Why Value Investing Is Never Dead
The Weekend Edition is pulled from the daily Stansberry Digest.
Whenever you hear "value is dead," you know it's about to prove itself once again...
On May 11, 2020, a Financial Times article asked: "Does value investing still make sense?" In the article, reporter Robin Wigglesworth noted...
Value stocks have been pummeled even more than the broader market in the coronavirus-triggered sell-off, agonizing supporters of the investment strategy.
Wigglesworth normally does a great job, but he got it wrong back then... including the idea that economist John Maynard Keynes was an early 20th-century value maven. Keynes was a speculator who abused leverage. He was wiped out multiple times in his investing career.
Like most sweeping dismissals of successful long-term strategies and businesses, Wigglesworth's critique was a perfect contrarian buy signal...
In January of this year, Matthias Hanauer of New York-based asset manager Robeco reported in a piece titled "Value Investing" that "reports of my death have been greatly exaggerated." As Hanauer continued...
In November 2020, the announcement of a successful Pfizer-BioNTech Covid-19 vaccine candidate results triggered the long-awaited comeback of the value factor. Since then, value has been mainly on the rise.
Hanauer filled out the piece with 10 charts showing the resurgence of value and its long-term viability as a strategy.
Value seems to have been unfairly targeted over the past several years. In a more recent essay titled "The Strange Death of Value Investing," Tim Price of U.K.-based Price Value Partners pointed out that momentum and other strategies have periods of underperformance as well. Yet we never hear of their demise.
When so-called experts tout the death of a strategy that has trounced most others over the long term... that smacks of the hyper bullishness we see at market tops.
It reminds me of economist Irving Fisher's famous quote from October 1929...
Stock prices have reached what looks like a permanently high plateau.
Fisher made the remark about six weeks after the 1929 peak. It wasn't a reason for optimism... It was the mother of all sell signals. The Dow Jones Industrial Average fell 89% from its September 1929 peak to its July 1932 trough.
So when anybody says value is dead or asks if it makes sense or any such thing, I dismiss the question out of hand. I just stick to figuring out what businesses are worth owning and at what price.
And not only do I doubt value investing is dead... I doubt that much of what people do in the stock market can be called "investing" at all.
Like many value investors, I agree in spirit if not in the letter of what Joel Greenblatt told Wigglesworth back in 2020...
All investing is value investing. The rest is speculation.
Blunt as it seems, it's just an echo of what value investing patriarch Benjamin Graham wrote in his classic value tome, Security Analysis, in 1934...
An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.
Bank of America Merrill Lynch has shown that value investing is worth doing. The bank studied nearly a century of data from 1926 to 2015 and found that growth stocks returned 12.6% annually, compared with 17% annually for value-priced stocks.
While growth performed OK, Graham, Greenblatt, Price, and I would probably all tell you that it didn't promise safety of principal. In other words, it made less return with more risk.
At best, growth investing is a speculation that a company will someday grow into a valuation that's overpriced based on today's performance.
(It's sometimes mixed up unfairly with momentum investing, which just means that if a stock has been going up, it should keep going up.)
These approaches can work, of course. But they're easy to get wrong. Value investing is just as much of a skill as those other two... But it's the only one that even attempts to keep your principal safe by establishing the value of an investment and paying a suitably large discount to that value.
Today, Nvidia (NVDA) is the poster child for speculation. Nobody who is buying knows or cares what it's worth. They know it's a great business that's growing a lot and they think that'll keep the stock price soaring. We'll see.
To be fair about all this...
I do struggle with the idea that your principal is protected when buying stocks...
After all, we can cite more than one occasion during my 60-plus-year lifetime when markets went haywire and priced excellent businesses as though they were about to go bankrupt.
The bear market of 1973 to 1974... the market slump of the early 1980s... the peak of the dot-com collapse (when Berkshire Hathaway traded 50% below its 1998 high)... and the 2008 financial crisis all come readily to mind.
Value devotees will instantly argue that stock price and intrinsic value are often not the same. That's what makes value investing possible.
But that very fact – that the market can push a stock's price below its intrinsic value – suggests the value won't necessarily prevent your investment from trading well below your purchase price.
No matter how good your valuation work is, the market can easily turn against you... and possibly for a lot longer than you'd ever have guessed... even if you're ultimately proved right.
So value investing requires a faith that markets will recognize value in a reasonable enough period of time to make the strategy work.
Honestly, though, I don't bother worrying too much about any aspect of value versus any other strategy...
Value is never dead. Over time, it has worked well, and we have no reason to believe it won't continue to do so.
And here's the ultimate reason I don't worry about being a value investor...
It's that I know the biggest risk is not that I'll follow the wrong strategy for too long.
Most of the risk in investing lies outside the long-term effectiveness of simple, workable, effective strategies. That's true whether you're an indexer, a value investor, or a pure momentum investor.
All three work just fine. The real risk is not that they'll stop working. It's that you'll screw them up because you're an emotional human being.
Most folks wind up selling when they should be buying, buying when they should be selling, and abandoning equities entirely when they should probably do nothing but stick to their time-honored strategy, whichever one it might be.
And today, my value orientation tells me folks are ripe for a screwup...
They're in "pay anything" mode again.
The S&P 500 Index is at new all-time highs. At 37, its cyclically adjusted price-to-earnings ("CAPE") ratio is getting closer to its peak of 38.58 in late 2021 – just before it fell 25% between January and October 2022.
That's why I keep telling folks to prepare for a wide variety of outcomes.
We're on a roll, and I'm not going to be shy about it...
By we, I mean Stansberry Research analyst/editor Mike Barrett and me.
Our valuation model in the hands of my partner in crime, Mike Barrett, is very likely the most powerful tool in our company for determining the intrinsic value of a business.
We're not perfect stock pickers, but neither is anybody else. We're better than average, though, according to Stansberry's tally of our results, which we update every quarter. And at the core of our track record is a tool that helps us determine what a business is worth.
And in April, our valuation model pointed to a stock recommendation that received a buyout offer four months later... and our position is now up more than 40%. Our model pinpointed its intrinsic value within just 2% of that buyout price.
Some folks say value investing is dead. But they forgot to tell Mike and me, and our Extreme Value subscribers.
We've seen it firsthand. Value is alive and well... and working just fine.
Good investing,
Dan Ferris
Editor's note: Today, Dan is seeing major cracks in the technology sector... a sign of a much larger correction that he sees looming. And Wall Street is seeing things the same way. If you want to join the "smart money" and be prepared for an upcoming market shift, click here to learn where the money will flow next.