Value Investing: The Pain Train has Arrived and it Sucks.

Value Investing: The Pain Train has Arrived and it Sucks.

October 12, 2015 Value Investing Research
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(Last Updated On: October 12, 2015)

A few months ago we highlighted a surprising result: cheap high-quality stocks were getting crushed by expensive junk stocks.

The spread at the end of June was around 18%. Here is the chart from the old post (details on construction are in the original post):

cheap hiqh quality versus expensive low quality stocks
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Logical conclusion: Buy Value!

Fast forward 2 months…

Here we look at the updated YTD performance comparing expensive junk stocks to cheap high quality stocks.

We examine value-weight returns for the cheap high-quality quintile and the expensive low-quality quintile. The daily returns run from 1/1/2015 to 8/31/2015. Results are gross of fees. All returns are total returns and include the reinvestment of distributions (e.g., dividends).

Specifically, here are the two portfolios:

  1. Cheap, High Quality = Value-weight returns to the cheap high-quality quintile.
  2. Expensive, Low Quality = Value-weight returns to the expensive low-quality quintile.
Expensive Junk Stocks are Killing High-Quality Value Stocks, YTD
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

An 18% spread was bad enough–how about we double down on that? The generic cheap quality versus expensive junk spread is over 30% YTD. Just when we thought things couldn’t get any worse – they got a whole lot worse! The results are driven by a horrific July, that looks anomalous, but still…Wow!

Logical conclusion: Buy value?! …hmmm…maybe it’s time to get rid of those value stocks and try something else? It’s not working now so maybe value doesn’t work any more?

But be careful with “logical” conclusions. As we’ve said time and time again, active value investing has been digging manager graveyards since 1900…but that is the nature of the active value investing game…long horizons are required and volatility relative to the standard benchmarks can be expected.

These are the times that try men’s souls.

– Thomas Paine

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Definitions of common statistics used in our analysis are available here (towards the bottom)

About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes,, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.

  • IlyaKipnis

    I wonder what this spread actually looks like as one time-series. Though I wonder why value investing is touted so highly…can’t it be turned on and off depending on how well it’s recently done–aka trend follow the factor itself?

  • bertRaven

    What do the sector exposures look like?

  • here is the raw data if you want to dig in. They don’t have info on the names


    there is hte raw data…let me know what you find and we’ll post

  • Tom Rinaldi

    Have you ever thought of applying the risk management rules to the value and the momentum pieces in the strategies either directly or somehow relative to the S&P?

  • Steve

    see Paskalis Glabadanidis (Market Timing with MA’s) – which shows you can. Athough when I played with some French data, I didn’t get the same good result, but I’m very slow (not a programmer) and only checked a couple things.

  • IlyaKipnis

    Wes…I took the High/High and subtracted the Low/Low from it…this approach takes some nasty drawdowns which can last a decade or more, and ever since recovering from the tech bubble, it’s just been getting wrecked.

    It’s just been chopping around for the past decades in unpredictable ways, or just losing money. So it doesn’t look like it can be faded, and certainly going long isn’t a good deal either. No bueno by any stretch of the imagination, it seems.

    Also, look at the high book to market, low operating profits equal weight series…36% CAGR with 2.75 Sharpe…does it have a ton of tiny companies in it or something? Because its results were lights out.

  • Steve

    “French” data meaning the Kenneth French data, not the French stock market(!)

  • Steve

    Painful; but very cool in a way (only the perverse will agree with me). Several “factor” investors have voiced concerns lately about the whole factor thing catching on so much…perhaps meaning a much diluted performance going forward. My punt has always been (and still is)…it will continue.

    Factor investing, just like the market itself, has its ways of throwing its participants off the roller coaster. In the light of all the ‘smart beta’ product palava and the popularity of quantitative based investing…once again, the market proves that human emotional behaviour reigns supreme – and that only the unemtional zombie investor can win. Many riding the factor investing fun train will fall off – as they weren’t “true believers” to begin with.

    Value investing is dead = outsized returns to come. I’m humble enough to never say, “I guarantee it” – but that’s the way I would (and do) punt.

  • Jack Vogel, PhD

    Yes, the number of firms can be small and may include micro-caps. The portfolios are formed using NYSE breakpoints on B/M and Profitability. Since independent NYSE breakpoints are used, each bin does not have the same number of firms (in the dataset it gives the number of firms in each bin). Additionally, they use all firms on NYSE, NASDAQ, and AMEX which will include some micro-caps and small-cap firms. This is why we focus on value-weight returns when using French’s data.

  • IlyaKipnis

    Steve, if you care to look at the link I reply with later, this form of value investing has *been* dead ever since 2003 or so. It’s in a decade+ drawdown. Value investing may not be dead, per se, but it doesn’t seem to be too alive, either.

  • IlyaKipnis

    In other words, that 36% CAGR is unachievable due to ultra-low liquidity? Darn. In any case, this spread (at least rebalanced daily) seems to be a complete dud. How long does something have to go nowhere before moving onto other opportunities?

  • Jack Vogel, PhD

    One would need to dig into the details of the underlying stocks to determine the feasibility.

  • Steve

    You’re talking about long-short; I’d have no idea and I’ll take your word for it.
    As a long only investor, value has been making new equity highs since 2003.

  • umair usman

    this is a classic sign of momentum taking over.