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Explaining the Recent Failure of Value Investing

Author

Listed:
  • Baruch Lev
  • Srivastava Anup

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.

Suggested Citation

  • Baruch Lev & Srivastava Anup, 2022. "Explaining the Recent Failure of Value Investing," Critical Finance Review, now publishers, vol. 11(2), pages 333-360, May.
    • Handle: RePEc:now:jnlcfr:104.00000115
    DOI: 10.1561/104.00000115
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    Cited by:

    1. Yin, Libo & Liao, Huiyi, 2024. "Anatomy of recent value premium's travails," International Review of Financial Analysis, Elsevier, vol. 94(C).
    2. Siddiqi, Hammad, 2022. "Asset Pricing in the Resource-Constrained Brain," MPRA Paper 120526, University Library of Munich, Germany, revised 05 Feb 2024.
    3. Hanauer, Matthias X. & Jansen, Maarten & Swinkels, Laurens & Zhou, Weili, 2024. "Factor models for Chinese A-shares," International Review of Financial Analysis, Elsevier, vol. 91(C).
    4. Anup Srivastava, 2023. "Trivialization of the bottom line and losing relevance of losses," Review of Accounting Studies, Springer, vol. 28(3), pages 1190-1208, September.

    More about this item

    Keywords

    Value investing; Growth investing; Hedged portfolio; Intangibles; RD; Market-to-book ratio; Credit crisis;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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