Value Investing Will Turn Around But No One Can Say When

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During his recent interview with Tobias Carlisle, Justin Carbonneau, Managing Partner at Validea Capital discusses how value investing will turn around but no-one can say when. Here’s an excerpt from the interview:

Tobias Carlisle: We’ve seen this really difficult time for value. I get the feeling that you’re not necessarily a believer that value can turn around. You don’t think it can do it again?

Justin Carbonneau: You don’t think that? No. I strongly believe, to your point earlier, I think value investing, there’s the underpinnings of what makes value stocks work. I believe very strongly in that. I just don’t believe anyone can time the turn in value or the turn in any of these factors. But, mean reversion is a very powerful thing in the market.

Looking out over the next ten years, I do think value stands a very good chance of certainly improving its relative performance. But, you also have to always question your beliefs to some extent and just try to be … That’s one thing I’ve tried to do more of and my partner, Jack, he does a really good job at it. I don’t. I tend to, on Twitter and the articles I read and stuff, I read the things I agree with. When I hear fundamental investing is dead or somebody that’s bashing Buffett for his performance over the last 15 years, I don’t agree with that stuff. But, I also want to be open-minded to that in the markets, things change and things can go on a lot longer than we think, and they have been for a couple of years now.

Tobias Carlisle: I think value investors have been doing a lot of introspection. The last decade’s been rough, but the last five years in particular. I thought five years into the underperformance was enough.

Justin Carbonneau: Yeah. I think we were writing about it five years ago. Turn in value.

Tobias Carlisle: Here it comes.

Justin Carbonneau: I think we might have been one of the earlier ones, and we were wrong. It kind of humbled us, I think, in that sense.

Tobias Carlisle: I’ve been saying, “It’s five years,” for so long that it’s longer than five years now. I’ve been saying it for six or seven years. I’m actually going to say it’s seven years. It’s so long.

Justin Carbonneau: Exactly.

Tobias Carlisle: I always think of that article that Malcolm Gladwell wrote about Nassim Taleb. Nassim Taleb used to say to his trader, “Have you introspected today? Introspect. Introspect.”

Justin Carbonneau: Yeah. Right.

Tobias Carlisle: Every value investor out there, there’s so much introspection going on. Why aren’t these strategies working? If you were a value investor who’s kept up with the market over the last decade, you’re a genius. You’re just undiscovered. Having lived through it, I remember all the… There’s a suggestion that the problem with the value strategy at the moment is it’s so focused in bad sectors. It’s focused in energy, it’s focused in financials. Having lived through it, I can point at each stage along the way. All of these disasters like Chinese reverse takeovers, they all came on. They looked pretty cheap. They all floated down into the value stuff if you bought them, you got carted out. Then there was the for-profit colleges.

Justin Carbonneau: What was the Corinthian college and-

Tobias Carlisle: I remember it well.

Justin Carbonneau: Yeah. These things were trading at PE of four or something, you know?

Tobias Carlisle: If you backed out the cash, though, free.

Justin Carbonneau: Right.

Tobias Carlisle: Then energy more recently. At every stage along the line, you’ve just walked into a value trap industry.


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