Are Markets Broken for Value Investors?
David Einhorn of Greenlight Capital recently expressed his concerns about the state of the market, particularly for value investors, during an interview at CNBC’s Delivering Alpha event. He voiced his frustration with the rising dominance of passive investing and the challenges faced by those who adhere to a value-oriented approach.
Einhorn’s criticisms of passive investors, particularly those who rely on index funds like the S & P 500, are not new. He believes that the emphasis on earnings growth and the disproportionate influence of technology stocks have distorted traditional measures of value, making it difficult for value investors to find opportunities.
While it’s true that passive investing has become increasingly popular due to its lower costs and the historically poor performance of active managers, Einhorn’s concerns highlight a larger issue in the market. Value investors like him have struggled to outperform growth stocks in recent years, despite historical evidence suggesting that value investing should be a winning strategy in the long run.
Rob Arnott of Research Affiliates echoes Einhorn’s sentiments, noting that value stocks have become cheaper relative to their fundamentals while growth stocks continue to command high valuations. This trend has been exacerbated by the fierce competition among active managers, who often lack a competitive edge and struggle to justify their higher fees.
Despite the challenges faced by value investors, there are still opportunities to outperform the market. Arnott suggests that investors who focus on profitability metrics like book value, sales, cash flow, and dividends may have a better chance of success over the long term.
Einhorn acknowledges that the current market is one of the most expensive in history, but he stops short of predicting a market downturn. While valuations are stretched, he believes that the market could continue to rise in the near future.
In conclusion, the debate over the state of the market and the challenges faced by value investors is ongoing. While passive investing and growth stocks may be dominating the landscape for now, there are still opportunities for value-oriented investors to succeed. By staying true to their principles and focusing on long-term value creation, investors like Einhorn may be able to weather the storm and come out ahead in the end.