Value Investing: Tools and Techniques for Intelligent Investment

Chapter 7. Deflation, Depressions and Value^[7]

One of the hallmarks of a post-bubble world is a greater degree of synchronization between the economic cycle and the stock market. For investors in the aggregate market this means that one can afford to sit back and wait for the cyclical lead indicators to turn. Does the same apply to value investing? The evidence from Japan suggests not. Following a simple long value/short glamour strategy allows one to be even 'lazier', and simply keep plodding away, ignoring any timing considerations. However, a very different outcome is shown during the Great Depression. During this period, nothing worked, you simply didn't want to be in equities!

• I have long argued that one of the key features of a post-bubble world is a tighter synchronization between the economic and equity cycles. This is powered by a change in the drivers of returns from multiple expansion (during the bubble years) to growth (in the post-bubble environment). Any failure of this growth means that investors de-rate equities as an asset class.

• The tighter synchronization of the economic and equity cycles means that investors in the overall market can afford to sit back and wait for the cyclical lead indicators to turn up to tell them when to return to the market. Does this also apply to value investors? In Ben Graham's terms, do we need to worry about timing as well as pricing? To assess this, I have looked at the experience of value during both the Japanese post-bubble world and ...