Value investing isn’t dead, you’re just doing it wrong

I've never been one for value investing. I lack the temperament and the discipline to be an effective practitioner of it. It requires a patience that few investors possess.  

That's not to say, however, that I don't appreciate it - far from it. That appreciation has increased lately, having done some work with Pzena Investment Management.  

To put it crudely, Pzena uses mathematical and intellectual horsepower up front, to define and sort its universe - something that 30-year Pzena veteran and Co-Chief Investment Officer John Goetz has previously told me is not the firm's competitive edge. 

No, the edge lies in the firm's ability to understand whether a business's malaise is terminal or temporary. That IP was established by Rich Pzena, a fact I recently learned from The Acquirers Podcast, a US-based investment podcast similar to Livewire's Rules of Investing. 

In the wide-ranging conversation, Pzena shares his origin story, investment philosophy, and hard-won insights from decades of managing deep value portfolios. 

From studying Graham and Dodd at Wharton, to enduring the dot-com bubble and COVID crash, Pzena reflects on the timeless appeal and real-world challenges of value investing. While the early years shaped his approach, the focus here is on how he thinks about valuation, opportunity, and risk in today’s markets.

You can listen to the podcast via the player below, or read a summary of the interview further down. 

Please note that the podcast is reproduced with permission. 

From oil fields to Wall Street

Pzena’s path to investing wasn’t linear. After graduating from Wharton in 1979, at the height of the efficient market hypothesis, he had little interest in finance as a career.

“I really thought that investing was going to be a hobby for me and not a career,” he said, choosing instead to work in the oil industry at Amoco.

“The oil industry was just as hot then as the tech industry is today.”

A headhunter eventually lured him into Wall Street, where he started as a sell-side analyst at Sanford Bernstein. He quickly transitioned to managing money, launching a small-cap fund and eventually founding Pzena Investment Management in 1996. The firm nearly folded during the dot-com bubble until a key backer, Joel Greenblatt, refused to let him give up.

“He said, ‘Whatever you need to make it through this period, you have a blank cheque.’ He never had to put in a penny. And by the end of 2000, we were ahead of the S&P.”

How Pzena values businesses

Pzena’s investment philosophy is grounded in deep value: buying high-quality businesses at distressed prices based on normalised earnings.

“The metric we use is price compared to normalized earnings… what should the business earn over a full economic cycle -not the peak, not the trough.”

He emphasises downside protection by focusing on companies with strong franchises and solid balance sheets. During COVID, that led him to invest in deeply out-of-favour names like GE:

“GE’s revenues were down 70%. But they had $50 billion in liquidity… I calculated the downside case at 75 cents a share, and the stock was $5. That’s a 15% return in a worst-case scenario.”

Halliburton was another example, trading at $4, with average earnings power of $2. “You didn’t have bankruptcy risk… yes, you have to take advantage of those opportunities when they come up.”

Mispriced risk, not just mispriced assets

A consistent theme in Pzena’s worldview is that investors misprice risk more than they misprice fundamentals. Whether it’s AI displacing call centres or macro fears over China or the U.S. dollar, Pzena leans into what others avoid.

“Everybody said China was uninvestable. How could you say that? They have great franchises with nothing to do with what’s going on geopolitically.”

Rather than obsessing over macroeconomic forecasts, he focuses on businesses that fulfil enduring needs. 

“If a business does something that people need, there’ll be a way for them to figure out how to do it profitably.”

He’s also sceptical of traditional risk metrics like volatility and tracking error:

“I would use the risk of permanent impairment of capital, rather than temporary impairment… volatility is not bad; it’s just volatile.”

Value traps, turnarounds, and holding periods

Asked how he avoids value traps, Pzena offered a dose of realism:

“Trying to avoid value traps pretty much ensures you’re going to avoid value… if we are superb at what we do, we’ll be 60/40. Not 80/20.”

He accepts uncertainty as part of the game, using position sizing and research intensity to manage risk. Importantly, he’s not a buy-and-hold purist:

“If they fix it, and then it’s fairly valued, why do you want to keep holding it when you can find another one that’s half price?”

That pragmatic approach means holding for years when necessary, but always with an eye on rebalancing into new undervalued opportunities.

The state of markets today

So where are we now? According to Pzena, valuation opportunities are average - not extreme like during COVID, but still attractive relative to long-term norms:

“We’re right in the middle… the range has been five to 10 times normalised earnings, and we’re around the midpoint.”

He notes that today's opportunities are different from those in 2020, but just as compelling for the patient investor. While market indices are skewed by mega-cap tech, undervalued names exist across the size spectrum.

On the active vs passive debate, he’s hopeful:

“If it’s a high-volatility era, active management could have a little time in the sun.”

And when asked about small caps vs large caps?

“I believe the opportunities are very similar… small-cap companies are often just big companies that shrunk. They’re still good businesses.”

Conclusion: survive first, then thrive

Pzena’s story is a testament to discipline, patience, and conviction. His firm went from nearly shutting down in 2000 to managing nearly $70 billion today, all by sticking to a deep value approach that many had written off.

“If you pay 20 times for something worth 10 times, you don’t ever get that money back. But if you stay on the cheap end, you minimize that risk.”

His final advice? Embrace uncertainty, avoid permanent loss, and know that even in a market dominated by narratives and noise, the math still matters.