Value investing - still appropriate?

Ben Steverman in Businessweek asks whether value investing is still the way to go.

Disciples of the value strategy, like Berkshire Hathaway's (BRKA) Warren Buffett, focus on the long-term intrinsic value of a company, hoping to buy shares in good companies at reasonable prices. By focusing on value, they avoid fast-growing firms with expensive stocks, and, by thinking long term, they try not to worry about the fickle gyrations of the market from month to month or day to day.

But amid a severe recession and financial crisis, true value has proven to be a slippery concept. "It's only a value if you can accurately assess today what the future profits will be," says Richard Sparks of Schaeffer's Investment Research. Particularly for financial stocks—some of which haven't or won't survive the crisis—it's nearly impossible to identify the long-term value, whether through profits, cash flow, or other measures.

Value or momentum!

Turns out both.

Found this paper by Clifford S. Asness, Tobias J. Moskowitz, and Lasse H. Pedersen1 (note: pdf link) via an article in the New York Times.

Here's the abstract:

We study jointly the returns to value and momentum strategies for individual stocks within countries, stock indices across countries, government bonds across countries, currencies, and commodities. Value and momentum generate abnormal returns everywhere we look. Exploring their common factor structure across asset classes, we find that value (momentum) in one asset class is positively correlated with value (momentum) in other asset classes, and value and momentum are negatively correlated within and across asset classes. Long-run consumption risk is positively linked to both value and momentum, as is global recession risk to a lesser extent, while global liquidity risk is related positively to value and negatively to momentum. These patterns emerge from the power of examining value and momentum everywhere at once and are not easily detectable when examining each asset class in isolation.

Value vs growth investing

Value investing (looking for low P/E, high dividend yield stocks) can be difficult in a bull market, with valuations on the rise. Anna French in The Australian explains what sorts of firms the fund managers are looking at. Note that the distinction between value and growth is not always clear:

Roger Montgomery, chairman of value manager Clime Asset Management, says value is hard to find but it is not the worst he has seen it. He also has a more flexible definition of value. "Value and growth are two sides of the same coin. You can't estimate the value of a business unless you can confidently assess its growth.