I’ve watched more than a few seasoned investors quietly shake their heads over the past decade. The numbers keep coming in, and they don’t look kind. Value stocks, those companies trading at a discount to their underlying worth, simply haven’t kept pace with the broader market. Over the ten years ending in July 2026 the MSCI World Value Index delivered an annualised return of 11.0 percent while the main MSCI World Index managed 13.3 percent. Momentum strategies did even better, posting 15.2 percent. For anyone raised on the classic idea that buying cheap assets eventually pays off, these figures sting.
So the question sits there, awkward and unavoidable. Is the whole approach finished? Has the market changed so much that hunting for undervalued businesses no longer makes sense? Or are we simply living through another stretch of market exuberance that will eventually correct itself? I’ve spent enough time looking at cycles to know the answer is rarely black and white. Let’s dig into what’s really happening and whether patient capital still has a place.
Why Value Has Lagged So Badly
Two forces have combined to push value strategies into the background, and they feed off each other. First comes the relentless rise of passive investing. Back in January 2008 passive funds made up only 12.4 percent of the total investment fund market. By July 2026 that share had climbed to 46.4 percent. Most of these vehicles track market-capitalisation weighted indices. Money poured into the biggest companies simply because they were already the biggest. Fundamentals barely entered the conversation for many of the buyers.
At the same time technology stocks exploded. Cloud computing, smartphones and more recently artificial intelligence concentrated growth into a handful of names. These businesses often trade at eye-watering multiples. One software firm recently sat above 150 times trailing earnings and more than 110 times forward estimates. An electric vehicle maker looked even richer. Traditional value screens reject these companies almost automatically because the numbers look stretched against current profits or assets.
The result feels almost mechanical. Passive flows keep reinforcing the largest names while the AI narrative keeps valuations elevated. Momentum becomes the dominant factor. One well-known fund manager admitted in a letter to shareholders that he would start paying closer attention to momentum when selecting holdings. He noted that markets dominated by index funds and AI excitement produce price moves driven more by flows than by profitability or returns on capital.
The Passive Investing Feedback Loop
Picture a simple mechanism. Investors buy an index fund. The fund has to buy more of the largest constituents. Those shares rise. Their weight in the index increases. Next month’s inflows buy even more of them. The process repeats. Nothing in that loop requires an analyst to check free cash flow or balance sheet strength. The largest companies keep getting larger relative to the rest of the market.
I’ve found this dynamic creates a strange environment. Companies that look expensive by any conventional measure continue to attract capital simply because they already sit at the top of the league table. Meanwhile solid businesses trading at modest multiples struggle for attention. The gap widens. Over time the distortion grows more pronounced.
Some observers compare the current setup to late-cycle markets of the past. Elevated valuations, strong momentum and a dominant narrative around a transformative technology all feel familiar. Whether the parallel holds perfectly is open to debate, yet the pressure on valuation-driven approaches remains real.
Tech’s Awkward Fit With Traditional Screens
Technology has always challenged classic value methods. These businesses often invest heavily for future growth rather than current earnings. Price-to-earnings ratios look extreme because the market prices in rapid expansion years ahead. A pure value investor looking only at today’s numbers walks away. The trouble is that walking away means missing some of the strongest compounders of the past decade.
That tension sits at the heart of the current debate. Should value managers stick rigidly to their process even when it excludes the most dynamic parts of the economy? Or should they adapt by incorporating elements of momentum and growth? The answers differ sharply depending on whom you ask.
A Notable Shift In Approach
One prominent manager recently told clients he would place greater weight on momentum in future decisions. The letter acknowledged that periods of market exuberance test valuation-driven investors especially hard. The combination of the AI investment boom, strong momentum and elevated prices creates clear echoes of previous late-cycle phases.
Not everyone agrees with that adjustment. Several investors argue the present environment is precisely when discipline matters most. Becoming more of a crowd follower, they say, risks abandoning the very principles that have delivered results across decades. In their view the right response is to stay focused on earning power and long-term compounding rather than chase recent price strength.
Does The Strategy Still Work Over Time?
History offers some comfort. Value has underperformed for multi-year stretches before. The late 1990s provide the most vivid example. Growth and technology names raced ahead while traditional value lagged badly. Then the cycle turned. Over the subsequent decade many of those discounted businesses delivered strong relative returns. The pattern has repeated in milder forms several times since.
What changes is the length and intensity of each period. The current stretch has lasted longer than many expected, partly because of the structural shift toward passive vehicles. Yet structural shifts do not erase basic arithmetic. Companies that generate high returns on capital and trade at reasonable prices still compound wealth over full market cycles. The timing of recognition simply becomes less predictable.
I’ve noticed that patient investors often describe the current environment as an opportunity rather than a threat. Passive flows and momentum chasing can push prices further from underlying value. That process expands the pool of potential mispricings. For someone willing to wait, the eventual reversion can prove powerful.
The Case For Staying Disciplined
One investment manager put it clearly. A market driven by passive flows and momentum can become increasingly distorted. Momentum currently sits at levels last seen in the late 1990s. That setup has historically ended poorly. The remedy, in this view, is not to join the crowd but to continue applying bottom-up analysis focused on earning power.
We continue to believe that disciplined, bottom-up value investing, with a focus on earning power, is the right way to compound capital over the long term.
The same manager noted that passive investing and index flows should expand both the number and the size of mispricings. Patient long-term shareholders stand to benefit. That perspective flips the usual narrative. Instead of viewing the rise of passive funds as a permanent headwind, it treats the resulting distortions as fuel for future outperformance.
In my experience the most successful value investors share a certain temperament. They accept periods of underperformance as the price of admission. They spend less time worrying about relative returns over three or five years and more time studying individual businesses. When the market eventually rotates, their portfolios are already positioned.
