Value investing is dead.
That seems to be the accepted wisdom of the markets these days. After all, the Russell Growth Index (NYSEARCA: IWF) has outperformed the Russell Value Index (NYSEARCA: IWD) by 92% over the last five years.
This year, we have seen the growth stocks in the technology sector leave everything behind, especially value stocks. Most value funds are struggling to keep up with the market and have been since the Great Financial Crisis.
Even Warren Buffett is having a hard time keeping up with the best growth stocks. He even invested in a high-priced IPO this year when he bought 6.1 million shares of Snowflake Inc. (NYSE: SNOW) – the big data and cloud computing company.
As is often the case, the idea that value investing is dead is a Wall Street mistake. Buying a good business at a bargain price has always worked out pretty well for investors over the long run.
And that’s certainly still the case today.
The problem is the way Wall Street defines “value investing.” They use an unmanaged index of companies based on their price-to-book value ratio to define value investing.
That’s just plain dumb.
While price-to-book value can be an important measure of value, many companies that trade for less than book value are garbage companies that are well on the way to liquidation. Most of the time, when a company trades at a bargain price, there is a good reason.
Successful value investing is about finding those companies that trade for less than they are worth and have a good business.
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