Is There Still a Value Effect?

Harry Mamaysky

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Value investing is the lens through which many view financial markets. Yet, a simple value factor has performed poorly for the last 16 years. Is the value effect over, or will it come back in 2024?

From Graham and Dodd’s hugely influential Security Analysis, to Warren Buffett’s storied career, to today’s value investing firms, like GMO, Oaktree, and GAMCO, the value investing ethos permeates financial markets. Indeed, the value effect is at the heart of much of investing practice and folklore.

Value investing typically means buying solid companies at low valuations, as measured by low price-to-earnings or price-to-book ratios, or by high dividend yields, amongst several other value measures. Proponents of value investing believe such stocks will outperform non-value (growth) stocks over time.

Academic theories suggest that this might happen because either (1) value stocks are, in some sense, riskier than growth stocks and thus compensate investors with additional returns for bearing this added risk; or (2) because value stocks have been temporarily mispriced in less than fully efficient markets (see Campbell, Giglio, and Polk 2023 for a recent discussion). If growth stocks have sufficiently high growth rates (of earnings or dividends), then it is possible that growth stocks, despite their higher valuation multiples, might also have higher expected returns than value stocks.

A lower multiple does not mechanically guarantee higher expected returns.