I've noticed that there has been a recent spike in articles claiming that value investing is dead, and the best way for any investors to make money in the current market is to own a basic index fund.
I think it is always interesting to review these articles and try to understand the authors' viewpoints. But I'm also generally skeptical about the idea that value investing has or ever will die.
When I say value investing, I mean the idea of value investing as initially proposed by Benjamin Graham and David Dodd, i.e., buying dirt cheap stocks compared to the asset value. All investing is, in a way, value investing, as in every investor wants to buy a company at a discount to its intrinsic value. But I am trying to draw a distinction here between these two styles, which are very similar but different at the same time.
The value cycle
Value investing or deep-value investing go through phases. Much like economic cycles, deep value investing goes in and out of favor with the market environment. And right now we are in a period where the value is generally considered to be dead, although this isn't the first time.
The last time this occurred was back in 2006 or 2007, just before the financial crisis when it looked as if equity markets would continue rising indefinitely forever.
Notes from the Berkshire Hathaway annual meetings around this time are fascinating because they give us an insight into what the Oracle of Omaha was thinking, in the midst of one of the most volatile market environments of all time.
At the 2010 annual meeting, one shareholder asked Buffett for his thoughts on the state of value investing before, during and after the market meltdown of 2008 to 2009.
Buffett responded by saying that while many investors believed valuing diversity had died in the years before the crisis, "There will probably be fewer, but I would say there will always be — except in the most bubbly of markets, perhaps — but there will always be opportunities if you're not working with large amounts of money."
Buffett has said before that he believes he could still trounce the market in any environment, if he was managing smaller amounts of money, and these comments seem to be reiterating this point. He went on to say:
"But if you manage moderate sums of money, I think there will always be opportunities to overperform. That doesn't mean lots of people are going to do it, but they will be out there. And, you know, it might have been easier many years ago when there were fewer people looking and not as much information was available on the internet and all that. But people still make the same mistakes."
He went on to give the example of the Daily Journal Co., managed by Charlie Munger (Trades, Portfolio). In the middle of the financial crisis, the Daily Journal invested virtually all of its cash reserves in a concentrated portfolio of stocks, which has since grown to be worth more than $150 million.
"In their fiscal year of 2019," Buffett explained in 2009, "they never bought stocks before I'd seen, and all of a sudden they'd bought $15 million worth of stocks and they were worth $45 million."
Here's a company that never had invested in the stock market before, but suddenly had an equity portfolio worth $45 million.
"So by sitting around for a while, but waiting until things got really ridiculous in certain cases, he put $15 million out that became $45 million within, probably, a six month period or so," Buffett summarized.
Based on these numbers, the Daily Journal shareholders made a return of 200% in around six months. This is an excellent example of why it pays to wait for the perfect opportunity. You might feel as if you are missing out as the bull market continues to grind higher, but the returns available by waiting for the ideal opportunity are far superior to the average market return. This approach isn't suitable for everyone, because it requires a lot of discipline and patience, but the returns cannot be disputed.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:Â
Finding Value the Jean-Marie Eveillard WayÂ
Hedge Funds Roar Back in 2019 but Stock Pickers SufferÂ
Warren Buffett's Giant Silver TradeÂ
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
