Value investing, which was pioneered by Benjamin Graham and Warren Buffett, has struggled since 2015 as so-called growth stocks beat out their inexpensive brethren. Sidman joins a growing list of managers that have given up on the strategy. In the last week alone, Bloomberg has reported plans by both Chieftain Capital Management and SPO Partners & Co. to return client money. John Griffin closed Blue Ridge Capital last year. Another long-time value investor, Eddie Lampert, has been flailing after his bet on Sears Holdings Corp. went awry.
Value strategies work best after a really big decline because they are oriented towards identifying the mispricing of individual stocks relative to their intrinsic value. However, they are prone to selling too early as prices advance for exactly the same reason.
The additional risk with value strategies is they sometimes fall victim to value traps in the latter stages of bull markets. When a company like Amazon is overtaking the retail sector it is easy for value investors to miss the wood for the trees because the balance sheets of the disruptees often look attractive on paper right up until they go bankrupt.
Hanesbrands, for example, appears in the statements of a number of value strategies because on paper it is a sound business selling a consumer staple. However, that ignores the growth of own brand essential garments and questions the brand premium of the incumbent. The share has held a progression of lower rally highs since 2015 and remains in a consistent downtrend despite the reasonably attractive valuations.
An additional consideration is the withdrawal of well-regarded value strategies from the market is a testament to the conclusion we are in the third psychological perception stage of this bull market where buy and hold and momentum have trumped just about every other strategy for the last couple of years. I’m tempted to think of value investors giving up as something of a contrary indicator.Back to top