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Stuck in the past
Aswath Damodaran, a professor at NYU, penned an article on why value investing needs a reboot.
His three points are:
- Value investing has become rigid. Value investing has been steadfast in its view that companies that do not have significant tangible assets relative to their market value, and that view has kept many value investors out of technology stocks for most of the last three decades.
- It has become ritualistic. The claim that your investment education is incomplete unless you have read Ben Graham's Intelligent Investor and Security Analysis to an almost unquestioning belief that anything said by Warren Buffett or Charlie Munger has to be right.
- It has become righteous. They view investors who deviate from the script as shallow speculators but are convinced that they will fail in the "long term.
Count me a shallow speculator😏 And he’s right. Reading Security Analysis and The Intelligent Investor will not give you an edge. And all investing, to some degree, is speculation. Without uncertainty, there would be no chance to profit.
It’s ironic. One of the best investments for both Ben Graham and Warren Buffett was GEICO. In 1948, Graham acquired a 50% stake in the business for $712,000. Back then, GEICO wasn’t a value stock. It was a small growth stock. And its business model was new and unproven (selling insurance directly to consumers).
And over 25 years, Graham’s $712,000 stake in GEICO grew to over $400 million, a 500 bagger. The father of value investing’s greatest investment was a growth stock. Go figure😂
The professor doesn’t just knock the core tenants of value investing; he offers a way forward (emphasis mine):
I believe that value investing has lost its edge, partly because of its dependence on measures and metrics that have become less meaningful over time and partly because the global economy has changed, with ripple effects on markets.
To rediscover itself, value investing needs to get over its discomfort with uncertainty and be more willing to define value broadly, to include not just countable and physical assets in place but also investments in intangible and growth assets.
Part of me hopes they don’t change. The die-hard value investors, the ones quoted by networks and newspapers, have given me some of my best ideas:)
Read also: Why Value Investing Sucks (Institutional Investor).
Read the rest of Wednesday's letter by clicking here.