Death of Value Investing

tags: [ finance , src:article ]

src: Economist

• value investing: using price-to-book ratio (or price-earnings ratio) as a measure of value to determine under-valued stocks
  • easy in the old days of the industrial era, where assets were tangible.
  • good track record of passing over bubbles (i.e. dot-com boom), since those stocks had bad ratios. but then missed the boat on the recent tech boom.
    • the idea being that if you stick to fundamentals, these stocks will ride out any irrational exuberance.
  • now, developed economies are dominated by the service sector, tech companies dominate the market. their assets are intangible, so the metric of price-to-book means you miss out on tech stocks (à la Buffet).
    • software
    • patents
    • ideas
    • supply chains (somewhat in between the two)
    • skills/knowledge/know-how
    • culture (Bridgewater Associates?)
• recently, value stocks have underperformed the market, lending empirical credence to the above
  • 
• new value (via the book “Capitalism without Capital”):
  • digital goods, intangible, have infinite scalability, since not limited to physical space
    • network effects
  • higher sunk costs: intangibles are harder to both measure and transfer around, given their ethereal nature
  • ideas have spillover, since they’re easy to replicate.
  • synergies abound in the realm of ideas, as it’s easier to experiment, very little start-up cost
• all of this is difficult to measure/extrapolate from a company’s books (again with the measurement problem)
  • more at stake, since network effects give rise to winner-takes-all

In an economy mostly made up of tangible assets you could perhaps rely on a growth stock that had got ahead of itself to be pulled back to earth, and a value stock that got left behind to eventually catch up. Reversion to the mean was the order of the day. But in a world of increasing returns to scale, a firm that rises quickly will often keep on rising.

• how does one determine some intrinsic value in today’s market?
  • differentiating between bubbles and true value is much harder now.