Bullish on value?
The era of technology transformation has thrown challenges at the art and science of value investing. It’s 2022. The world is changing and so is the idea and execution behind value investing. Maybe even beyond the strategies that Graham, Buffett, and Munger have demonstrated?
The investing days of Benjamin Graham’s value investing have been around for more than 100 years now. However, the greatest known practitioner of value investing is Warren Buffett. The belief in his investment style is reinforced by the amazingly large amount of corpus that he has built right under the nose of traders, technical analysts, quantitative investors, or other hedge fund managers. All of this while he has also been purportedly sharing his investment secrets, at least, once a year in his annual letters to shareholders!
Some consider his partner, alter-ego and Vice Chairman of their investment vehicle Berkshire Hathaway, Charlie Munger as an even smarter investor. Probably, reinforced by Buffett himself.
A search on “Warren Buffett” on www.amazon.com shows more than 3000 books. A search on www.listennotes.com for “Warren Buffett” shows more than 10000 episodes. Similar results are seen for the term “value investing”.
The folklore and strategies of Buffett are well-known. The wannabe Buffetts look for “moats” or sustainable competitive advantages and once found, plan to buy-and-hold these stocks forever. This is the holy grail of investing, or so they have been told. They have even been told that price doesn’t matter.
Just a thought, Buffett never said that.
Similarly, the ones who have discovered Charlie Munger go one step further and decide to buy only 3 or, at most, 7 stocks in a highly concentrated portfolio.
Connoisseurs of value investing have, of course, read Benjamin Graham’s Intelligent Investor and some have even read his Security Analysis. Graham talks about Net-nets, i.e., market-cap less than cash on the books and market cap less than assets on the books, i.e., low price-to-book stocks and low price-to-earnings stocks.
But are these strategies of Graham, Buffett and Munger appropriate for the new era of transformative technologies? The era where one of the largest retailers in the world, Amazon, has a primarily store-less business model, one of the largest passenger transport companies, Uber, has a car-less model, one of the largest travel & hospitality companies, Airbnb, has a hotel-less model, one of the largest Enterprise IT companies, Microsoft, doesn’t sell servers and software, i.e., Microsoft Azure; and one of the largest media & entertainment companies, Netflix, doesn’t need the theatre-owners or the television & cable channels.
In this era of technology disruption and transformation, the assets are not on the balance sheets. These are intangible assets that are not carried on the balance sheet but are expensed out in the income statements. The spending on talent, research and development, marketing, and other expenses under other heads including sales, general and administrative expenses are actually investments for creating intangible assets and developing “moats” or persistent competitive advantages.
Since assets are not in the books, the price-to-book metric of Graham is not going to work. The expenses are high due to R&D, marketing etc., the earnings are low and the price-to-earnings metric is not going to be that low as required by a value investor. Similarly, with low earnings,
The RoE also, typically, doesn’t look juicy enough to signify a moat as required by Buffett. Then how does one apply the value investing strategies?
For this one has to go back to Graham’s Intelligent Investor to absorb the core philosophy of “margin of safety”. Go to John Burr Williams to learn about the present value of future cash flows. Go to John Templeton to learn about deep discounts to intrinsic value. Go to Phil Fisher, Buffett’s guru but also the guru of Silicon Valley venture capitalists, to learn about growth investing. Go to Peter Lynch to understand growth further. Go back to Buffett to learn about moats. But also go to Michael Porter and Bruce Greenwald to understand persistent competitive advantages. Go to Michael Mauboussin to learn about moats in the new era. Learn from theoreticians Bruce Greenwald, Baruch Lev and practitioners like Bill Nygren. Go back to Martin Whitman, Joel Greenblatt and Seth Klarman to have the feet firmly on the ground so that there is no compromise on “Margin of Safety”, and large discounts to intrinsic value.
These are essentials that lead us to ideas in investment. And in 2022, it’s about time that we connect the dots of fundamentals, but also make investing more every day and contextual.
Want to learn more about value investing and its implementations? Here are some resources for you –
- Value Investing with Legends – Podcast – https://www8.gsb.columbia.edu/valueinvesting/resources/podcast
- John Burr Williams – Book – Theory of Investment Value -Link: https://www.amazon.in/Theory-Investment-Contrary-Opinion-Library/dp/087034126X – Book authored by Williams first published in 1938
- John Templeton – Youtube Video – https://www.youtube.com/watch?v=K__WTucylzk – Story of the Legendary Investor
- Martin Whitman – Book – The Aggressive Conservative Investor (Link)
- Phil Fisher – Book – Common Stocks and Uncommon Profits (Link)
- Greenwald – On competitive advantages: https://rblock.typepad.com/All_Strategy_Is_Local.pdf
- Bruce Greenwald – Book – Value Investing: From Graham to Buffett and Beyond & Youtube – A deep dive into Value Investing (Link)
- Michael Mauboussin – http://michaelmauboussin.com/
- Seth Klarman – Youtube – https://www.youtube.com/watch?v=YdGloitRgbM
- Bill Nygran – Blog – https://thecalminvestor.com/bill-nygren-value-investing/