Long Live Value Investing

This article has been excerpted and edited from our quarterly newsletter to clients dated November 25, 2025.

Some have argued that value investing is dead.  Growth names have considerably outperformed.  Passive (index-linked) investments now represent the majority of ETFs and mutual funds.  These two phenomena have been reinforcing because the growth companies—pricier companies whose valuations tend to overshoot as growth is prized—represent such a disproportionate portion of major indices.  Because information is so readily available, markets are highly efficient and many contend that markets no longer produce meaningful anomalies.  As such, strategies focused on value have been regarded as outdated.

But claims of the death of value investing are always prevalent near market tops, when speculation has unduly lifted securities, seemingly without reference to underlying value.  Bitcoin is up because bitcoin is up.  Gold is way up.  What kind of “safe haven” is as volatile as stocks?  And it trades about 2.7x its cost of production—a level only briefly reached by 4 other commodities in the last 50 years, all of which promptly sold off dramatically.  Many stocks are also ignoring underlying fundamentals.  Anything AI related has been raging.

Active managers generally underperform underlying stock indexes.  It’s mainly because indexes are designed to include the strongest companies—most are cap weighted, overweighting the largest ones—while weaklings are culled.  No fees or commissions in indexes helps too.  Over the last 20 years, fewer than 2% of all U.S. mutual funds have managed to beat the S&P 500.  As such, why would investors not simply passively invest in index ETFs?

STACKING THE DECK IN OUR FAVOUR

To us, the answer is simple; by employing the tenets of value investing we can buy high-quality undervalued securities that are being ignored, while avoiding poor quality or expensive ones.  Therefore, our process begins with specifically designed screens of leading securities and/or markets to distill a list of those that are likely to outperform.  Then, these positions are assessed utilizing our TRAC™ tool to optimize entry and exit points.

Some assert that stock prices always reflect the value of companies.  But prices fluctuate way too much to constantly be indicative of value.  Most academics argue markets are mostly efficient, and we agree; however, inefficiencies certainly exist.  Though, in our wired world, inefficiencies don’t last as long.  Therefore, we need to react relatively quickly when an opportunity presents itself, and similarly when a position reverts to our estimate of its Fair Market Value (FMV).

Indexes are currently positioned to underperform.  Markets have been more efficient than usual leaving fewer companies undervalued.  Some have traded too high above their underlying values, pushing overall indexes too high, right to ceilings in our work.

In the short term, market psychology drives prices.  Over time, economic reality prevails and prices coincide with values derived from businesses’ bottom-lines.  That’s right out of the value investing handbook.  Value investing isn’t dead; it’s just been overshadowed.

WEAKENING FUNDAMENTALS

Across the U.S. and Canada, construction is contracting for housing and commercial buildings.  You don’t need to tell Toronto condo builders there’s a contraction.  Sales activity is 90% below the 10-year average and prices per square foot are down over 22% from their 2022 peak.

Lenders generally have become anxious.  For example, lenders are changing terms to require unanimous consent before borrowers can cause a new loan to rank ahead of theirs.  At the rate this is occurring—over 80% of all credit deals—it’s possibly an early-warning sign about impeding credit issues.  Delinquencies are already up for consumers and small businesses, while sub-prime borrowers are feeling an even greater pinch.  Business bankruptcies are running high too.

In the first 3 quarters of 2025, companies cut 55% more jobs than the comparable period last year, the most since the 2020 recession.  October’s job cuts were the most for October since 2003.  Consumer sentiment is awful and, based on history, is foreshadowing much more unemployment.

Capacity utilization has weakened globally, down to about 75% from its peak of 79%.  This likely means additional idle capacity, lower capital spending, increased corporate financial pressures, and potential price cuts.  While it doesn’t auger well for economic growth, it implies lower inflation.  Disinflationary pressures should also continue from AI—a productivity enhancer and expense reducer—as well as tariffs which inhibit global trade, and other growth suppressors such as high government debt levels, contracting money supply, and anemic population growth.    As a result, lower interest rates are likely.

The economy has been buoyed by spending on AI infrastructure which has been astounding, though it is unlikely to last at its current level.  U.S. IT spending has risen to nearly 4.5% of GDP, just below where it peaked in the dot-com bubble.  Further evidence that it’s overdone, Microsoft, Amazon, Alphabet, and Meta have spent 10 times what they’re receiving in AI revenue this year, and profits, if any, would be negligible.  These companies are now spending over 60% of their cash flow on capital expenditures, up from a more normal average of 30%.  And we won’t even delve into the complications around the key players who seem to be funding each other, i.e. investing in/financing customers.

GDP growth rates have already fallen and profits margins nearly always follow too but, unusually, margins have increased for the past year or so.

Competition from China is coming.  Though U.S. protectionism could slow its onset, misplaced U.S. policies are forcing lasting structural changes.  The political climate has led many Chinese born academics and tech experts to flee the U.S. and return to China.  Already, China produces many products more efficiently and much cheaper.  Now, with better funding, more R&D, and operating in a more competitive fashion, with more urgency, it could catapult ahead.  China is responsible for half the world’s most-cited scientific papers, compared to a decline to one-third from the U.S.  China could take the lead in key areas such as AI, quantum computing, and biotech.

PRICED FOR PERFECTION

Yet, major U.S. and Canadian stock markets are close to all-time highs, at or below TRAC™ ceilings, and priced above FMVs, leaving them vulnerable to price declines.  Long-term attractiveness is poor too, since real returns (net of inflation) have never been positive over a 10-year period when equity valuations have been this high.  The ratio of the Wilshire 5000 (the broadest measure of U.S. corporate prices) to after-tax profits has only been higher during the dot-com bubble.

The stock markets don’t seem to care.  Market speculation has continued.  Equity call option volume relative to puts—bullish bets versus bearish—is the highest on record.  Equity ownership is at all-time highs, itself implying poor 10-year expected returns.  And the Russell 2000 small cap companies that are unprofitable were up 30% in 6 weeks through mid-October, while high-quality stocks’ underperformance is at a low not seen since the dot-com bubble.

Given that valuations are so high, U.S. growth is weakening, and our Economic Composite, TEC™, is still alerting us to a potential recession, we continue to maintain hedging strategies by either holding short positions (where authorized) or inverse long ETFs.

A RARE BREED

As indexes run higher and passive investing gains even more converts, value investors are becoming scarce.  But bottom-up security selection based on value and quality, while not easy, should be sought out and embraced, especially when market valuations are so high.

Value investing uses common sense.  We endeavour to buy at a discount and sell at fair market value.  We emphasize quality businesses, diversify holdings, and hedge via shorting or inverse longs when our models indicate a recession or bear market.  We can diversify across strategies too, for exposure to additional assets classes or geographies which ought to reduce drawdowns and volatility.  None of that sounds like it should be scarce.

The best investment ideas tend to come from well-sourced idea generation.  We continue to integrate all our tools to screen for the best new potential investments, to constantly parse and analyze the results, and to find appropriate entry and exit points for those selected for inclusion.

Underlying fundamentals ultimately matter, even though psychology can overwhelm for some time.  Just like their investments, value investors themselves are currently ignored.  But time and logic are on our side.  We’re nowhere near extinction.

Long live value investing.