At this year's annual meeting of the Daily Journal (DJCO, Financial), the corporation's chairman, billionaire investor Charlie Munger (Trades, Portfolio), took over two hours of questions from shareholders around the world. He answered questions on topics ranging from value investing to cryptocurrencies and negative interest rates.
As always, his comments on the financial markets and other financial topics were highly informative and educational. His insights have become even more valuable over the past few weeks as market volatility has increased.
Munger on value investing
Since the aftermath of the 2008 financial crisis, value investing as an investment style has underperformed growth.
Indeed, since the beginning of 2009, the Vanguard Growth (VUG) ETF has returned a cumulative 331% compared to 149% for its value counterpart (excluding dividends paid to investors).
With this in mind, one shareholder at the Daily Journal meeting asked Munger for his thoughts on where investors should be looking for value, and if investors should be focusing their efforts on high return companies instead. Munger responded by saying:
"Basically, all investment is value investment in the sense that you're always trying to get better prospects that you're paying for. But you can't look everywhere at once. Just any more than you could run a marathon in 12 states at once.
And so you have to have some system of thinking some place to look which is your hunting ground. But you're looking for value in every case...I think the strongest companies are not in America. I think Chinese companies are stronger than ours, growing faster...
It really helps if you know which hunting ground to look in. Where we all do better hunting and hunting where the hunting is easy. I have a friend who's a fisherman. He said I have a simple rule for success in fishing, "Fish where the fish are." You want to fish where the bargains are. It's that simple. If the fishing is really lousy where you are, look for another place to fish."
Munger's insights
There are two crucial points in these comments. First of all, Munger tries to make it clear that value and growth investing are interchangeable. As long as you are paying less today than you expect to receive in the future, then you can argue that an investment is a value investment. Trying to distinguish between value and growth by using simple metrics such as price to book value or the price-earnings ratio overlooks this vital part of investing.
That's why Warren Buffett (Trades, Portfolio) has been so happy to devote a large percentage of Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) equity portfolio to Apple (APPL). The stock might not look like a value investment in the traditional sense, but the company is growing shareholder wealth over the long term, and that is worth paying for.
You could make the same argument for Berkshire. The stock doesn't look particularly cheap at the time of writing on traditional value metrics, but it does look cheap on a ten-year outlook. That's what value investing is all about.
Munger's second point, about hunting for value all over the world, is equally relevant. The U.S. stock market might not look especially cheap at current levels on an overall basis, but other markets around the rest of the world do.
With this being the case, it should come as no surprise that very successful value investors such as Mohnish Pabrai (Trades, Portfolio) and Seth Klarman (Trades, Portfolio) have been deploying capital outside of the United States in recent years. Pabrai has been putting his investors' capital to work in India and Turkey. Meanwhile, Klarman has made investments in Europe, if reports are to be believed.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Warren Buffett 2019 Letter: Don't Fret About Market Decllines
- A Look at Klarman's Smaller Stock Holdings
- Seth Klarman Increases His Favorite Holdings in the 4th Quarter
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