Is Value Investing Dead or Alive? Exploring Observational Angles

Is Value Investing Dead or Not? Tactical Investor Take

Updated July 31, 2024

Introduction

The debate over the vitality of value investing is as enduring as the strategy itself. Sir John Templeton, a pioneer in the field, would likely argue that the principles of value investing are timeless. He emphasized the importance of seeking undervalued opportunities and maintaining a long-term perspective. He famously looked for bargains in markets at the “point of maximum pessimism,” where others saw despair, Templeton saw an opportunity.

With his keen understanding of market cycles and trader psychology, Paul Tudor Jones might suggest that value investing is never truly dead. Instead, it ebbs and flows with market sentiments and economic conditions. His agility in navigating market trends while keeping an eye on fundamental values aligns with the idea that value investing may evolve but remains relevant.

Drawing wisdom from a brilliant investor, such as Benjamin Franklin, we find that the core tenets of value investing are deeply rooted in the philosophy of seeking intrinsic value and avoiding the herd mentality. Franklin’s adage, “An investment in knowledge pays the best interest,” resonates with the value investor’s creed of thorough research and informed decision-making.

The current bull market may have favoured momentum and growth strategies, but this does not render value investing obsolete. It is essential to discern between a genuine value proposition and a value trap, where a low P/E ratio might mask underlying issues. The integration of mass psychology and technical analysis can unveil actual value, as seen in the case of stocks like WMT, CAT, OXY, etc, which rebounded after being undervalued and overlooked.

In conclusion, value investing is not a relic of the past but a strategy that requires adaptation and insight. The key is to adjust one’s angle of observance, as perspective alters the outlook. Templeton, Jones and the sagacious Franklin teach us that value investing is a dynamic discipline that thrives on patience, diversification, and an unyielding search for true worth in a fluctuating market landscape.

Redefining Value Investing: Beyond the Grave or a Golden Opportunity?

Is value investing dead? Is this a million-dollar or just a one-dollar question? Don’t bother answering that, for it does not matter. Whenever experts state that something is dead, hated, or disliked, one has to start viewing that sector or strategy more favourably. This bull market has not been kind to value investors, but it has been very gracious to momentum and growth investors. We don’t think value investing is dead, but one should abstain from purchasing a stock because it offers excellent value.

There is a reason that stock has a low P/E ratio, so one has to be careful not to fall for the value investing trap. What is a value investing trap? Buying a stock just because it appears to offer value; many stocks are trading below book value, but they make for a terrible investment. However, by combining Mass psychology with technical analysis, one can find great value plays that make sense. For example, the stock CALM, from July 2016 to roughly July 2017, the stock was in a downtrend, but it started to bottom in July 2017.

The stock was trading in the extremely oversold ranges, the public was shunning it, and it fell under the “value category.” If you purchased the stock anytime on or slightly after July 2017, you would be sitting on gains of over 30% today. Everything depends on your angle of observance; alter the angle and the outlook changes.

Value investing can work if you have a strategy.

Amid the din of expert opinions on value investing, the truth is nuanced. While some herald the death of value investing, others champion its enduring merits. The reality is that value investing may evolve but does not perish. Critics, sometimes as stubborn as mules, may lack the vision to see beyond the current market trends. It’s important to approach their sweeping statements with scepticism.

Celebrated for his investment acumen, Philip Fisher encouraged investors to look beyond mere numbers and consider qualitative factors such as management’s quality and a business’s growth potential. He believed these elements could reveal hidden value in companies the market has overlooked. Sir John Templeton, another giant in the field, demonstrated through his global investment approach that finding value is an active, ongoing process that geographic or sector limitations can unbind.

Value investing may have dimmed in the glow of the growth and momentum sectors, but it still possesses the potential for significant returns when combined with a comprehensive strategy. It is not the principle that has faltered but rather the application that must be refined. By integrating mass psychology’s insights and technical analysis’s precision, investors can discern authentic opportunities from the mirages.

CALM shows that a stock that once languished in obscurity can provide tangible returns when assessed with an informed eye. This illustrates that value investing remains a formidable strategy when infused with the proper techniques.

Resilience of Value Investing: Lessons from Market Crises

Value investing, a strategy focusing on purchasing undervalued assets, has demonstrated remarkable resilience through various market crises. This approach, pioneered by Benjamin Graham and championed by Warren Buffett, has consistently proven its worth during market turmoil. Let’s examine how value investing principles have weathered significant market downturns, providing valuable lessons for investors.

