For reference, BSE 100 index was up 3.5x during the same period. Value annihilated the market, and every other strategy.
So here in lies the dilemma – which decade should we go by? The one where value made 13x or the one where value lost 50%? Which way does the weight of evidence tilt? And more importantly, if it has worked so well before then …
Even though I’m only really concerned about the Indian market here , fortunately for us, value stopped working in the US around the same time as it did in India.
Which means that like every other US financial phenomena, the death of value has also been sliced, diced, and julienned from every possible angle.
And sure enough, the brilliant financial pathologists of America seem to have found their culprit… Intangibles.
A recent survey piece in the Economist summarizes their findings as follows:
- Intangibles are the primary source of value for many companies, more so now than in the past. And intangibles are hard to account for using GAAP. So any strategy based on GAAP book value or earnings, like value investing, is meaningless as well.
- Businesses based on intangibles are easier to scale, so a small number of firms come to dominate. These firms have increasing returns to scale. As they grow bigger they get better, which makes them even bigger, and so on. Mean reversion is dead and so is value investing.
- The indices are dominated with tech. There’s too much disruption in tech, and value investing does a poor job of predicting disruption.
Before we get to whether any of this holds true for the Indian markets (it doesn’t), let’s examine whether it even holds true for the US. Cliff Asness, who runs a $140bn systematic strategies fund, did just that back in May. He argued that:
- If the problem is accounting then let’s buy cheap stocks and sell expensive ones within industries and see what happens. In any given industry the importance of intangibles should be about the same for all players. Besides, everyone more or less follows the same accounting rules.
- If the problem is mega-caps (Microsoft, Amazon, Facebook, Google etc.) that dominate due to increasing returns on scale then let’s exclude those mega caps and see what happens.
- If the problem is tech, with all that disruption, then let’s exclude tech completely and see what happens.
In each of these cases when Asness ran the numbers he found value investing to be severely underperforming over the last decade. Cheap stocks are the cheapest they have ever been regardless of how you cut the data. Those fancy explanations for why value doesn’t work are likely bunk.
If the explanations designed for the US don’t work in the US then one can hardly hope for them to work for India.
But here’s another cut — this time using common sense instead of statistics. Take a look at the top 10 Indian firms by market cap below (along with their American counterparts for reference). Together these 10 firms make up ~ 40% of the total Indian public equity.