Value Investing II: A Lost Decade!

In this, the second of three sessions on value investing, I start by looking back at the twentieth century and the glory days of value investing, and note the dark sides to even those glory days. I follow up by looking at the last decade (2010-2019), when high PE and high PBV stocks handily beat low PE and low PBV stocks, and extend that analysis into the COViD era, by chronicling the continued damage to old time value investing nostrums. I close this session by looking at explanations, ranging from benign (for value investors) to consequential, and argue that as the years of under performance stretch on, it is time to stop arguing that this is a passing phase or that the Fed did it, and to start looking at how value investing needs to change to succeed in a flatter investment world (where everyone has data and tools) and a changed economy.
Slides: www.stern.nyu.edu/~adamodar/pd...
Blog Posts:
Value Investing I: The Glory Days: aswathdamodaran.blogspot.com/...
Value Investing II: A Lost Decade: aswathdamodaran.blogspot.com/...
Value Investing III: aswathdamodaran.blogspot.com/...

[@MattCommins]

Most of my portfolio is in value and I really appreciate this video. I always listening to intelligent people with different beliefs than me. Thanks for posting these!

[@calaious]

Prof. Damodaran, thank you for this very enlightening video/series in Value Investing. I read your books since I was in Bachelor, I am a great admirer and currently doing a PhD in Finance.

[@alhobabkhalawi3587]

Good boy

[@Jiwonsharma]

So will u his valuation method wont work in the future?

[@DP-dc2vv]

Thank you for this, super thoughtful as always. Completely hear the thesis, particularly given the ongoing struggles of Value for a while now, notably Q120. It seems somewhat self-evident that Value will struggle during, aside from the late 90s, the most ascendant period in history for US tech (ie, Growth) stocks. Considering 2020 performance, 6 companies have driven the majority of positive performance among R1 securities, the rest of the market is flat. I think when the economy stabilizes some, and with a President and Fed less focused on buoying 'the economy', we see a return to the 2000s status quo (with greater variability year over year), and a resurgence (albeit not like decades ago) for Value.

[@luisespanola]

Thank you for sharing your knowledge, Sir.

[@quant-trader-010]

This is gold!

[@rimservices]

Wow, dismissing Value in October 2020. I wonder how Professor felt a month later. Perfect timing.

[@tiananicholetallant]

So excited to be learning from you 🥳

[@suryaprakashdama575]

Thank you sir! Will always be grateful for the knowledge I gain from your videos...

[@user-wc7em8kf9d]

Amazingly interesting! Thank you professor for sharing.

[@edofer5205]

Looking forward to the next session!!!😀✌️👍

[@breakoutgaffe4027]

Twelve years is starting to push the limits of what a passing phase is ahahaha i love this guy!!

[@62anweshroy]

Thanks for the video! If Oppenheimer's study of 13 years can be called a market anomaly, why can't the last decade be called one as well? However, I agree that markets are flatter today and we have to change the way we approach value investing.

[@Sadar21Osasuna]

Thank you for publishing these videos, they are very informational!

[@sebastianhentzschel8732]

Thank you for the excellent explanation!

[@poohshmoo9892]

im new to this channel and im blown how come there are only 25k views of this video and only 230k subs to the channel .. this channel itself is gold mine ( no pun intended )

[@akashcast]

10:38 - value factors like lower pe multiples outperformed high pe in 7 of the 9 decades since 1930s.

[@HiepNguyen-uo1tf]

"We think the very term 'value investing' is redundant. What is 'investing' if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value - in the hope that it can soon be sold for a still-higher price - should be labeled speculation (which is neither illegal, immoral nor - in our view - financially fattening)." - Warren Buffett So, Low P/E, P/B, high devidend yield is not equal value investing, Warren Buffett once said Growth is always a component in the calculation of value so we should'nt separate into 2 different concepts. When Berkshire bought American Express (1962), Walmat, Costco, Moody, P&G, Coke..., etc almost in 2 digits P/E. You only invest if you can answer 3 questions about cash flow: (1) how much (2) when (3) How sure. And the biggest reason for a decade underperforming is not about the approach. Size does matter, Warren said that for the past decades.

[@anvo89]

Great video and update! As someone who fell in love with investing through Buffett, I’ve had to revisit the way i approach investing over the last 5 years. Thankful I did!

[@josshlegg8647]

how has your approach evolved?

[@diegolca7]

Really good content, thanks Damodaran, will have my eyes widely open in value I'm an investor in Brazil and my porfolio is 100% in value, happy with my results (return of 4% this year while the IBOVESPA similar to SP500 is -10%) Always thankful for yours teaching (books and videos)

[@gurusukh]

Value investing can turn out to be value trap investing. The market has realized that a lot of companies in various sectors like travel, hospitality, retail etc have reached their terminal values this year and has hence priced them accordingly. Although there could be some gems out there that are mispriced.

[@silkroad365]

Thank you professor! I still tend to keep certain portion of my portfolio value companies.

