Warren Buffet once said: “Price is what you pay, value is what you get” and it’s rather puzzling to notice how today this wise advice falls short of being noticed or even struggles to apply in the real world. Buffet, a disciple of Ben Graham from Columbia University, started his career as an investor in years when participation to securities markets was limited and many opportunities, therefore, were overlooked by investors and speculators. Hence, if you wanted to be "long" an asset, the game was finding a good investment where the price is cheaper than the intrinsic value of a security - say a traded equity share or a bond. But let’s go back to the opening quote by the Oracle of Omaha (Warren Buffet nickname).
In practical terms, what Buffet said means, in investment terms, is that when you are buying a stock, the price that you pay for it tends to be a number given by the dynamics of the market you are buying from. On the other hand, the actual value of that same stock is an intrinsic dollar quantity not necessarily expressed at its full potential (for ease of use I will not consider short selling). Hence, we arrive at a possible definition of what value investing stands for: buying something that today has a certain price because one day you think that market participants will recognise that “something” to have a higher value than today’s price.
This investment theory has ruled the asset management sector for decades, and to these days is still one of the most cherished by the old guard. Nevertheless, today is very much debated whether value investing is still working as it was in the past. The performance of the value investing managers have been generally quite disappointing in the last years, and this evidence may be attributed to a series of factors like central banks easing their monetary policies as well as stocks of growth and technology companies constantly stacking the pack. But what if we start looking at the markets with a new perspective and we get rid of all traditional financial textbooks?
First of all, let’s look at the last ~10 years best performing stocks across various market capitalisations and we see that these stocks, once labelled as expensive by value investors, tend to belong to the following industries: technology, services, luxury and indulgence goods. So, what is this telling us? Well, not necessarily that we are all becoming a species of compulsive-consumerist-techno-zombies but certainly that something has changed and most likely this change lies in the fact that stocks yielding the highest returns are the ones of companies that provide goods and services that are consistently in people’s consumption and/or purchase preferences. Now, whether this evidence comes from the fact that these companies have best-in-class features, such as unique brand equity, goods and services that create most satisfaction to the consumers, or even because they supply efficiency through technology – you name it – IT IS AN ENDLESS AND CONSTANT DEBATE… However, the fact that consumers dictate rules seams an unquestionable reality.
So, is value investing over? Not at all, but it did change perspective, as today the value is where people watch and buy rather than where the market misses reaching fair valuations. Furthermore, in a World ruled by Central Banks and with an experiential and social media-driven economy like ours, the spotlight effect plays a major role, so that main markets trends ought to become self-fulfilling prophesies at the expenses of hidden champions that get overlooked.
It is often said, with a pinch of irony, that economists always suffered from an inferiority complex towards physicists, and other hard sciences practitioners, because historically they wanted to fit reality into abstract mathematical models. Hence, to sum up, I guess that my personal hope is that value investing will not attempt the same squeeze that economists did and that it will mould accordingly with the behaviour of our modern economies’ participants.
As we commenced this article with Warren Buffet’s quote on the difference between the price and the value of an investment, I think that the following one from Oscar Wilde will serve as a proper finale: “Nowadays people know the price of everything and the value of nothing” – so to say…
This article has been written by Tancredi Cordero. Tancredi is the Founder & CEO of Kuros Associates.
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