When Valuation Fails

Is relative valuation investing dead? Are markets “broken”? The authors attribute the long period of underperformance of value stocks to technological disruptions and inadequate accounting for intangible assets. They introduce a new methodology, <italic>data mining confidence bands</italic>, to provide transparency in backtesting performance and avoid overfitted models. Backtesting 24 strategies shows modest returns for valuation-based approaches, with improved results when incorporating momentum adjustments. Despite the diminished effectiveness of relative valuation signals over the past two decades, relative valuation investing remains viable. Successful investors must adapt by incorporating judgment, accounting adjustments, fundamental research, and awareness of technological and macroeconomic trends.