[@Pulkit29]

S2

[@Pulkit29]

F

[@sallanmega1]

Loved your video

[@nishalnandwani]

Value based on DCF still matters tho. And always did even in the old days, right? Whether you were looking at big manufacturing companies and their price to book ratios, they were worth what their future cash flows could bring.

[@johnbailey3351]

Speaking of Warren Buffett re-read Christopher Mayer's book "100 Baggers". The books has a chart that lists all of the 100 baggers that the author identified. There are 365 that returned 100x or more including 6 that returned more than 10,000x from 1962 (or later) until 2014. The highest return was Berkshire which returned over 18,000x from 1965 to 2014. The next two were Kansas City Southern which returned 16,000x from 1972-2014 and Altria which returned over 15,000x from 1962-2014. So a railroad and a tobacco stock which were not exactly growth industries even in 1962 had the highest returns. Don't know how Kansas City Southern did it, but Altria's performance was partially from a flaw in the methodology from reinvesting dividends, but still would have been a legitimate 1000 plus bagger.

[@capalbc]

Dr. Damodaran, I find your analysis (and model used for analysis) is missing the concept of how much prices (and the forward outlook on future earnings they represent) have been driven up by the total debt increases in credit and derivative markets. In the 1990s and once again post the GFC, there has been an exponential explosion of debt that has fueled financial asset inflation. The rate of debt increases due in large part from a low interest rate environment as well as various intervening fiscal policies. In addition, with stock buy backs and various other forms of financial engineering, the capital structure of corporations has shifted to less equity and more debt. This will skew PE and PBV. Expand your analysis to the past 500 years and I think you'll find price performance (and therefore your argument of value vs growth) more reflective of what's going on in the long-term debt cycle and the monetary resets that have occurred in that period.

[@AlessandroOrlandi83]

Very interesting.

[@dmitrypetrov1753]

Thank you for the research! Recently I red on Buffet (BUFFETT’S ALPHA (2013) by Lasse H. Pedersen) and it seems that the assets he chose didn't bring the excess return. The true magic behind his returns was high and cheap leverage. With such cheap leverage he managed to outperform the market even without perfect selection of assets (in fact the market assets in his portfolio outperformed the PE assets that he managed).

[@zapa2017]

Hmmm when the next session... nice work

[@NeverMyRealName]

i think we also need to analyze the sentiment behind why a p/e ratio is high. valuable stocks could be ones that have the highest growth outlook through generating future value. maintaining value is harder and if a stock has a low p/e ratio this could also indicate that the market does not believe there is value being generated or forecasted to grow.

[@cheehiong]

I think its crucial to look into value investing deeper and provide a sectorial analysis to draw any conclusions - eg. even in technology there are high P/E stocks are didnt perform like UBER and LYFT. Since the impact of the virus has been structural on the movement of people, of course relatively low P/E stocks like airlines, real estate etc would underperform compared to technology.

[@InvestorCenter]

Buying stocks below intrinsic value will never go out of style. Buying low P/E stocks isn’t true value investing without taking into account growth prospects of that company.

[@triptop3703]

I highly doubt if the Nebraskan has ever built a DCF model, but what do I know?

[@x10mark24]

I wonder what behavioral finance has to do with the lack of value performance. over the past decade or two the success in the tech field has been quite explosive. people may have gotten used to that success and come to expect it, they find a company they like and dump money on it (think we work, Tesla, Nekola, and the tidal wave of tech IPO's) regardless of how its doing in the moment (Nekola didn't even have a working car/truck) this inflow of funds can keep all but the worst of companies growing for a while which gives them time to use those funds to establish themselves and actually deliver that promised growth in a self fulfilling prophesy (with enough thrust you can fly a brick, with enough funding can you turn a mom and pop shop into a global empire?)

[@ilyakan7764]

a low price to book doesnt necessarily represent value investing. A business can’t just be undervalued there has to have a lot more to it, such as koats and great management. Graham wouldn’t consider a simple p/bv as a way of value investing

[@gauravrai5784]

Great professor

[@venomviper98]

When Buffett he said he wouldn't invest in technology, it was technology companies he didn't understand it. Although Apple is a technology stock, Buffett said he would only invest in companies he understands. Apple is easy to understand as they sell products. Buffett is very well versed in companies selling products.

[@Han-rg4zt]

I'm presuming the term value investing that professor is referring to were large caps value companies. Since Farma french 3 factor model stated SMALL CAP VALUE soooo it's pretty vague when professor says value investing.

[@the_blahhh]

Do you accept the current COVID market as a true crisis / test of value investing? I see it as the bull run never really ended. If value investing tends to do well after crises (like AQR and others predicted), it's not just because there's a crisis, but because there's a correlation with those crises. Clearly confidence in high growth companies hasn't collapsed like it did in some earlier crises, like, why would it?

[@imba69420]

Is really anyone still using PBV to to find 'value'? Low P/E stocks? Low compared to what? If company grows 100% a year then 50 P/E is value! "Price is what you pay, value is what you get" - that's value investing.

