Name a rich investor. Chances are the first person that popped into your mind was Warren Buffett. As of today, Buffett’s Berkshire Hathaway fetches over $292,000 per share and its total market capitalization is just shy of $500 billion.
Buffett has widely praised his former teacher and mentor, Benjamin Graham for helping him become a better investor. With this, Buffett has repeatedly lauded Graham’s book, The Intelligent Investor.
Many investors, anxious to unlock the secret sauce of Graham’s knowledge rush out and pick up the book. However, that is where the excitement ends for most. Graham’s writing is dense and academic. His examples seem to come from another world: why would anyone need to break down railroad bonds in 2018?
Many people, frustrated and confused, abandon Graham’s teachings. They conclude value investing is no longer relevant. Maybe to cement this belief and throw in some confirmation bias, they find articles published on a financial news site (read tabloid) that discuss how Buffett has too much money and nowhere to put it now, or how Buffett’s stock investments have underperformed the market indices over the past several years.
With that, is value investing still relevant today? YES!
I wholeheartedly believe this a period of transition to a new form of value. Graham focused on tangible assets. He believed in buying companies that if they went bankrupt, the shareholder could still make money. Buffett, on the other hand, pivoted. He bought brand names that could grow and had strong intangibles, such as American Express or Coca-Cola.
Presently, value investing is in a strange state of flux. Advanced stock screeners have left companies that trade below liquidation value like leap years: you might only encounter that situation every four years. Meanwhile, there are limitations to Buffett’s success. When he bought companies like Coca-Cola, the company still had a long runway nearly everywhere outside the United States. Now, Coca-Cola cannot double in size unless they find another 7 billion people to consume their product.
How is value investing relevant? There are new pockets of market inefficiencies everywhere. With the rise of Amazon, consumer retail stores had a massive selloff throughout all of 2017. Despite this, Amazon was only 44% of all retail sales last year, and only 4% of total US retail sales in 2017. This means certain, “Amazon-proof” companies, such as Best Buy, where consumers want to interact with their electronics, or women’s apparel that requires fitting, were sold off beyond their diminished value from “the Amazon effect.” And when equities are oversold, this creates depressed prices and establishes a margin of safety for value investors.
With that said, I am of the belief value investing is relevant as ever. Rather than dismiss value investing as antiquated, second level thinking indicates that perhaps the way value is defined, created, and generated is changing.