7.6.17

[ Investing Fact ] Value Investing Don't Work Anymore!

Buying stocks that are cheap and out of favor to capture extra return when they eventually recover—a cornerstone of value investing—has worked for decades, but may no longer be a sound strategy due to shifts in how markets operate.

The bible of value investing, rely on a phenomenon called mean reversion. Simply put, many stocks that become undervalued should eventually recover, while stocks that become overpriced should eventually return to earth.

The metrics such as price-to-earnings, price-to-book and profit margins, which tended to revert to the mean, are no longer following previous rules. In other words, it’s less clear what’s really cheap or what’s truly expensive.

The interest rate, often referred to as discount rate, is used to calculate future cash flows: the higher the discount rate, the lower the present value of the future cash flows. If average valuations as well as average profitability are higher and interest rates or discount rates used to calculate future cash flows are lower, then stock prices should continue to rise