The decline of value investing is not a recent phenomenon but a process that has been unfolding for over three decades. While many pinpoint its loss of effectiveness around 2007, Baruch Lev and Anup Srivastava demonstrate in their study that the strategy has in fact been structurally underperforming since the late 1980s. The key question is therefore: is value investing dead, or merely in a deep hibernation?
Figure: value vs. growth
The traditional value strategy—going long on stocks with low market-to-book ratios and shorting expensive “glamour” stocks—is built on the principle of mean reversion: stocks that are (too) cheap eventually rise in value, while overvalued companies are ultimately downgraded. This pattern generated strong excess returns for decades. But since the late 1980s, the engines driving this strategy appear to have stalled.
One key reason lies in the accounting treatment of intangible assets. While investments in physical assets appear on the balance sheet and contribute to a company’s book value, expenditures on research and development (R&D), marketing, IT, brand development, and employee training are typically recorded as expenses on the income statement. These outlays often fall under the broader category of “Selling, General & Administrative expenses” (SG&A), which also includes regular operational costs. As a result, companies that invest heavily in intangible assets appear “expensive” from an accounting perspective, even when they are fundamentally sound. Value strategies that rely blindly on traditional valuation ratios such as market-to-book or price-to-earnings end up making systematically flawed classifications.
Lev and Srivastava correct this distortion by reclassifying R&D and part of SG&A expenses as capital expenditures, then depreciating them over multiple years. This provides a more realistic view of book value, resulting in significant rebalancing within value and glamour portfolios. The outcome is striking: in nearly every year since 1970, the adjusted strategy delivered better returns than the conventional one. In the 2000s, the difference was particularly pronounced, and even after 2007—when value investing underperformed across the board—the adjusted strategy continued to yield positive results.
Yet accounting is only part of the story. There has also been a structural decline in mean reversion. In the past, glamour stocks frequently lost their leading position while value stocks managed to recover. Today, companies remain much longer in their value or glamour categories. Data show higher rank correlations, longer holding periods within portfolios, and fewer price jumps of more than ten percent—all signs of diminished revaluation.
The causes are macroeconomic. The credit crisis of 2007–2009 had a prolonged negative impact on financial institutions and consumer-facing sectors—traditional value domains. Banks, insurers, retailers, and utilities faced low profitability, limited access to capital markets, and insufficient internal cash flow to invest in innovation. In contrast, glamour firms in tech, pharma, and software had ready access to financing, achieved high margins, and were able to invest heavily in scalable, intangible assets.
The authors analyzed which value companies nonetheless managed to escape their low valuation status. These “escapees” were marked by high investments in intangible assets, net capital expenditures (after depreciation), healthy revenue growth, and the ability to take on additional debt. Interestingly, factors like acquisitions or sector shifts made little difference. Internal investment and business model thus proved more decisive than strategic reshuffling.
For institutional investors, the message is clear: traditional value strategies are outdated when they continue to rely on accounting metrics that ignore intangible assets. Those looking for true value must reinterpret accounting rules, focus on fundamental business models, and select companies with both the potential and the means to invest. Value investing is not dead, but it does require redefinition—away from book value, toward economic value.
Gertjan Verdickt is an assistant professor of Finance at the University of Auckland and a columnist for Investment Officer.