The death of value investing

But in addition to the business cycle, there are supercycles. Such a supercycle occurred in technology in the opening years of this decade. Inventories weren't just enormous, they also became obsolete in 18 months or so, and they were replaced by an enormous new generation that likewise died before it could be sold.

Finance is undergoing something similar. Credit was too easy for far too long. So credit inventories became unsustainably large. In fact, they became unimaginably large because most of them were spirited off banks' balance sheets into collateralized debt obligations, structured investment vehicles and other exotic brews on the books of hedge funds, insurance companies, pension funds, sovereign wealth funds and other entities that didn't have a glimmer of an idea what they had purchased.

To this day nobody -- nobody -- has been able to estimate the total magnitude of the credit mess.

Loving the unloved

Mutual fund managers are smart and should be able to avoid an oncoming train, right? Not value managers. Their specialty is beaten-down stocks. They stand on the tracks for a living. The current mess is their daily commute.

"This financial crisis at some point in time will get fixed, and we'll be back on our way," says Neil J. Hennessy, the manager of Hennessy Cornerstone Value (HFCVX), which has 41% of assets in financials and has crumbled 27.9% in the past 12 months. "This feels like the end of the world, but it's not."

So don't rely on your favorite value fund to suddenly transform itself into something it is not. Value will be reborn at some point in time. Value managers are content to wait.

I, on the other hand, am not. I have given my personal portfolio a decided growth tilt over the past year, and every value fund I still own is a candidate for sale. As I've previously disclosed, these include Dodge & Cox Stock (DODGX), with 15.8% invested in financials; and Tweedy Browne Global Value (TVGVX), with 21.5%. I love these funds and have done well with them, but . . .

I would have sold both in my personal accounts some days ago, but MSN Money trading rules for columnists forbid me from trading until three days after these columns appear. So when you read this, I'll be getting ready to pull those triggers.

I earnestly hope the historic rally in financials July 16 will be repeated again and again before I sell, so I can get more for my shares than they're worth as I write these words. And I'm still not selling all my value holdings. I could be wrong, and, in any event, 20 years from now they'll be doing great.

But I'm cutting back, especially compared with one year ago. For now, value is dead. Long live growth.

At the time of publication, Tim Middleton owned shares of the following funds mentioned in this article: Dodge & Cox Stock and Tweedy Browne Global Value.

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