On the face of it, value investing has been left for dead. It seems that the market is now only interested in growth stocks, and investors are willing to pay whatever the market offers to buy a piece of these businesses. Many traditional value investors have expressed concern at this market environment.
Other stocks are being left behind with huge seas of money flooding into companies like Tesla (TSLA, Financial) and Snowflake (SNOW, Financial). For example, Tesla is now worth more than Warren Buffett (Trades, Portfolio)'s Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial), even though the conglomerate is vastly more profitable. It's also not relying on at-the-market offerings to fund its operations.
These trends have prompted some market commentators to claim that value investing is dead. That is not correct, however. Value investing never went away.
What has changed, in my opinion, is that the market is no longer interested in buying junk. Buying good businesses at attractive prices is just as important today as it was 50 years ago. The concepts of a good business and an attractive price may have changed, but the basic principles have not.
Value investing is like buying a house
I recently read an article that compared value investing to buying a property. Most people whoe are buying to live in the property rather than as an investment look for a couple of qualities. They want a solid building, a good location, something they can afford, and more important than anything else, something they would like to live in.
Buyers don't seek out properties with shaky foundations in rough areas that are uncomfortable to live in, hoping the property will be worth more than the purchase price one day.
This analogy can be easily transferred to the field of investing. The very foundations of value investing are buying good businesses at attractive prices. The emphasis here should be on businesses. Value investors buy businesses. Traders buy stocks to speculate on rising or falling prices.
Most investors, whether they believe themselves to be value investors or not, are looking for good companies. What may qualify as a good company will vary from investor to investor, but most investors don't buy a stock if they think they're buying a terrible asset.
This is where the processes of buying a property and buying a stock start to overlap. Investors who go out to buy an interest in a business want to own companies that they believe have strong foundations, are not overpriced and they're happy to own, much like buying a house.
Few, if any, investors (although this does not apply to speculators) buy a stock that they believe is about to go bankrupt and that they're unhappy to own. The point is, the principles behind value investing have not changed over the past 50 years. So, value investing is still well and truly alive.
However, what has changed over the past few decades is the type of companies that succeed. Most of the analysis claiming that value investing has died is based on what I would call out-of-data research and methods of valuation. For example, strategies based on book value, one could argue, are no longer relevant because this only measures physical assets. Intangible assets such as data and brand power are far more critical for business success in 2020.
Further, strategies based on dividend income alone may also struggle because in the current age of disruption, companies that are giving too much away to investors while not investing enough to stay ahead of the competition will quickly fall behind.
What worked as an investment strategy or style 50 years ago will not necessarily work today. On that basis, yes, the style of value investing that was popularized in the 1960s and 1970s may be dead today. However, the underlying foundation of value investing, which is buying good businesses at attractive prices, has not changed, and it never well.
Disclosure: The author owns shares in Berkshire Hathaway.
Read more here:
- Mohnish Pabrai: Capitalism Is 'Brutal' and Investors Need to Adapt
- Mohnish Pabrai's 100-Bagger Scuttlebutts
- Mohnish Pabrai: On Growing Pies and Changing With the Times
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