Value Investing Is (Not) Dead

Ho Khinwai
Ho Khinwai

Recently, I’ve been seeing a lot of articles like that question if value investing is dead and Buffett is “losing his touch“.

Like this: Is value investing dead? It might be and here’s what killed it

This. Death of a star: Why value investing is out of style

And this. Are Your Clients Moving Away from Value Investing?

It also seems like this is a popular question people are asking…hmm…

These articles cite the strong outperformance of growth stocks and the persistent underperformance of value investing over the last 10 years – that even famous value investors have switched sides.

Source: Modified chart from Yahoo Finance

To wit, Buffett’s increasing investments in “growth” stocks like Amazon and Apple signals that he might be ditching his long-term “value” strategy in boring, stable companies for these growers.

More doubts about value: Berkshire Hathaway’s Amazon Investment is a Sign of the Times

And fear: Why Warren Buffett buying Amazon stock means traditional value investing is dead

That cannot be further from the truth.

Here’s why.

#1: “The Two Approaches Are Joined At The Hip”

Professionals and stock market experts have conventionally tried to classify stocks into different baskets (or “styles”) based on their characteristics – two of which being “Value” and “Growth”.

You see this classification more apparent with the popularization of factor investing.

Heck, even we here at Dr Wealth teach people our factor-based method of investing through the “Value” and “Growth” strategy! (But I’ll get more into that later)

However, they should not be thought as separate.

Value needs growth – and growth needs value.

I find this analogy from ValuePlays particularly memorable:

Value without growth is like sex without orgasm

If you think about it rationally, it makes sense. You wouldn’t buy something cheap… just because it’s cheap, right? (if you hesitated – you need to rethink your life choices)

In a similar vein, you wouldn’t buy something that’s growing without paying attention to the price right? (unless you’re super-rich – to which, you can send some of that money to my bank account, thank you very much)

Even if you are a value investing purist and are religious “Graham”-ian, note that even he expects his “Simple Strategy” of stocks to show some level of growth above the yield on bonds.

Image result for graham formula
The Graham Formula, as stated in Security Analysis

So – Warren Buffett buying shares in Amazon was not a mistake.

Buffett clearly sees huge long-term growth potential in Amazon, and determines (based on a long-term time horizon) that Amazon is under- or fair-valued when he bought it.

He is, ultimately, still following his “value” principle to a T.

#2: People Don’t Understand the Difference Between Discretionary and Systematic Value

Biggggg words.

But let me break it down for you.

“Systematic Value” is the conventional form of “value” that most industry professionals and academics recognize. It measures value stocks based on a quantitative metric like “P/E” or “P/B”.

What Warren Buffett, we at Dr Wealth, and investors like Whitney Tilson do is known as “Discretionary Value” investing.

This kind of value ignores all conventions and “rules” of value like P/E and P/B, and focuses more qualitatively and fundamentally on concepts like “Intrinsic Value” and “Margin of Safety“.

The reason why news reporters, investors and even some experts discredit value investing is that they don’t understand this vital difference.

When the news reports that “value” is supposedly underperforming, they are simply referring to “Systematic Value” underperforming.

Meanwhile, discretionary value investors simply carry on with their lives finding for undervalued picks that are winners in the long-term.

We do not care about how conventional growth is outperforming relative to value – because, as you have seen in #1, growth and value are joined at the hip!

With the popularization of factor investing, people who buy “Value” as a factor and thinking that they are replicating Buffett’s performances are being misled.

The original “value” factor was created using the top quintile (20%) of stocks using a rank from the lowest to highest P/E ratios.

Purely a quantitative method – and nothing Buffett about it.

This is why, despite Amazon trading at a P/E ratio of 78, Buffett plonked in a huge percentage of Berkshire’s funds into the stock. He saw discretionary undervaluation rather than value based on a quantitative metric.

#3: Mean Reversion

If you’re in the “Systematic value” camp, there’s nothing wrong with that too. It’s a highly logical and systematic process to invest your money – and some professional fund managers have done well using this strategy.

Using this context, we still can argue that “Value is not dead”.

If you’ve read my previous articles on factor investing, you’d understand that factors don’t work all of the time.

A particular factor may go through a period of underperformance, while another factor may be just starting to do well. Factors go through these phases of under- and outperformance over time, and it is to be expected.

That’s why a multi-factor portfolio is recommended for investors using this strategy.

The fact that “value” as a factor is in a slump right now does not mean that they will be in a slump forever. However – they have been for a very long time.

According to the famous quantitative investor, Cliff Asness, “a huge part of our job is building a great investment process that will make money over the long term, but a fair amount of our job is sticking to it like grim death during the tougher times”.

Value investing, as a factor, will work eventually – we just don’t know when.

In Conclusion

The bottom line is – as Charlie Munger says – “all investing is value investing”!

Editor’s Note:

Value investing is far from dead. We will continue to buy the proverbial dollar for less as often, and as much as we can. If you would like to take a look at how we do it, you can register for a seat here.

Otherwise, have fun. Stay safe. And remember Value never dies.