A strategy favored by value investors for many decades, picking stocks whose market values are below 澳洲幸运5官方开奖结果体彩网:book value, may no longer have validity, according to research by Inigo Fraser-Jenkins, head of global quantitative and European equity strategy at Sanford C. Bernstein & Co., as repor✱ted by .🅰

In their influential work published in 1934, Security Analysis, Columbia Business School professors 澳洲幸运5官方开奖结果体彩网:Benjamin Graham and David Dodd laid out many principles of value investing used to this day, including seeking stocks that trade below book value. Master investor 澳洲幸运5官方开奖结果体彩网:Warren Buffett has called Graham's 1949 work, 澳洲幸运5官方开奖结果体彩网:The Intelligent Investor, "by far the best book on investing ever written." However, Buffett's reputation has suffered in recent years as Berkshire Hathaway Inc. (BRK.A), a colossus with a $520 billion 澳洲幸运5官方开奖结果体彩网:market cap, has failed to beat the market. During the current 澳洲幸运5官方开奖结果体彩网:bull market, from March 9, 2009 through June 28, 2019, both the 澳洲幸运5官方开奖结果体彩网:S&P 500 Index (SPX) and Berkshire stock are up by 335%. ꧒In 2019, the year-to-date gains are 4.0% for Berkshire versus 🍌17.3% for the S&P 500.

Significance for Investors

Buffett himself has noted the diminished utility of book value. "The annual change in Berkshire's book value...is a metric that has lost the relevance that it once had," he wrote in his 澳洲幸运5官方开奖结果体彩网:2019 annual letter to shareholders. "Accounting rules require our collection of operating companies to be included in book value at an amount far beloꦯw their current value, a mismark that has grown in recent years," he added꧋.

A key premise behind Graham and Dodd's framework is 澳洲幸运5官方开奖结果体彩网:mean reversion, by which stock valuations and returns adjust tꦜo long run averages. Stocks that trade below their intrinsic values, based on a variety of metrics, 𒁃eventually should recover in price.

Looking at the last 10 years, however, Fraser-Jenkins and his team found that mean reversion has not occurred, as cheap stocks have tended to remain cheap and expensive stocks have tended to get even more expensive. They believe that the dominance of high-growth tech stocks and the effects of 澳洲幸运5官方开奖结果体彩网:quantitative easing (QE), by which 澳洲幸运5官方开奖结果体彩网:central banks have pushed interest rates to historic lows, are key reasons why traditiꦓonal value investing has broken down.

Low interest rates mean low 澳洲幸运5官方开奖结果体彩网:discount rates for projected earnings and 澳洲幸运5官方开奖结果体彩网:cash flows, boosting the valuations of companies that are expected to deliver robust growth far into the future. The dominant tech stocks, meanwhile, have such high expectations for future growth, leading to ever🎃-expanding valuation multiples in the market.

Finally, the Bernstein team notes, many successful companies today, notably tech firms, have much of their value in the form of 澳洲幸运5官方开奖结果体彩网:intangible assets such as brand names and 澳洲幸运5官方开奖结果体彩网:intellectual property. Such intangibles typically are not recognized on thᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚe balance sheet, leading to severely understated book values.

“Value is currently trading at the biggest discount ever, and offers the largest premium over the last 30 years,” according to a note to clients from Dubravko Lakos-Bujas, chief U.S. equity strategist at JPMorgan, as quoted in . He looked at the median 澳洲幸运5官方开奖结果体彩网:forward P/E ratios and the 澳洲幸运5官方开奖结果体彩网:price to book ratios of the cheapes൲t and most expensive S&P 500 stocks to draw this conclusion.

Looking Ahead

After meeting with Chinese President Xi Jinping on Saturday, President Trump announced that trade talks between the U.S. and China are "right back 💫on track" and that new tariffs are on hold, reports. If this boosts the market on Monday, value stocks may continue to lag, at least for now.