The Dot-Com Bubble (1995-2000)

During the late 1990s, technology stocks soared to unprecedented heights, driven by speculation and irrational exuberance. While many investors were caught up in a frenzy, value investors like Warren Buffett remained sceptical.

Example: Buffett’s Berkshire Hathaway avoided investing in overvalued tech stocks, a decision that was initially criticized. However, when the bubble burst in 2000, Berkshire’s portfolio remained relatively stable while tech-heavy portfolios suffered significant losses. From 2000 to 2002, the S&P 500 declined by 37.6%, while Berkshire Hathaway’s stock price increased by 26.4%.

Lesson: Following fundamental value principles can protect investors from market bubbles and subsequent crashes.

The 2008 Financial Crisis

The 2008 crisis, triggered by the housing market’s collapse and exacerbated by complex financial instruments, led to a global economic meltdown. Value investors saw this as an opportunity to acquire quality assets at discounted prices.

Example: Warren Buffett made several high-profile investments during this period:
1. $5 billion investment in Goldman Sachs in September 2008
2. $3 billion investment in General Electric in October 2008
3. $5 billion investment in Bank of America in 2011

These investments provided much-needed capital to these companies and generated substantial returns for Berkshire Hathaway as the market recovered.

Lesson: Market crises often create opportunities for value investors to acquire quality assets at bargain prices.

The COVID-19 Market Crash (2020)

The sudden onset of the COVID-19 pandemic in early 2020 led to a sharp market decline, with the S&P 500 falling 34% in just over a month. Value investors viewed this as another opportunity to invest in fundamentally strong companies at discounted prices.

Example: While many investors panicked, value-oriented fund managers like Seth Klarman of Baupost Group strategically deployed capital. Klarman increased his stake in companies like eBay and Fox Corp, which he believed were undervalued relative to their long-term prospects.

Lesson: Short-term market panics can create significant opportunities for patient, value-oriented investors.

Critical Principles of Value Investing in Crises

1. Margin of Safety: Graham’s buying assets are significantly below their intrinsic value, which provides a buffer against market volatility.

2. Focus on Fundamentals: Value investors prioritize a company’s financial health, competitive position, and long-term prospects over short-term market sentiment.

3. Contrarian Thinking: Value investors often go against the crowd, buying when others are fearful and selling when others are greedy.

4. Patience: Value strategies often require time, demanding patience from investors.

Statistical Evidence of Value Investing’s Resilience

Research supports the long-term effectiveness of value investing:
– A study by Fama and French (1992) found that value stocks outperformed growth stocks by an average of 4.8% annually over 26 years.
– According to Bank of America, value stocks have outperformed growth stocks 63% over rolling 5-year periods since 1926.

Conclusion: The Enduring Relevance of Value Investing in Market Crises

Value investing’s resilience during market crises is not merely anecdotal but supported by robust empirical evidence. This approach, rooted in fundamental analysis and patient capital allocation, has consistently demonstrated its effectiveness in navigating turbulent market conditions.

Key evidence supporting value investing’s efficacy:

1. Long-term outperformance: A study by Fama and French found that value stocks outperformed growth stocks by an average of 4.8% annually over 26 years.

2. Crisis performance: During the 2008 financial crisis, value-oriented investors like Warren Buffett invested strategically in companies like Goldman Sachs and General Electric, which later yielded substantial returns.

3. COVID-19 market crash: Value investors such as Seth Klarman of Baupost Group capitalized on market panic by increasing stakes in undervalued companies like eBay and Fox Corp.

The principles of value investing align well with Gustave Le Bon’s insights into crowd psychology. During market panics like the 2020 COVID-19 crash, mass sell-offs create opportunities for disciplined value investors to act against collective fear. By focusing on fundamental worth rather than ephemeral market sentiments, value investors can identify mispriced securities and invest with a long-term perspective.

However, it’s important to note that value investing is not without challenges. Critics of the Efficient Market Hypothesis (EMH) argue that consistently beating the market is difficult, if not impossible. Yet, the success of investors like Warren Buffett and the historical performance of value strategies suggest that market inefficiencies do exist and can be exploited by skilled practitioners.

In conclusion, while no investment strategy is foolproof, value investing has proven to be a robust approach, especially during market distress. By adhering to fundamental principles such as margin of safety, focus on intrinsic value, and patience, investors can potentially achieve superior long-term returns and navigate market turbulence with greater confidence. The enduring success of value investing is a testament to the power of rational analysis and disciplined investing in the face of market irrationality.