Value Investing in the Age of Policy Overreach: A Discipline for the Patient Investor

The world of investing is often shaped by powerful ideas, and one of the most persistent is the "Vision of the Anointed." As economist Thomas Sowell described, this is the belief held by policy elites that they possess a superior, almost moral, understanding of how society should be organized. They see the world not as a complex, imperfect system, but as something that can be perfected through state action. This vision, often cloaked in self-congratulation, drives a constant stream of interventions that distort markets and create temporary setbacks for businesses.

This is the reality we operate in. As one analysis notes, the post-crisis era of relatively light government hand was the aberration. We are returning to a more normal condition where governments matter deeply, setting the rules, taxes, and spending levels that directly affect corporate profits and investment decisions. The "smart money" now scrutinizes proposed government actions with intense interest, a stark contrast to the pre-2008 mindset of focusing solely on business fundamentals. For the patient investor, this landscape presents a paradox: policy overreach creates value opportunities by mispricing assets, but it also demands a disciplined response.

The key is to treat this policy volatility as background noise, not the central signal. A disciplined value investor must anchor their analysis on two timeless principles: intrinsic value and the width of a company's competitive moat. These are the real engines of long-term compounding. The market's reaction to a new regulation or a shift in fiscal policy is often emotional and short-term. The wise investor looks through that noise to assess whether the underlying business can generate durable cash flows over decades.

History provides a powerful testament to this discipline. While the broader market, like the S&P 500, has experienced negative returns over some 10-year periods, a consistent value approach has delivered positive returns in every such period since 1968. This track record is not a guarantee, but it is a powerful reminder that focusing on what truly matters-the quality of the business and the price paid for it-can navigate through any policy cycle. The alternative, as seen with value managers who drift toward growth stocks to keep pace, is a recipe for long-term failure when the market eventually corrects. The anointed may shape the headlines, but the patient investor shapes the portfolio.

The Global Value Resurgence: A Model for Success

The patient investor's discipline finds a powerful ally in the global market. While the U.S. has seen a sharp divergence between growth and value since the launch of generative AI, the rest of the developed world is telling a different story. In 2025, value investing staged a powerful comeback internationally, with the MSCI EAFE Value Index posting its highest year-to-date returns (33.8%) in over 25 years. This is not a fleeting anomaly but a fundamental shift, driven by a tangible recovery in corporate profitability.

The engine of this resurgence has been the banking sector. After years of underperformance in the post-crisis low-rate environment, banks in developed ex-U.S. markets have seen their return on equity (ROE) recover from historical lows to around 12%. This operational improvement, supported by global rate hikes that lifted net interest income, has provided a solid anchor for the sector's rerating. The result is a clear international style divergence: value has outperformed growth in international developed markets while the opposite holds true in the U.S.

This global split offers a compelling model for portfolio construction. It demonstrates that a disciplined value approach can thrive when driven by improving fundamentals, even as policy and technology trends favor growth elsewhere. For an investor, this suggests a strategic opportunity. A simple 50/50 blend of U.S. growth and international value has historically offered diversification benefits and resilience across different sectors and macroeconomic regimes. It is a way to navigate the current global style divergence, capturing the momentum of innovation in one region while maintaining exposure to the value-driven recovery in another. In a world of policy overreach, this kind of balanced, globally diversified discipline is a proven path to long-term compounding.

Catalysts and Guardrails: What to Watch for the Patient Investor

For the disciplined investor, the path forward is not about chasing the latest headline but about watching for specific signals that confirm or challenge the underlying thesis. The primary catalyst to monitor is the health of the U.S. manufacturing cycle. This sector, a key bellwether for the broader economy, ended a 26-month contraction streak in January but has since resumed its downturn. A sustained break in this cycle would be a significant macro catalyst for value stocks, which tend to benefit from a cyclical upturn and are often more sensitive to the business cycle than growth peers. It would provide the external event that, as research shows, is often needed to trigger a reversal in relative performance.

Another critical signal is the persistence of wide valuation spreads between growth and value. These spreads have been extreme, with the S&P 500's Shiller CAPE 10 at historically high levels of over 40 at year-end. While such high valuations have historically been a precursor to value outperformance, they have not reliably predicted turning points. The key is not to time the market based on a single number, but to watch if these spreads widen further. A persistent, deep discount for value stocks, even amid high overall market valuations, is the kind of mispricing that a patient investor seeks. It is the gap between price and intrinsic value that creates the opportunity.

Yet, the most important guardrail is not a market signal, but the investor's own discipline. The temptation to chase growth is powerful and has been a recurring theme. As one veteran money manager noted, when value is out of favor, embattled managers often sell out of their mandate to grab expensive growth stocks to keep pace with the rally. This "cheating" may offer a quick fix, but it is a recipe for long-term failure. It leaves a portfolio without the cheap names needed to ride back up when value eventually recovers. The long-term compounding power of a true value approach remains intact, as demonstrated by the track record of disciplined investors who have endured multiple cycles. In a world of policy overreach and volatile style leadership, that unwavering adherence to a proven process is the ultimate competitive advantage.