When Good Investing Tools Go Bad
How Once Reliable Investing Ideas Lose their Luster
“Sell In May and Go Away!”
I recall speaking with a client many years ago during a typical day in May. He suggested that the market would start pulling back, so I asked why he thought so. “Sell in May and go away!”, he replied. It was a common idea at the time, that many traders would start their summer holidays in late May, early June, meaning there would less market volume, more selling, and an expected pullback. “Everyone knows this!”
In response, I asked if whether he thought it was still a valid idea worth trusting. He thought so. So, I asked what would happen if he legally obtained information on a stock that no one else had heard about. “Oh, I would buy!” Makes sense. But what if everyone was given that same information? What if this information was published on the front page of the WSJ, for example? “Well, it’s no longer a tip then, is it?”
Needless to say, he got the point. The fact that “Sell in May and Go Away!” was a well known maxim meant that it had lost its power to affect markets. It simply wasn’t reliable anymore.
But what about other investment craft? Analytical “tools” and trading strategies? How do we know whether they still work?
A Growing List of ‘Has Beens’
Markets have an incredible ability to discount widely known information. This is true both of market news and market tools.
Many of the tools that investors continue to use aren’t necessarily wrong; they’ve simply become less useful “has beens” because markets adapt. Once enough people exploit an inefficiency, it tends to disappear. It’s priced into the market and loses its power.
There is a long (and growing) list of such strategies. Tools that at one time gave investment “gurus” their title. Maybe you’ve heard of these examples:
Price-to-Book Ratio
For decades, Benjamin Graham-style investors relied on the price-to-book ratio. The formula is basically Market Price divided by Book Value. This works great when business are composed of tangible assets. But in our technology-driven economy, it works less well.
Dogs of the Dow
This strategy became enormously popular during the 1980s and 1990s. Each year investors simply purchased the ten highest-yielding companies in the Dow. Historically, it outperformed because it exploited two phenomena: 1) market overreaction, 2) mean reversion among large businesses.
To reiterate the point, once Wall Street discovers something works, two things usually happen: 1) Everyone begins using it and 2) excess returns begin disappearing. The strategy still has adherents, but its historical advantage has substantially diminished.
This illustrates an important investing principle:
The more famous a strategy becomes, the less likely it is to continue producing extraordinary results.
One Tool That Hasn’t Stopped Working
Warren Buffett once remarked that investing is not about finding a magic formula but about valuing businesses. The tools have changed, but a handful of principles remain remarkably durable:
Free cash flow.
Competitive advantages.
Management.
Valuation.
Time.
Perhaps the tool that has aged best is not a ratio at all, but the willingness to ask:
“What assumptions must be true for this investment to work?”
That question exposes weak businesses, speculative narratives, and unrealistic expectations better than almost any spreadsheet calculation. Understand what you own, paying a sensible price, and allowing time (and compounding) to do much of the work.
Investing tools don’t necessarily become obsolete. Rather, they become less powerful. The Price-to-Book ratio still has value when analysing banks. Dividend yield still matters for income investors. The PEG ratio can still provide useful context.
What has changed is that no single metric deserves to be used in isolation. Modern investing increasingly requires combining multiple measures of value, profitability, capital allocation, and business quality before reaching a conclusion.
The most enduring investment tool may not be a ratio at all, but intellectual humility: recognizing that every metric has a shelf life and that markets are constantly adapting alongside the investors who participate in them.
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