Traditional staples of classic value investing — readily discernible quantitative measures of cheapness — are no longer likely to produce a sustainable edge on their own as the world today has gotten more complex, distressed debt specialist and Oaktree Capital co-founder Howard Marks has written in a memo titled “Something of Value” to his clients on 11th January.
Value investing consists of quantifying what something is worth intrinsically, based primarily on its fundamental, cash flow-generating capabilities, and buying it if its price represents a meaningful discount from that value.
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The other key discipline is “growth investing,” which targets a new breed of companies that are expected to grow rapidly and are accorded high valuation metrics in recognition of their exceptional long-term potential.
Highlighting the fact that “growth” stocks have meaningfully outperformed “value” in the last 13 years, Marks suggested that investors’ search for value in low-priced securities should be one of many important tools as opposed to “a hammer constantly in search of a nail.”
“The focus on ‘value’ versus ‘growth’ doesn’t serve investors well in the fast-changing world today,” he added.
The performance of value investing has lagged that of growth investing over the past decade-plus, and massively so in 2020, leading some experts to declare value investing permanently dead while others assert that its great resurgence is just around the corner.
Explaining the underperformance in value stocks, Marks wrote, “Anchored by today’s cash flows and asset values, these stocks should theoretically be ‘safer’ and more protected, albeit less likely to earn the great returns delivered by companies that aspire to rapidly grow sales and earnings into the distant future.”
According to Marks, in the past, bargains could be available for the picking, based on readily observable data and basic analysis. “Today it seems foolish to think that such things could be found with any level of frequency. Thus, in the world we live in today, investing on the basis of rote formulas and readily available fundamental, quantitative metrics should not be particularly profitable,” he added.
Here are seven conclusions from Marks’ memo that may make value investing click in today’s world:
- Value investing doesn’t have to be about low valuation metrics. Value can be found in many forms. The fact that a company grows rapidly, relies on intangibles such as technology for its success and/or has a high p/e ratio shouldn’t mean it can’t be invested in on the basis of intrinsic value.
- Many sources of potential value can’t be reduced to a number. As Albert Einstein purportedly said, “Not everything that counts can be counted, and not everything that can be counted counts.” The fact that something can’t be predicted with precision doesn’t mean it isn’t real.
- Since quantitative information regarding the present is so readily available, success in the highly competitive field of investing is more likely to be the result of superior judgments about qualitative factors and future events.
- The fact that a company is expected to grow rapidly doesn’t mean it’s unpredictable, and the fact that another has a history of steady growth doesn’t mean it can’t run into trouble.
- The fact that a security carries high valuation metrics doesn’t mean it’s overpriced, and the fact that another has low valuation metrics doesn’t mean it’s a bargain.
- Not all companies that are expected to grow rapidly will do so. But it’s very hard to fully appreciate and fully value the ones that will
- If you find a company with the proverbial license to print money, don’t start selling its shares simply because they’ve shown some appreciation. You won’t find many such winners in your lifetime, and you should get the most out of those you do find.