Opinion: Value Investing Is Dead? Not By a Long Shot

According to some, hunting for stocks that are undervalued as a basis for portfolio selection — commonly called value investing — has been out of favor as former value investors have embraced higher-risk growth stocks.

The idea of researching companies with the goal of buying stocks that are cheap or undervalued was an investing philosophy introduced by the legendary Benjamin Graham, whose most well-known disciple is Warren Buffett.

Value investing seeks to differentiate between the price of a stock and the value of the underlying business. The goal is to ascertain a stock’s intrinsic value, based on an analysis of a company’s current financial condition and its prospects for the future.

The investment principles espoused by Graham held that a share price that is below its intrinsic value is considered a bargain.

Now some argue that the precepts of value investing are no longer applicable as the tech stocks have appreciated substantially since the financial crisis. In many cases tech stocks now operate as market leaders, helping to consistently bring indexes to new highs.

These companies are different in that they are asset-light — they rely on either intellectual property or advertising tech business models.

Yet of the demise of value investing may be premature. Those who contend value investing is irrelevant in the 21st century due to the dominance of the growth or tech stocks sang the same song in the late 1990’s and 2000, during the dot.com craze.

That bubble burst with calamitous effects on those who thought the sky was the limit and traditional fundamental analysis was old-fashioned.

Further, purported “value” funds today suffer from some of the same flaws that Graham warned investors about in the late 1960’s and early 70’s.

Namely, portfolio managers are caught up in the herd mentality and are under constant pressure to dress up their fund’s performance or total return figures to remain competitive with other similar funds.

Often, this entails purchasing individual stocks for the portfolio that traditional value investors would avoid but are now included in the value fund.

Seeking out bargains in the market is in no way at odds of the phenomenal rise of technology stocks. Many of those who argue that value investing is dead base their arguments solely on the performance of the composition of stocks in broad stock market measures, such as the Dow Jones Industrial Average and the S&P 500 index.

There is also the factor of how one defines a “value” stock.

“One of the toughest things is being able to articulate what value investing is anymore,” said Laton Spahr, the portfolio manager of Oppenheimer’s value fund.

Blurred line

Indeed, his value fund has blurred the line between value and growth. Its portfolio has positions in Microsoft and UnitedHealth Group — two equities that are classified as growth stocks.

Purchasing a tech stock that has appreciated dramatically does not, in and of itself, mean it is still not a bargain. The determinative factor is whether its current price reflects the value of the business itself.

This measure is not dependent on the types of assets the company owns. Whether its main assets are intellectual property or advertising revenue as opposed to physical plant and machinery is irrelevant.

Amazon, for instance, is classified as a growth stock. But it could still be considered undervalued if the prospects for its continued earnings growth are not reflected in its current share price.

Another significant factor that were not present during the astronomical rise of the growth tech stocks was the absence of competition, which has created market dominance or a monopoly for each of the companies in their respective industries.

That laissez-faire attitude helped accelerate these companies’ earnings growth. Regulators are now scrutinizing the business practices of Google, Facebook and Amazon in order to ascertain if their rapid growth and business models stifles competition and makes it difficult for start-ups who might challenge their dominance.

Finally, the historically unprecedented zero interest rate environment of the past 10 years fueled the bull market and the tech stocks that rose in tandem.

A long-running low interest rate investment climate skewed asset pricing. Now that the Federal Reserve has announced that quantitative easing is over, bonds are beginning to appear more attractive and the presence of alternative fixed income vehicles for investors will have an impact on the stock market.

Those who claim that value investing is dead based solely on the performance of the stock market during the long bull run should be careful about predicting the future by merely extrapolating the past.

Recommended Articles

Before You Sign, Read the Pros and Cons of Timeshares

Timeshares are upscale vacation and recreational properties that are simultaneously owned by multiple investors. However, there is a catch. Each owner is contractually obligated to only visit and inhabit the

6 Fast-Food Facts That Will Make You Put Down That Burger

Americans are more overweight than ever before. Sedentary lifestyles and poor diet is to blame. The convenience of fast food is also a factor. Morbid obesity increases the potential for

7 Common Impulse Purchases People Regret the Most

The bane of consumerism is that people voluntarily buy things that they don’t need or want for its own sake. By some estimates nearly 80% of American consumers buy some

10 Detoxifying, Filling Foods to Help You Slim Down Without Deprivation

Fad diets are a trend that may never die, as much as most of us want them to. It’s high time we took the focus off skinny and turned to

6 Ways to Get Perfectly Legit Free Government Cash

No such thing as a free lunch. Well, as a rule, yes. But we also know that for every rule, there are exceptions. While on one hand, we must beware

A Healthier You In Just a Month With These 12 New Habits

This is a simple guide to creating a healthier you in just one month! Some of these may be difficult, but the end results of feeling great are well worth

Warren Buffett’s Partner Says the Secret Is ‘Just Avoid Being Stupid’

Avoid meetings and read constantly, advises 95-year-old Charlie Munger If you avoid doing stupid things, it's easy to make money investing, he says. Disciple of value investing godfather Benjamin Graham

Wills, Trusts, and Living Trusts: Which Do You Need?

Regardless of your overall net worth, you should have a plan in place to make sure your financial affairs are in order before passing on. There is nothing more frustrating

6 Hugely Successful Businesses Started On a Shoestring Budget

You really need money to launch a business, but not as much as you’d think. What you need to start a business is a strategic business plan and an idea

How to Grow Your Own Never-Ending Supply of Ginger Indoors

Ginger is the ideal plant to grow inside your home. Growing ginger requires little sunlight and maintenance, which makes it simple and convenient for you! Plus you get an endless supply

4 Ways to Generate Extra Income Today

Feel dissatisfied with what you are earning from your day job? Think you have the potential to earn more? Well, the first thing to remember is that there are no

Should You Buy That Hot IPO? The Data Says Proceed with Caution

IPOs are hot, until they're not. Many trade lower after going public. It's important to understand how, and if, a company can become profitable. Who benefits from an IPO? In