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Till early last year, before the tech sell-off, I was reading articles and research papers like: “Is value investing dead?" After the tech sell-off, I read articles like: “Is Value Investing back from the dead?"

The two-contrasting articles within a short span reflect the cyclical nature of the market. It is true that value has struggled to deliver returns in the last many years, and various reasons are ascribed to it, ranging from the rise of intangibles to liquidity-led monetary policy and lower interest rates to value becoming a crowded trade and so on.

Most of such conclusions are based on the return profile of the Factor. But is Value Investing and Value Factor the same? I don’t think so.

Value investing is a philosophy or a concept of buying stocks at a price lower than some reference point (call it inherent or intrinsic worth). Waiting for the blackfriday sale to buy that next pair of jeans is akin to value buying. Value factor, on the other hand, is a metric to measure and define the quantum of value present in that one stock relative to the other (read cross sectional – how much discount does Levi’s jeans has over Diesel).

Typically, such factors are defined using P/B or P/E or some form of dividend discount models (there could be other fundamental variables at play as well). Most of these are accounting measures and prone to estimation errors. Valuation as a concept is closer to cash flows. DCF is normally the preferred method for any analyst to estimate the economic worth of a company.

Though one can argue that cash flows in DCF are estimated using accounting variables like EBIT/EBIDTA.

Even if we stick to the accounting measure, the value factor is a way of gaining exposure to value in a systematic way. A negative alpha for systematic value cannot be the basis for a conclusion on value investing as a concept. Discretionary value, together with systematic value, forms a large part of the value investing world.

While in terms of a pure factor portfolio (a long short portfolio with unit exposure to value and zero exposure to all other factors), value factor performance might be questionable, there are enough individual value stocks that have performed. PSU stocks, for example.

So while the debate is still on whether value is dead or not, it might help to take a look at the definition of systematic value and isolate discretionary value from the debate.

The author, Sujit Modi, is WealthBasket Curator and Founder & CEO, Quantech Capital

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