[@Reathety]

We have historical levels of debt and historically low interest rates. This is why we have such a distortion in the markets. Growth companies have great access to capital. This will end eventually like all speculative manias do. As to when I couldn't tell you. Getting a 7% + return on low valued dividend stocks is hardly something to cry about.

[@edofer5205]

And btw, thanks for sharing!

[@ENGmais]

Do you think that we shouldn't focus in companies paying dividends? How do you rate this question? Thanks.

[@BradKaellner]

Something tells me Jim Simons hired Damodaran as a consultant building his trading models

[@markcuban1763]

Can you please increase volume levels for videos going forward ?

[@chulie_4961]

What course do you teach? I want a seat!

[@samirkamrouna6149]

I really love you professor, you are so good for the world of investing and finance! But I have a remark. When you consider the "Buffett argument" you don´t actually refute it, you answer practically: "Come up with something new", but then when it seems to work for the benefit of your argument, you use Buffett as an argument. To be fair, I believe that if you want to be consistent, you also should actively refute the Buffett argument. With kind regards, Samir.

[@steelyspielbergo]

Professor, has value investing been losing simply because of the FAANG/MAGA stocks?

[@hawkwingscorner6904]

Dear Dr. Damodaran, you are a great teacher, entertaining and insightful. I learned as much from you as at my MBA. However, I think you fail to address the main topic. What is value, as I have learned from you previously its the discounted cash flow of all future earnings. The day it does not work to assess the underlying value of future cash flow and demand a margin of safety, everyone should stop investing and stop taking your valuation classes. To look at the outcome from price fluctuation is first-level thinking, especially on the COVID timeframe.

[@zpacify]

Is it poetic justice that at the time this was released value stocks started to outperform growth? Lol. Was that an inflection point for the next ten years? But great content as always professor.

[@Americabeatz]

low p/e and low price/book is not value investing in the modern world.

[@Americabeatz]

@@governmentofficial_23 yeah i think everything is a cycle, growth stocks are going to bleed somewhere in the future.

[@henriquepacheco27]

Do you say??? Show me your numbers

[@yangbetty5727]

its less about value/growth investing but cyclical/non-cyclical stock investing under the current economy

[@rhythmandacoustics]

I think growth investing can make more than value investing but you must be really able to time the market and sell, while value investing means owing the stock regardless of whether the secondary market goes away or not. The problem with growth is that it is mostly overblown in part due to momentum investors. By growth investors, I mean those people who buy stocks just because the price is going higher, momentum, or just because the revenues shot up but never look at the high leverage and all. If you take out the internet stocks because of the pandemic situation, growth is not delivering good fundamental returns. Perhaps the price has gone higher but their book value is poor.

[@non5309]

Приятно черт возьми когда собственное мнение полностью совпадает с мнением автора

[@loktevda]

Теслу прикупили?)

[@non5309]

@@loktevda жаль только что не в конце 2019 г.

[@StefanLawson]

I hold some overweight value indexes (IJS and IUSV) due to the Fama and French study showing value outperformance. But you're making me question that however.

[@pipilnkous5463]

Stefan, Fama is a joke. He simply put data into a mathematical model. I actually read his 'academic' paper. Finance is not a real science like physics or chemistry - I have a degree in it. His explanations in his paper are merely false interpretations, under a false assumption of market efficiency. The person who sold you those funds has been marketing it to you in order to keep collecting fees - they have no clue what they are talking about. Value/Growth are simply ways to categorize stocks, similar to sectors. You have a lot to learn. kzbin.info/www/bejne/hIbOnIWaetChoKs

[@pipilnkous5463]

however with the covid vaccine we might see a continued rotation/capital flow into value so rather start filtering down stocks from within those funds to invest in. Get rid of the companies that are losing money!! Common sense > academic blabla

[@pipilnkous5463]

however those funds did do well pre 2018 ; try to figure out what actually caused it ;)

[@jonathanbrotto7278]

Still the dean.

[@johnjohnston8098]

Not playing the same (old) Buffett card: Mohnish Pabrai and Li Lu?

[@ashutoshdhote1339]

That CNBC speeches

[@zaphrode4110]

its not abt just 1 decade tho, value investing takes many decades to show its worth

[@HenrikhTarjumanyan]

Value investing has nothing to do with book value or price to book.

[@manubhatt3]

11:10 - There is a contradiction between what you are saying and what is written on the chart/graph!

[@andreobrien988]

This hasnt aged well…

[@phantomcreamer]

I'm shocked at the deceptiveness of this video. The video makes value vs growth statements. Then looks at studies of P/B, and equivocates that to value investing. Then points out how that isn't actually value investing, but then later states uses the very definition it refuted in the middle of the video, to state that it is now clear that value doesn't beat growth. Bottom line: stagnant things like high div stocks or low p/b stocks is not and never was value investing. If at anytime you hear anybody say value vs growth, no matter how much you blindly want to axiomatically believe words they form with their mouths, your bullshit alarm should be ringing in your head at max volume.