Why the Nightmare Continues for ‘Value’ Investors

Why the Nightmare Continues for ‘Value’ Investors

New research by two professors at New York University and the University of Calgary suggests that we’re calculating “value” incorrectly, according to a recent article in MarketWatch.

The researchers claim that the value definition doesn’t properly account for intangible assets: “We’re still counting things like land, and factories, and machinery and other tangibles as ‘assets,’ “ the article says, adding, “But we’re not counting things like intellectual property, patents, and all the accumulated know-how that a company builds up through years of research and development.”

The study involved recalculating “adjusted” asset values to include the amounts spent internally on R&D, then estimated how that would affect a long-short strategy—betting on stocks with the lowest price compared with adjusted assets and betting against those with the highest price.

In 34 of the 39 years studied (1970-2018), the researchers reported that the returns from the adjusted value strategy were higher than those in the conventional strategy, and in most years were substantially higher.

The article notes the following implications for value investors:

  1. “Cookie-cutter” value funds, that “simply stick to an old accounting-based value strategy” are missing out on important information.
  2. If investors want to understand a company’s assets, they need to look closely at R&D spending over multiple years—and even then, it may be difficult to get the whole story.
  3. “Be wary of all stock market fashions, including this one.”

The article concludes, “It’s generally been a wise strategy to buy what’s out of fashion, and cheap, and avoid what’s in fashion, and therefore expensive. There are always bargains, but finding value means more than just buying ‘value.’”