Value investing refers to a form of investing strategy where you choose stocks which are currently trading at a value which is less than their book value. In simpler terms, it refers to buying a dollar’s worth of stock at probably 80 cents (you get the gist). This form of investing strategy has been largely popular with the masses. If you have ever read The Intelligent Investor or Security Analysis or followed any of Benjamin Graham’s works/ideas, you should be very familiar with the concept of value investing. In fact, Warren Buffett (being a student of Graham) is a keen follower of this investing strategy and hence value investing was often referred as the mantra for most investors.
Until recent years.
If you have been paying attention to the investing space, you probably heard the term that “Value Investing is dead”. There are many who claim that this investing strategy is now outdated and could no longer apply in the current context. For many, growth investing is now the correct way to go. Trying to identify the next Amazon or Apple and invest in them seems like the correct strategy to go. If value investing is about buying a dollar’s worth of stock at probably 80 cents, growth investing will be trying to buy a stock which will worth 8 dollars tomorrow at a cost of 1 dollar today.
Well, these folks are not wrong actually. In fact, the data from the past decade did show that growth investing trumps value investing.
Dimensional Fund Advisors once did a study and showed that growth stocks return an annualized compound return of 16.3 percent for a ten-year period ending June 2019 as compared to U.S value stocks which produced an annualized compound return of 12.9 percent. I could only imagine that the difference is probably even more apparent now. This means that you are better off putting your money on growth stocks as compared to value stocks for the past decade and that difference in compound return could make a world of difference to your portfolio. And hence, this is the reason why many are advocating that value investing is now dead.
But is value investing indeed dead?
Turns out not so.
If you were to look deeper into history (as shown in the study above), you would see that this performance of 12.9 percent for U.S value stocks is not too different from the historical average of 12.7 percent. In fact, value investing has been providing consistently good returns. And if value investing is dead, you will probably not be looking at such returns. What causes many to think that value investing is dead is probably the fact that growth investing is too much “alive”. The annualized compound return of 16.3 percent over the ten-year period for growth stocks is much higher than its annualized compound return of 9.7 percent since July 1926! Hence, the recent decade of outperformance seems more like an outlier if you look at things in this context.
And if you were to look deeper, you might even notice some interesting trends. In the 1960s, many investors were fascinated with fast growing technological companies like Xerox and IBM. The same thing happens in the late 1990s when investors are again fascinated with the internet companies. (Does this ring a bell to anyone? )During these periods, growth stocks are the darlings in the market and value stocks are again largely ignored. What’s interesting is that value stocks always come roaring back following these periods and value investors are usually duly rewarded.
While value investing seems to be able to stand the test of time, I believe the ways to go about doing value investing or assessing the value of a company might need to change. The standard GAAP accounting way used to understand the value of traditional companies could not probably be used to assess the value of software companies. What was used in the accounting way to understand how companies spend their money building hard assets could not be used to understand how companies spend their money building up their intellectual property. So in a way, adopting an updated way of assessing value of new software and technological companies will be the key to ensure that you are doing the “right” value investing.
Hence, value investing is definitely not dead. It might be more alive than you think it is, and could be in a form which you have not imagined.
Till the next time.
If you are looking for some backtesting results on value investing, do check out this post from PyInvesting.
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