In today’s rapidly changing world, what does it mean to be a “value” investor - as opposed to any other sort of investor?
I used to know. Twenty years ago, when asked what I did, I would answer proudly, “value investor”. With an emphasis of “value” - as opposed to momentum, contrarian or quantitative investing.
Value Investing was a distinct approach with a strong intellectual heritage - in which one carefully researched and evaluated a company’s fundamentals - to come to an conservative evaluation of intrinsic value.
And if there was a sufficient discount, a margin of safety, one would one would consider buying.
Yes. There were minor quibbles to whether growth investors could be considered to be value investors. But then Jim O'Shaughnessy cleared it up when he famously said, "value and growth are joined at the hip."
I, along with Terry Smith, Ruane Cunniff and many others was hugely enamored with this GARP (growth at a reasonable price) approach.
Then Charlie Munger, generalized further, saying, at one of the Berkshire Hathaway meetings that, “All intelligent investing is value investing and vice-versa. Investing is intelligent when you are paying a little less than what you are getting.”
So far, so good.
Except that a bubble was starting to form. In 2004, Jeremy Grantham said, "Every great bubble starts as a great idea, and then it gets corrupted by the crowd and taken to an extreme."
Perhaps that’s when the rot started settling in: Value investing is yet another good idea that got corrupted by the crowd and taken to extreme.
Let me take you through it: in the most phases of the most recent market cycle, investors who claimed to be buying value were doing something very different to the value, or GARP investors of the past - in that they no longer required a company to have current earnings.
In order to claim that they were buying something at a discount to intrinsic value, these investors just needed the company to have a spectacular future.
Cathie Wood, manager of the ARK range said, for example in an interview with CNBC in 2021 “We think that value is to be found in future growth. It's very hard for human beings to look out into the future and predict how things are going to develop, but if you can, there are massive opportunities."
New kids on the block
And Tom Slater of Baillie Gifford, joined in, saying, "I like businesses that can make me money over a long time horizon. I don't really care what the multiple is today or tomorrow because I think the value is in the growth that the company can generate over the long-term."
There are aspects of these statements that sound like Warren Buffett or Terry Smith talking about investments in companies like Coca Cola, Diageo, Unilever or Nestle. Except that the companies Cathie Wood and Tom Slater were interested in did not always have earnings.
