Why Value Investing Just Won’t Die (And That’s a Good Thing)
It’s easy to get swept up in shiny promises: “High Growth! High Returns!” Investors are no strangers to the allure of these words. But the reality? Long-term returns rarely favor the crowd’s darling stocks. This is where the old-school value factor enters the scene—a strategy built on common sense, proven history, and a delightfully simple principle: don’t pay a fortune for something you don’t fully understand. Let’s get into why we think this approach works, why it’s survived decades, and why it’s worth having in a balanced portfolio.
What’s the Value Factor, and Why Is It Actually Simple?
The value factor—fundamentally—is about buying cheap. Specifically, value stocks are companies trading at a discount relative to their book value, earnings, or cash flows. While growth investors look for the “next big thing,” value investors look at beaten-down stocks, generally asking, “Is this company really as unloved as it seems?” By comparing a company’s stock price to these fundamentals, value investing zeroes in on stocks that are priced lower than their intrinsic worth. Think of it as buying quality goods from the clearance aisle, rather than paying a premium for new arrivals.
Intuitive, Consistent, and Persistent: Why We Believe Value Investing Works
Intuitive: The core idea behind value investing is intuitive because most of us already do it in daily life. We don’t just buy the fanciest car or the highest-priced gadget on a whim; we’re often looking for the best we can get without breaking the bank. Value investing works the same way, rooting for stocks that are, frankly, underdogs in the short-term market race.
Consistent: Value investing is not a “sometimes strategy.” It’s reliable through market booms and busts, offering a consistently lower entry point to a stock and capitalizing on the market’s tendency to overestimate the bad news. Long-term, that consistency has delivered attractive returns to those patient enough to wait for the market to catch up.
Persistent: Over the long haul, the value factor just doesn’t go away. Academics have pored over this strategy for decades, affirming its ability to deliver a reliable, long-term return premium over growth stocks. For clients with a little patience, value investing is like a steady compass—it might take longer, but it often ends up pointing north.
A History of Common Sense: From Benjamin Graham to Fama/French
The early roots of value investing come from Benjamin Graham, who’s probably rolling his eyes in his grave at today’s obsession with high-priced tech stocks. Graham’s value investing philosophy in the 1930s was simple: look for stocks that are priced below their book value, and when everyone else is chasing excitement, be the one who buys cheap.
Warren Buffett, Graham’s star student, pushed this philosophy further by looking not just for cheap stocks but for strong companies with a durable competitive edge. Buffett isn’t interested in mere value; he’s after value with staying power, believing that good companies bought cheap can ultimately pay off.
Enter Fama and French, who in the 1990s moved value investing from “gut instinct” to quantitative science. Their three-factor model[i] put value, size, and the market itself into a systematic framework that proves what Graham and Buffett already suspected: value stocks tend to beat growth stocks over the long term. And it’s not a trivial difference—Fama and French found an average 2–5% annual outperformance for value stocks over growth over given periods of time. Call it luck, call it persistence, but the numbers keep coming out in value’s favor.
Why Growth Often Fails: Cliff Asness and the “Bubble Logic” of Cisco vs. Ford
Dr. Cliff Asness, in his classic paper “Bubble Logic”[ii], nails down another critical reason why value investing outperforms: growth stocks frequently fail to meet their own sky-high expectations. Asness points out how investors are far too willing to overpay for high-growth potential. He contrasts Cisco and Ford during the dot-com bubble—a time when Cisco was seen as the future of the tech world, priced at astronomical levels, while Ford was considered an old-school, safe play. Investors loaded up on Cisco, convinced it could do no wrong. Yet Cisco couldn’t meet the sky-high expectations built into its price. Meanwhile, Ford, despite being out of favor, chugged along, paying its investors a return because it wasn’t battling a monstrous price-to-growth gap.
Asness’s takeaway? Investors consistently overestimate the growth potential of popular stocks, creating price bubbles that eventually burst. Value stocks may seem boring by comparison, but they offer a far more grounded return—one that doesn’t rely on starry-eyed projections and constant outperformance. By avoiding stocks with inflated prices, value investors steer clear of the bubbles that so often plague growth markets.
