The Tell: Value investing isn’t what it used to be, says Jeremy Grantham

Buying stocks that are cheap and out of favor to capture extra return when they eventually recover—a cornerstone of value investing—has worked for decades, but may no longer be a sound strategy due to shifts in how markets operate, according to Jeremy Grantham, founder of asset manager GMO.

Students of Benjamin Graham, author of The Intelligent Investor, widely considered the bible of value investing, rely on a phenomenon called mean reversion. Simply put, many stocks that become undervalued should eventually recover, while stocks that become overpriced should eventually return to earth.

Finding truly undervalued companies with the potential to recover requires skill and patience, but the reasonable predictability of valuation trends helped many value investors remain confident in their picks.

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