- 1Classic value metrics (P/E, P/B) are less effective than they used to be
- 2Modern value adjusts for intangible assets like R&D and software
- 3Arnott et al. (2021) showed intangible-adjusted value outperforms
- 4Value works best when combined with quality factors
#The Value Investing Story
Value investing starts with Benjamin Graham, Warren Buffett's mentor. The idea is simple: buy stocks trading below their intrinsic value.
For decades, this meant looking for low price-to-book ratios. Stocks trading below book value were "cheap" and outperformed.
Then something changed.
#What Happened to Value?
From 2007 to 2020, value investing struggled. Growth stocks—particularly technology—massively outperformed.
Many declared value investing "dead."
But the problem wasn't the concept. It was the measurement.
#The Intangibles Problem
Traditional book value includes: - Property and equipment - Inventory - Cash
It excludes: - Brand value - Patents and intellectual property - R&D investments - Software development - Customer relationships
In 1980, tangible assets were 83% of S&P 500 market value. Today? Less than 10%.
Old value metrics are comparing companies on 10% of their assets.
No wonder they stopped working.
#The Research: Arnott et al. (2021)
Robert Arnott and colleagues at Research Affiliates published "Reports of Value's Death May Be Greatly Exaggerated" in the Financial Analysts Journal.
Their key insight: When you adjust book value for intangible investments, value starts working again.
How to adjust: 1. Capitalize R&D expenditures (treat as asset, not expense) 2. Add back certain SG&A costs that create intangible value 3. Amortize over appropriate useful life
Intangible-adjusted book value better reflects true company value—and better predicts returns.
#Multiple Value Metrics
Smart value investing doesn't rely on a single metric. Our approach uses a composite:
1. EBIT/Enterprise Value (Earnings Yield)
Measures operating earnings relative to total company value (debt + equity). Avoids distortions from capital structure.
2. Free Cash Flow/Enterprise Value
Cash is harder to manipulate than earnings. Companies generating real cash are genuinely cheap.
3. Sales/Enterprise Value
Revenue is the hardest number to fake. Useful for companies with temporarily depressed margins.
4. Intangible-Adjusted Book/Market
Traditional book value adjusted for R&D and other intangible investments.
We z-score each metric and average them. This reduces the noise in any single measure.
#Value and Quality: Better Together
Here's a crucial insight: value works best when combined with quality.
Cheap for a reason: Some stocks are cheap because they're bad companies—declining revenues, poor management, dying industries. These "value traps" underperform.
Cheap and high-quality: Stocks that are both cheap AND profitable tend to outperform. They have the margin of safety of value plus the fundamental strength of quality.
This is why our system weights both value (15%) and profitability (30%). The combination is more powerful than either alone.
#The Bottom Line
Value investing isn't dead—it evolved. Modern value measurement accounts for intangibles, uses multiple metrics, and combines with quality.
The patient investor who buys cheap, high-quality companies and holds through cycles has 50+ years of evidence on their side.
#Academic Sources
- Fama, E. F., & French, K. R. (1992). "The Cross-Section of Expected Stock Returns." Journal of Finance
- Arnott, R., Harvey, C. R., Kalesnik, V., & Linnainmaa, J. (2021). "Reports of Value's Death May Be Greatly Exaggerated." Financial Analysts Journal
- Asness, C. S., Frazzini, A., Israel, R., & Moskowitz, T. J. (2015). "Fact, Fiction and Value Investing." Journal of Portfolio Management
Last updated: February 1, 2026