Practical Ways To Apply Value Principles Now
Even if the purest form of deep value faces headwinds, the underlying ideas remain useful. Looking for businesses that generate solid free cash flow, maintain healthy balance sheets and trade at sensible multiples of those cash flows still makes sense. The difference today lies in the time horizon required and the willingness to tolerate volatility.
- Focus on absolute rather than relative valuation metrics when screening
- Pay closer attention to the quality of earnings and the sustainability of returns on capital
- Accept that some high-quality compounders will rarely look cheap on traditional measures
- Build a margin of safety large enough to withstand further periods of underperformance
- Review holdings regularly for changes in competitive position rather than short-term price moves
Perhaps the most interesting aspect is how these principles interact with modern markets. A company that looks expensive relative to its sector peers might still offer attractive absolute returns if its competitive advantages are durable. Conversely a cheap stock can stay cheap for years if the underlying business is deteriorating. Judgment remains essential.
Momentum Versus Value In Different Market Regimes
Markets move through regimes. In some environments momentum dominates. Rising prices attract more buyers, narratives strengthen and valuations stretch. In others the focus returns to fundamentals. Cash flow, balance sheet strength and reasonable entry prices regain importance. The transition between regimes is rarely smooth or well signalled in advance.
Trying to time those shifts perfectly is a fool’s errand for most of us. What works better is maintaining a consistent process that can survive both environments. That process might include a modest allocation to higher-momentum names while keeping the core of the portfolio anchored in undervalued businesses. The exact mix depends on risk tolerance and time horizon.
I’ve seen investors try to abandon value entirely after long periods of underperformance only to regret the decision once the cycle turns. The reverse also happens. Rigid adherence without any adaptation can leave a portfolio stuck in the past. Balance is harder than it sounds yet more valuable than pure dogma.
What History Suggests About Mean Reversion
Long-term data still supports the idea that cheaper stocks eventually deliver higher returns than expensive ones. The effect is not constant year to year. It tends to appear in clusters. After extended periods of underperformance the subsequent catch-up can be sharp. Investors who stayed the course through the late 1990s enjoyed strong relative performance in the early 2000s. Similar patterns appear in other decades.
The length of the current underperformance period raises legitimate questions about whether something structural has changed. The growth of passive investing is real. The concentration of market leadership in a small number of technology names is real. Yet companies still need to generate cash to survive and grow. That basic requirement has not disappeared.
When the narrative around a dominant technology eventually cools, capital often rediscovers businesses that were ignored during the boom. The precise timing remains uncertain. The direction of eventual travel looks more predictable.
Building A Portfolio That Can Endure
Practical construction matters more than theory. A pure value portfolio concentrated in the cheapest quintile of the market can experience painful drawdowns. Spreading exposure across quality, value and a measured dose of momentum can reduce the emotional pressure of underperformance. The goal is not to eliminate tracking error but to keep it within a range that allows the investor to stay invested.
Position sizing also plays a role. Large bets on individual deep-value names require high conviction and a long time horizon. Smaller positions in a broader set of undervalued businesses can still capture the factor while limiting the impact of any single misjudgment. Diversification remains a useful tool even for value-oriented approaches.
Tax considerations and costs influence the outcome as well. Frequent trading to chase the next cheap stock can erode returns. A lower turnover process that holds positions for several years often proves more efficient after costs. The exact threshold varies by market and by investor, yet the principle holds.
The Role Of Temperament
Strategy only works if the person implementing it can stick with it. Value investing demands a certain stubbornness. Watching peers post higher returns for years tests anyone’s resolve. The investors who succeed tend to focus on process rather than short-term results. They measure success over full market cycles rather than calendar years.
That temperament can be cultivated. Keeping a written investment policy helps. Reviewing performance only at predetermined intervals reduces the temptation to react to every monthly ranking. Surrounding oneself with people who share a long-term outlook also helps. The alternative is constant second-guessing that eventually leads to abandoning the approach at the worst moment.
In my own observation the managers who talk least about relative performance often end up delivering the strongest absolute results over time. They spend their energy understanding businesses rather than ranking tables. That focus becomes a competitive advantage precisely when markets grow most distracted by narratives and flows.
Looking Ahead Without Predictions
No one knows when the current regime will shift. Momentum could continue for longer than most expect. Valuations in certain segments could stretch further. New narratives could emerge. Predicting the exact turning point is less useful than preparing for the possibility that it arrives.
Preparation means maintaining exposure to undervalued businesses that can compound capital if and when recognition returns. It also means avoiding the temptation to abandon the approach entirely after a difficult stretch. The market has a habit of rewarding those who stay consistent through uncomfortable periods.
Perhaps the most honest answer to the original question is that value investing is not over. It is simply out of favour. Being out of favour has never been a permanent condition in markets. The principles of buying assets for less than their intrinsic worth and allowing time to close the gap remain as logical as ever. Execution requires patience, discipline and a willingness to look different from the crowd for stretches of time.
Those qualities have always been rare. They may be even rarer in an age of constant performance comparison and instant information. That scarcity itself creates opportunity for those who can cultivate them. The next chapter of the market cycle will eventually reveal whether the current underperformance was merely a long pause or something more permanent. Until then the quieter path of focusing on businesses rather than benchmarks continues to appeal to a certain type of investor.
The numbers of the past decade are clear. Value has lagged. Momentum and passive flows have dominated. Yet the arithmetic of compounding still favours businesses purchased at sensible prices relative to their earning power. History suggests those businesses eventually receive their due. The waiting is the hard part. For investors willing to endure it, the approach remains very much alive.
