We seek value in many aspects of our lives. It is no different with the stock market.
However, many seem to be declaring a moratorium on value investing. The good news is value investing is not dead. Here are three reasons why investors can succeed with value investing today.
The first reason is that value investing has withstood the test of time. Buying stocks of solid companies that appear underpriced or mispriced (the “value” in value investing) is a strategy that has rewarded investors repeatedly. There is no reason to believe that won’t continue.
It may be time to redefine what people mean by value investing, though. Many brick-and-mortar companies of old used a measure called book value to determine the value of a stock.
Book value is what you would have if you liquidated the company and sold it off, after expenses.
But many of these older companies produced physical assets. The majority of companies today are serviced-based or create digital assets. These modern components are not easily valued using book value.
Intellectual property and goodwill were not common measures of value in the past. They are difficult to quantify, even today.
However, computerized financial models have made the job easier. Computers were not readily available to businesses in the early part of the 20th century. This fact could account for the reason why business owners and financial analysts did not incorporate these measures.
Warren Buffett’s bet
The next reason is that Warren Buffett won a bet for charity based on value investing principles. In 2007, he challenged hedge fund managers that his strategy would handily beat strategies used by hedge funds.
Just one hedge fund took him up on the bet.
The rules stated that the hedge fund manager had to choose from at least five actively managed hedge funds. Warren was only permitted to invest in an index fund. He chose an S&P 500 fund provided by Vanguard.
In the first few years of the bet the financial spin doctors declared that Buffett had bit off more than he could chew. The hedge fund manager was ahead in the bet.
However, the hedge fund manager eventually conceded and almost a year before the bet was completed. Buffett was so far ahead he could not be beaten.
The third reason is that investing paradigms tend to fall out of favor. This is the current condition of the value investing discipline. It’s also the reason why many are calling for its demise.
However, the nature of stocks or sectors being out-of-favor is the primary benefit of value investing. Usually it’s when people give up on value stocks that they become attractive to investors again.
No one can state with certainty if value investing will make a comeback. However, investing in the S&P 500 is considered a value investing approach. The index continues to perform well.
The index is a proxy for how corporations are performing. It’s been a proxy been since its creation. If the S&P 500 index is not doing well, overall, this is likely a sign that something more systemic is going on.
We’ve been down this road before, though. We survived many financial crises in our history. 2020 is evidence that we haven’t seen the last of them. If you believe, as Buffett does, that American ingenuity will continue to reign supreme, then you have what it takes to succeed as a value investor.