Data Doesn’t Lie: Value Investing’s Robust Performance
Let’s talk numbers. Fama and French’s research proved a strong statistical foundation for the value factor, showing that value stocks outperform growth by 2–5% annually over different decades, with a t-statistic comfortably above 2.0. This might sound technical, but it means the results are statistically significant—hard to argue with and even harder to ignore.
More impressively, value investing tends to hold up even when you tweak the formula. While price-to-book is the classic measure, tweaks to the formula accounting for the timing of the rebalance and when price is measured also demonstrates the robustness of value[iii]. Some investors even incorporate “quality” filters[iv], looking for cheap stocks with strong balance sheets and consistent cash flow. Whether the approach is classic or nuanced, the value premium remains robust and consistently real, meaning that cheap stocks with solid fundamentals are where the long-term rewards often lie.
Value Investing Isn’t Risk-Free—It’s Risk-Savvy
Adding value stocks to a portfolio isn’t about avoiding risk; it’s about taking on the right type of risk. Value stocks are often unloved for a reason—they’re facing near-term challenges, perhaps a rocky earnings season, or even shifting management. But the risk here is often tied to patience, not peril. With a long-enough horizon, value stocks can often recover, rewarding those who had the sense to buy while prices were low.
So, why bother adding value to a portfolio? In a word: resilience. When growth stocks stumble (and they do), value stocks, with their strong fundamentals and lower price tags, tend to hold steady. They’re a hedge against market exuberance and a steady source of long-term returns. For anyone thinking about the next five to ten years rather than the next five to ten days, value investing offers a more dependable route to wealth creation.
Wrapping It Up: Why Value Investing Makes Sense (And Doesn’t Try to Be Cool)
Value investing isn’t flashy, and it doesn’t claim to be. It’s for the investor willing to look beyond the latest trend, the person who knows that chasing excitement rarely ends in sustained success. It’s about common sense, grounded expectations, and, yes, a healthy dose of skepticism toward growth promises that defy gravity. And as Cliff Asness’s *Bubble Logic* reminds us, sometimes it’s better to be the one who’s quietly compounding in the background than the one riding a bubble that’s bound to pop.
So, if you’re looking to add a smart, time-tested factor to your portfolio, consider the virtues of value. It might be a slower, less glamorous route, but it’s one that we think has proven its worth through the hype and beyond it. And for those of us who don’t mind waiting for results, that’s reason enough to put our faith in value’s steady hand.
John Grubbs, CAIA®, AAMS®
Disclosures:
Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal. Any references to historical returns, financial projections, or expected results are based on assumptions and are not guarantees. Market conditions, economic events, and other factors can significantly impact investment outcomes, and no investment strategy can assure profitability.
All information is provided in this publication for informational and educational purposes only, and in no way is any of the content herein to be construed as financial, investment, or legal advice or instruction. Meridian Wealth Management, LLC does not guarantee the quality, accuracy, completeness, or timeliness of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Information in the publication may have been provided by third parties and has not necessarily been verified by Meridian Wealth Management, LLC and does not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tor (including negligence) or other tortious action.
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Sources:
[i] “French, Kenneth R. ‘Data Library: Value Factor.’ Dartmouth College, (November, 2024) Available at: https://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html
[ii] “Asness, Clifford S. ‘Bubble Logic: Or, How to Stop Worrying and Learn to Love the Bull.’ Financial Analysts Journal, July/August 2000.
Available at: https://www.aqr.com/Insights/Research/Articles/Bubble-Logic”
[iii] “Asness, Clifford S., Frazzini, Andrea, Israel, Ronen, & Moskowitz, Tobias J. ‘Fact, Fiction, and Value Investing: The Devil Is in the HML Details.’ The Journal of Portfolio Management, Winter 2015.
Available at: https://www.aqr.com/Insights/Research/Journal-Articles/Fact-Fiction-and-Value-Investing-The-Devil-Is-in-the-HML-Details”
[iv] “Asness, Clifford S., Frazzini, Andrea, & Israel, Ronen. ‘Combining Quality and Value: A Dynamic Approach.’ The Journal of Portfolio Management, Vol. 44, No. 4, 2018, pp. 16-32.
Available at: https://doi.org/10.3905/jpm.2018.44.4.016”
