Dead Collector: Bring out yer dead! [A large man appears with a (seemingly) dead man over his shoulder]
Large Man: Here’s one.
Dead Collector: Nine pence.
“Dead” Man: I’m not dead.
Dead Collector: What?
Large Man: Nothing. [hands the collector his money] Here’s your nine pence.
“Dead” Man: I’m not dead!
Dead Collector: ‘Ere, he says he’s not dead.
-Monty Python and the Holy Grail
Much has been made of the horrible underperformance of “value” over the current cycle. But I think it’s crucial to distinguish “quantitative value” from traditional “value investing.” In every example of value’s demise that I have seen, reference has been made to the former rather than the latter. However, in every case it has also been put forward without making this important distinction.
Surely, quantitative value has fared atrociously and much of this has to do with the simple fact that it amounts to an anti-indexing strategy, as Mike Green has so adroitly pointed out. That is, quantitative value seeks to overweight stocks the indexes are in the process of systematically underweighting. Because so much money has flowed into passive products in recent years, quantitative value has necessarily suffered.
On the other hand, (and leaving aside the in-name-only non-quant value managers) traditional value investors employing a measure of security analysis paired with a sense of contrarianism have likely fared much better. As pointed out by Steve Bregman, the popularity of passive investing creates tremendous opportunity for those willing to be far more intrepid and selective than quantitative value investors.
For example, Apple (AAPL) back in 2013 offered traditional value investors a terrific opportunity I wrote about at the time. Herbalife (HLF) in 2015 was another such opportunity. The gold mining stocks later that year provided traditional value investors with a classic Graham net-net trade. I discussed another example of terrific value in the market on The Investors Podcast in 2017 (CF) and again last year (BBBY); both worked out very well. Today, energy looks to be another one.
Sadly, many quantitative value funds have literally zero exposure to the energy sector for whatever reason. To me, this is emblematic of what’s, in fact, plaguing these investors: an unwillingness to acknowledge that quantitative value investing is not really value investing at all, at least not as Ben Graham espoused and Warren Buffett popularized it. In fact, quantitative value may just be an inferior form of passive investing, at least as long as investors consistently choose other forms of “passive” instead.