In a recent Robeco article, Boston Partners Senior Portfolio Manager Mark Donovan shared five foundational value investing principles that have stood the test of time, “even as these principles seem to be discounted during temporary bouts of market irrationality.”

The five principles, Donovan argues, “serve as a valuable reminder that mean reversion is to finance what gravity is to physics.”

Here is a summary:

• The future is unknowable: “What makes this point particularly relevant today,” writes Donovan, “is the research-driven arms race being waged across the asset management industry to gain any edge, however fleeting or illusory.”
• Bottom-up beats top down: Donovan argues that many investors “pay undue attention to macroeconomic factors,” highlighting the vast amount of evidence supporting “the challenge of trying to predict economic trends.” He explains that from an investment perspective, macro strategies are even more challenging given that “accurate forecasts, however rare, still offer no guarantees as to how the markets will ultimately react.”
• Management matters: “True value investors take a bottom-up approach to security analysis and scrutinize, in depth, company fundamentals, business momentum and catalysts for growth.” Donovan adds that evaluating management teams is not a purely subjective exercise: “What can be most telling, and complements regular executive meanings, is the analysis that goes into how management deploys available cash flow.”
• Games are lost, not won: Donovan notes that many stock pickers tend to “abandon fundamental analysis in favor of momentum strategies” during extended market runs, and that discretion is warranted. He argues that momentum strategies present a challenge in that “investors expose themselves to sharp reversals when fortunes turn,” and further, that “momentum ignores a fundamental truth about long-term investing: value matters.”
• Stay true to philosophy and process: Today, investors need to be “in the market in any capacity or anywhere within it, to generate returns,” Donovan argues. But he adds that “when we begin to hear the detractors start to screech that value or fundamentals no longer matter, this is typically a sign to double down on our philosophy, which has proven itself throughout time.” He asserts that signs of the next value cycle are already revealing themselves and, further, that “high multiple momentum-driven stocks are lagging in this pro-cyclical, value environment as the economy re-opens from the pandemic.”