The greatest sign of intelligence is the proof that one has changed their mind. This article, excellent itself, is all the more so as we are witnessing someone in their 75th year of life openly willing to challenge long-held philosophies and think, from bottom-up principles, about how their view of the world may need to evolve. I have enormous respect for people who can do this. There are very few.
Selected quotes from the essay:
The focus on value versus growth doesn’t serve investors well in the fast-changing world in which we live.
The essential underlying principles of value investing are these:
- the understanding of securities as stakes in actual businesses,
- the focus on true worth as opposed to price,
- the use of fundamentals to calculate intrinsic value,
- the recognition that attractive investments come when there is a wide divergence between the price at which something is offered in the market and the actual fundamental worth you’ve determined, and
- the emotional discipline to act when such an opportunity is presented and not otherwise.
[Ben Graham’s] investment style relied on fixed formulas to arrive at measures of statistical cheapness. Graham…achieved enviable investment performance although, funnily enough, he would later admit that he earned more on one long-term investment in a growth company, GEICO, than in all his other investments combined.
“Carrying low valuation parameters” is far from synonymous with “underpriced.”
The two approaches – value and growth – have divided the investment world for the last fifty years. They’ve become not only schools of investing thought, but also labels used to differentiate products, managers and organizations. Based on this distinction, a persistent scoreboard is maintained measuring the performance of one camp against the other…. My belief, especially after some deep reflection over the past year…is that the two should never have been viewed as mutually exclusive to begin with.
I don’t believe the famous value investors who so influenced the field intended for there to be such a sharp delineation between value investing, with its focus on the present day, low price and predictability, and growth investing, with its emphasis on rapidly growing companies, even when selling at high valuations. Nor is the distinction essential, natural or helpful, especially in the complex world in which we find ourselves today.
There is no such thing in our minds as value and growth investing. (Warren Buffett)
Now we live in a complex world where a range of tools is required for success.
When value and growth investing were codified,
- the level of competition in the market was much lower, with far fewer participants
- information was very hard to find and process, with no computers, no digital distribution and very few information services
- the investment thought process wasn’t something broadly developed or disseminated; the key analytical frameworks were not yet codified, and folks like Graham and Buffett had a huge edge simply because they knew how to process the data they found.
In short, there were few people searching; the search process was quite difficult; and few people knew how to turn the data they did find into profitable investment conclusions. In this environment, bargains could literally be hiding in plain sight for anyone with the willingness to look and the capacity to analyze…the Grahamian value framework was created at a time when things could be stupidly cheap based on clearly observable facts, simply because the search process was very difficult and opaque.
Candeto aside: I recall my first reading of The Intelligent Investor. As is my nature, I immediately began an experiment: search for stocks fitting the attributes discussed in the book (generally speaking, firms trading for less than the value of their cash and liquidation value of their assets). I ran a stock screen. There weren’t any.
In the past, bargains could be available for the picking, based on readily observable data and basic analysis. Today it seems foolish to think that such things could be found with any level of frequency.
It also stands to reason that in a time when readily discernible quantitative data is unlikely to produce high-profit opportunities:
- if something carries a low valuation, there’s probably a good reason, and
- successful investing has to be more about superior judgements concerning (a) qualitative, non-computable factors and (b) how things are likely to unfold in the future.
While it’s important not to lose your skepticism, it’s also very important in this new world to be curious, look deeply into things and seek to truly understand them from the bottom up, rather than dismissing them out of hand. I worry that value investing can lead to rote application of formulas and that, in times of great change, applying formulas that are based on past experience and models of the prior world can lead to massive error. John Templeton warned about the risk that’s created when people say, “it’s different this time,” but he also allowed that 20 percent of the time they’re right. Given the rising impact of technology in the 21st century, I’d be that percentage is a lot higher today.
The basic equations of finance were not built to handle high-double-digit growth as far as the eye can see, making the valuation of rapid growers a complicated matter. As John Malone famously said, if your long-term growth rate exceeds your cost of capital, your present value is infinite. However, this is only true for truly special companies, which are few and far between and certainly not as ubiquitous as is generally implied by the market in times of ebullience.
It’s hard to make a convincing case that today’s market is too high if you can’t explain why its tech leaders are overvalued. (quoting his son, Andrew Marks)
Rather than being defined as one side of this artificial dichotomy, value investing should instead consist of buying whatever represents a better value proposition, taking all factors into account.
The first rule of compounding is to never interrupt it unnecessarily. (Charlie Munger)
When you multiply together the probabilities of succeeding at a large number of challenging tasks, the probability of doing them all correctly becomes very low. It’s much more feasible to have great insights about a small number of potentially huge winners, recognize how truly rare such insights and winners are, and not counteract them up by selling prematurely. (Andrew Marks)
According to Charlie Munger, he’s made almost all his money from three or four big winners.
As I said before, the natural state of the value investor is one o skepticism…. However, in a world where so much innovation is happening at such a rapid pace, this mindset should be paired with a deep curiosity, openness to new ideas, and willingness to learn before forming a view…. Without attaining real knowledge of what’s going on and attempting to fully understand the positive case, it’s impossible to have a sufficiently informed view to warrant the dismissiveness that many of us exhibit in the face of innovation.
Broad observations about historic valuations are not a sufficient foundation for market opinions today.
The search for value in low-priced securities that are worth much more should be just one of many important tools in the toolbox, not a hammer constantly in search of a nail. It doesn't make sense for value investors to bar investments simply because (a) they involve high-tech companies that are widely considered to have unusually bright futures, (b) their futures are distant and hard to quantify, and (c) their potential causes their securities to be assigned valuations that are high relative to the historic averages. Their goal at the end of the day should be to figure out what all kinds of thing are worth and buy them when they're available for a lot less.
Not everything that counts can be counted, and not everything that can be counted counts. (Albert Einstein)
Value is where you find it.
If you don't sell, you get to compound without paying capital gains taxes until the end. (Andrew Marks)
I'll only have a few good insights over my lifetime, so I have to maximize the few I have. (Andrew Marks)
Selling should be a function of watching how the future develops relative to your expectations and weighing the opportunity as it stand at any point in time against whatever else is out there. (Andrew Marks)