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I call myself a “value investor” (if there’s something like that) and have been doing this for the past 23 years. But over these years, there have been multiple periods, sometimes lasting two or three years, when value investing simply stopped working for me.
And I’ll tell you what those stretches feel like.
Your portfolio has gone nowhere for two years. The index is doing fine. The stocks you carefully analysed and bought at a discount to intrinsic value are sitting there, doing nothing. And the voice in your head starts telling you the thing you most fear hearing: maybe this whole approach was a mistake.
Or it shows up the other way. The market is roaring. The index is up 20% in a year. Your portfolio is up too, but only 12%. Everyone around you is making money faster than you are. The stocks doubling and tripling are the ones you looked at carefully and chose not to buy because the numbers and businesses didn’t make sense. And now you watch them run, week after week, while your sensibly priced companies sit quietly. The voice arrives again and says the same thing: maybe this whole approach was a mistake.
I know this voice well.
The one thing that has helped me deal with it is something Joel Greenblatt once said in an interview with Jack Schwager, the author of the Market Wizards series, when asked the question every value investor eventually faces: Does value investing actually work?
“Value investing doesn’t always work,” Greenblatt replied. “The market doesn’t always agree with you. Over time, value is roughly the way the market prices stocks, but over the short term, which sometimes can be as long as two or three years, there are periods when it doesn’t work. And that is a very good thing.”
I want to think about that last line for a moment. That value investing doesn’t work over the short term is a very good thing.
There is a cycle at work here, and once you see it, you cannot unsee it. Let me walk you through it, because understanding this cycle is the difference between surviving as a value investor and becoming one of the many who quit.
Stage 1: Value investing works over the long term. This is where the cycle begins. Over decades of market history, buying above-average companies at below-average prices has produced above-average returns. The evidence is overwhelming and not seriously disputed by anyone who has studied it.
Stage 2: Everyone becomes a value investor. When something works, capital follows. New funds launch with “value” in their names. Conference speakers and social media influencers drop Buffett quotes. The strategy becomes popular not because more people understand it, but because the recent results make it look easy.
Now, here it’s also important to understand the mechanism that drives the next transition. When too much capital chases the same mispricings, those mispricings shrink. The very thing that created the returns gets competed away.
Stage 3: Value disappears over periods of time. This is the stage that breaks people. It is the stage where you question everything. The market is not rewarding patience. It is rewarding speculation, momentum, and narrative. The stocks you carefully analysed and bought at a discount to intrinsic value are sitting there, doing nothing, while stories-of-the-day are doubling.
This stage can last one year or three years, sometimes longer. And during this period, the emotional experience of being a value investor is indistinguishable from the experience of being wrong.
This is where Rudyard Kipling’s words from his poem “If—” land with full force:
If you can keep your head when all about you are losing theirs… you’ll be a Man, my son.
This is an exact description of what the value disappears stage demands of you. Keeping your head when the market is rewarding people who have lost theirs is the single hardest thing in investing.
Stage 4: Fake value investors disappear. And here is where the cycle renews itself. The people who called themselves value investors because it was working, not because they understood why it works, start to leave. Their conviction was borrowed from recent results, not from deep understanding. When results turned negative, they had nothing to fall back on. Like Aesop’s wolf in sheep’s clothing, they played a role contrary to their real character, and the market eventually called their bluff.
Their departure is what creates the opportunity for the cycle to begin again. As they sell their holdings in frustration, prices fall below intrinsic value once more. The mispricings return. And the few who stayed and who understood the cycle well enough to endure it, find themselves holding the very bargains that will fuel the next decade of returns.
This brings us back to Stage 1. Value investing works over the long term, partly because so many people abandon it in the short term.
Greenblatt captured this perfectly when he said that the only way you will stick with something that is not working temporarily is by understanding what you are doing. I think this is the most important sentence in all of value investing. Because most investors treat patience as a personality trait. Something you either have or you don’t. I see a mistake in that framing, and it is why so many thoughtful people fail at this.
Patience is not a trait. It is an outcome. It is what happens when you have a process that makes staying the course possible even when your gut is screaming at you to sell.
Let me share three things that have worked for me over years of practicing this approach.
First, the pre-commitment journal. Before I buy a stock, I write down my thesis, my expected holding period, and the specific conditions under which I would sell. And these are not vague conditions like “if the story changes,” but specific ones. Like, if debt-to-equity goes above 1x, or if the promoter pledges more than 20% of holdings, or if the core business margin falls below 10% for two consecutive years. When the pain of Stage 3 arrives, I don’t need to be brave. I don’t need patience as a character virtue. I just re-read my own words from when I was calm and rational. If none of my sell conditions have triggered, I stay. The decision is mechanical. It was made by a clearer version of me, and I trust that version more than the anxious one staring at a red portfolio.
Second, the three-year test. Before buying anything, I ask myself: if I could not check this stock’s price for three years, would I be comfortable owning it? If the answer is no, I don’t understand the business well enough. This is Greenblatt’s point made tangible. Understanding what you are doing is not an abstract ideal. It means being able to describe, in simple language, how the company makes money, why its competitive position is durable, and why the current price does not reflect that durability. If you can do that and believe your own reasoning, three years of price stagnation is just noise. If you cannot, you are speculating, and no amount of patience advice will save you.
Third, the base rate reminder. Value strategies have underperformed in several individual years historically. That is not a bug but simply the price of playing this game. But when you extend the lens to rolling five-year periods, the underperformance rate drops. And over rolling ten-year periods, it becomes very small.
Charlie Munger put the core idea simply when he said:
Take a simple idea (value investing) and take it seriously.
Now, taking value investing seriously does not mean reading about it or agreeing with it intellectually. It means building a system and process that lets you practice it when every signal around you is saying stop. It means surviving Stage 3 not through willpower but through understanding.
I have been at this for over twenty-three years now, with sincerity and with decent success, purely based on personal standards of success. I have seen a lot of my fellow investors drop out during the painful stretches, only to watch from the sidelines as the cycle completed itself and value returned. Many of them now rue their decisions.
It’s important to remember that the cycle is not just a theory but a lived experience. And the question it asks of you is not whether you believe in value investing. Almost everyone believes in it when it is working. The question is whether you understand it deeply enough to hold on when it isn’t.
There is a parallel cycle happening not just in markets, but inside each investor’s mind. Confidence builds in the good years. Overconfidence sets in. Disillusionment follows during the bad years. And then either deep understanding emerges and you continue, or you quit and start chasing whatever is working now.
I want to leave you with a question, which is not specifically about value investing but about any practice that works over the long term but fails over the short term, which is most things worth doing.
The question is: What is the one specific thing, not a principle, not a quote, but a concrete thing you do or a thought you return to, that keeps you from abandoning the approach when everything around you says you should?
If you can name that, you have something more valuable than any investment thesis.
P.S. If this essay resonated with you, you may find my new book The Long Game useful. It is a hardcover collection of reflections from 30 investing practitioners on what it actually takes to stay the course over decades. You can find it here.
I can’t do anything except Investing.
Because it’s my comfort zone