Diagnosing the Recent Decade of Drawdown in Value

This post analyzes the historical performance of value investing strategies, specifically examining the book-to-price ratio's effectiveness in identifying value stocks. It highlights a regime change around the Global Financial Crisis (GFC) where the profitability and operating efficiency of stocks identified by the book-to-price metric diverged, with 'glamour' stocks becoming more profitable and 'value' stocks less so. This divergence is attributed to the increasing importance of intangible assets, which are not fully captured by traditional accounting book value. The analysis suggests that a value strategy incorporating intangibles, such as one based on earnings yield, has remained profitable and did not exhibit the same regime change, indicating that book value has become an incomplete fundamental valuation model for firms in the modern economy.