Debunking value investing myths: Exploring a world of opportunity

In recent years, value investing – that is buying unloved stocks with low valuations – has fallen out of favour. A sustained period of underperformance after the global financial crisis fuelled the notion that value investing no longer works. Many investors have simply given up on the value style. 

The dominance of growth stocks in the US stock market and globally in recent years has undoubtedly been challenging for even the most dedicated value investor. However, we believe that the prevailing narrative about value investing is wrong; instead, we think the outlook for value investing is currently very promising – and we forcefully challenge the idea that value is irrelevant.

In many regions outside the US, value has actually outperformed growth over the past three years. In Europe and Japan, the outperformance has been fairly meaningful, which might surprise a lot of people. Far from being ‘old news’, we suggest that this demonstrates value is very much relevant and is deserving of investors’ attention once more. 

“Far from being ‘old news’, we suggest that value is relevant and deserving of investors’ attention.”

Still working: Value has outperformed growth in some regions

The perception that value no longer works is just one of several myths that we think exist about value investing. Let’s take a closer look at some of the other misconceptions.

Myth #1 – the valuations of quality and growth stocks reflect their fundamentals

One of the most common claims we hear is that the higher valuations of growth and quality stocks are justified by their underlying fundamentals. The argument goes that these expensive stocks are not really that expensive, given their superior quality or high levels of growth.

In our view, this perception is wrong: in many cases the elevated valuations do not always reflect superior business performance. Take US retail giant Walmart, for instance. The company is considered by many as a stable quality business and, over the past decade, its valuation has rocketed from a price-to-forward earnings (PE) ratio of around 15x in 2015 to around 37x in 2025.

Walmart has been through a lot of change in this time, investing in e-commerce and automation, for example. And yet, despite considerable innovation and investment, the company’s return on invested capital metric has remained constant at 13%. Walmart’s valuation has more than doubled in a decade but this has not been matched by improved fundamentals.

US exceptionalism and optimism may be keeping Walmart’s valuation at elevated levels, despite the fundamentals remaining stagnant. When there is a discrepancy between market expectations for a stock and business reality, it is hard to predict when there might be a correction but ultimately we believe that underlying fundamentals win. Eventually, the market becomes reacquainted with valuation constraints and realises that a company’s valuation does not reflect its fundamentals.

To see this in action, we can point to the experience of Pernod Ricard, another perceived quality company. The European beverages company saw its share price rise dramatically between 2009 and 2022. However, over this period, there was no change in the company’s free cash flow. In the last two years, Pernod Ricard’s shares have fallen sharply as investors have recognized there has been no real change in the company’s underlying performance. 

“In the last two years, Pernod Ricard’s shares have fallen sharply as investors have recognized there has been no real change in the company’s underlying performance.”
 

Whether this could be the fate of Walmart remains to be seen. But following the example of Pernod Ricard, we suggest that the idea that ‘the elevated valuations of growth and quality stocks are always justified by fundamentals’ is, to quote the current president of the US, “fake news”.

Myth #2 – You just want to own the Magnificent 7

Another misconception that we think exists about value investing is that investors today only need to own the so-called Magnificent Seven (Mag 7)¹. This belief has arisen, in our view, because these large US stocks, and Nvidia in particular, now dominate the market and have driven performance in the past few years. The fact they represent a significant proportion of indices has arguably created the perception that growth is doing much better than value. 

“We can highlight several examples of value stocks that have done just as well as, if not better than, the Mag 7.”
 

Our counter to this notion is that we can highlight several examples of value stocks that have done just as well as, if not better than, the Mag 7. Unlike the Mag 7, which is a fairly correlated basket of stocks, linked to a similar (new economy) theme, our Magnificent Global Value basket is a diverse group, spanning different sectors and countries.

Alternatives to the Mag 7 can be found among value stocks

In our view, the highly concentrated nature of the US market and by extension the global market is not only limiting investors’ diversification but also overriding the contributions from value stocks that have performed well. 

However, one region that doesn’t have the same level of concentration and where we see lots of value stocks currently performing well is Europe. Although the region’s highly valued luxury goods companies and consumer staples businesses are a challenge, the lack of distortion from a Mag 7 equivalent means value has been working in Europe in the past couple of years. 

So, in response to the idea that investors only need to own the Mag 7 we assert that this is also fake news. The performance of the Mag 7 so far this year has increased our confidence in this view. As a group they have declined, trailing the S&P 500, while European stock markets have actually risen. We see this as evidence of the numerous attractive opportunities beyond the Mag 7.

Myth #3 – Value investing involves sacrificing growth and quality

An argument we encounter frequently is that value investing means sacrificing growth and quality. To an extent, this is true. There has to be a trade off when buying cheaper stocks, but the trick is to give up as little as possible. And today, we believe value investors need to make minimal sacrifices. Across our value strategies we have been able to construct portfolios with large value biases without having to give up much in terms of quality or growth. 

Looking at the earnings growth that has been delivered over the past five years by the stocks in the cheapest part of the global market and the most expensive, we can see that the respective growth rates in almost every sector are either very similar or the cheapest part of the market has actually outperformed. There are notable exceptions such as information technology and real estate, but we think this shows that cheaper stocks have not performed as badly as investors might have expected. 

Value vs growth: Similar earnings growth but much lower valuations 

Another important observation is the wide differential between the valuations of the two categories. In most cases, the valuation of the cheapest basket of stocks is about half that of the expensive basket; in consumer discretionary it’s about a third. While the outcomes from each basket in terms of earnings growth have been quite similar, the valuations are extremely diversified across the market. 

“Value investors today can potentially construct portfolios with large value biases, without having to give up very much in terms of growth or quality.”
 

As a result, value investors today can potentially construct portfolios with large value biases, without having to give up very much in terms of growth or quality. They don’t have to look at really troubled companies with stressed balance sheets or undergoing deep restructuring. Instead, they can buy companies with good prospects, with acceptable management teams and generating good returns, in our opinion.

We believe this is an exciting time to be a value investor and the idea that value investing involves sacrificing growth and quality is simply more fake news.

Entering a value world

For investors who look beyond the fake news surrounding value investing, we believe there are plenty of opportunities in the world of value. For a start, there are potentially great diversification benefits. There have been times when value was concentrated in certain pockets of the market but today we see value across the whole market. We believe this offers the potential to create diversified portfolios of reasonable companies at attractive valuations. 

In an uncertain world, we think value offers exposure to risk assets at decent valuations, and, contrary to the misconceptions, represents a compelling long-term opportunity.
 

¹ The Magnificent Seven are a group of dominant mega-cap US stocks: Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast, nor a recommendation to purchase or sell any particular security.