Re: Is Value just a big bet on Financials? via Abnormal Returns.

The answer is either “yep,” or “it depends.” Let’s define some terms.

There are three types of analysis: Technical, Fundamental, and FundaTechnical. “Value investing” uses FundaTechnical analysis as it’s bedrock, and is predominantly quantitative in nature, although “value investors” will often through some qualitative junk into the trunk, talking about whether the company has a “moat” (WTF is a “moat?”) or has an easily understandable business model (that depends on who’s trying to understand it, don’t it?). But aside from the general taxonomy of where “value investing” fits, analysis-wise, in the greater realm of TRADING, we can get more specific with what “value investing” is: “Value investing” is simply a mean-reverting sentiment trade. It’s built on the premise that markets overreact, and beat down good companies past the point where (statistically, not necessarily specifically) it makes sense. Even the “cigar-butt” diversified quantitative trading strategy defined by Ben Graham is based on that central premise.

Digging deeper into the idea of “value investing,” there are at least three different types of “value” that can be defined, based on the measurement benchmark (and NOT the measurement METRIC - the metric is the FundaTechnical ratio used, such as Price/Book, Price/Earnings, etc):

(1) relative industry value - selecting those stocks which are “cheap” in their industry

(2) relative market value - selecting those stocks which are “cheap” in their market

(3) absolute value - selecting a value for the metric which is independent of the environment, such as “the stock price is below the company’s NCAV”

Having defined some terms, we can now critique the article Is Value just a big bet on Financials?

First, those indices mentioned don’t have readily-available, useful definitions of “value” for us to evaluate them by. Splitting the universe of one index into halfsies called “value” and “growth” is just bullshit, as anyone who’s ever done hard-core value analysis knows.

Second, and the reason behind the “yep” answer, above, is that many, if not most, “value investors” use either benchmark (3), absolute value, or benchmark (2), relative market value, in their benchmarking. Certainly those bullshit indices use benchmark (2). This means that, today, those valuation benchmarks will spit out tons of financials.

DUH.

This is actually a DESIRABLE FEATURE OF VALUE SCREENERS! The whole frickin’ gosh-darn POINT of “value investing” is that it is CONTRARIAN, i.e., a “mean-reverting sentiment trade.”

At any given point in history, “value investing” with benchmarks (3) or (2) will load you up with stocks from a peculiar concentration of industries. “Value investors,” take your screeners and see what was on them in 1997, in 2000, in 2003, or even in 1980. Betcha you’ll find a high industry concentration …

Third and final, and the reason behind the “it depends” answer, above, is that if the “value investor” wants to avoid this industry concentration, they can do so very easily. Use benchmark (1), “cheap in their industry,” as the definition of “value.” Presto! No longer loaded with financials …

Note that the historical demonstration of which benchmark style works best, historically, with your particular metric choice is left to the reader.