom bust. We identify two major reasons for the failure of value investing: (1) accounting deficiencies causing systematic misidentification of value, particularly of glamour (growth) stocks, and (2) fundamental economic developments that significantly slowed the reshuffling of value and glamour stocks (mean reversion), which drove the erstwhile gains from the value strategy.

DOI:10.1561/104.00000115