You have to remember that Bogle/Munger/Buffet all gained prominence when value investing wasn't a thing and investing of any kind was wildly out of reach for the common man. Today anyone can go online and buy VTI in minutes. Every financial advisor and 401k plan recommends index funds by default, and it is how the vast majority of people and organizations store their wealth. It doesn't need any more cheerleaders or icons. It had simply become synonymous with investing at large.
> Every financial advisor and 401k plan recommends index funds by default, and it is how the vast majority of people and organizations store their wealth. It doesn't need any more cheerleaders or icons. It had simply become synonymous with investing at large.
This is passive investing, not value investing.
Value investing is very much active investing, otherwise how would you select the undervalued assets?
Value investing is about finding undervalued companies and buying them while avoiding the properly valued or over valued companies. It has nothing to do with ETF's or index funds.
The term "value investing" is confusing because it is used in two different ways:
The first way it's used is to describe buying stocks that are cheap relative to their current financial characteristics (price to book, price to earnings, price to FCF, etc). This approach is usually contrasted with "growth", which would refer to investing in companies with a compelling thesis and bright future ahead of them.
A second way the term "value investing" is used is to describe the approach of Buffett/Munger where the investor compares the current price to the present value of the future cash flows and seeks a margin of safety above that.
You can do passive investing in the first approach. Just go buy ETFs that weight towards value metrics, like Vanguards $VTV value ETF. You can't really do passive investing in the second approach, aside from investing money in the funds of people who do that for you.
You’ve just described the same thing twice. You have a model for how to value a company, and you look for examples of market inefficiencies. Buffet/Munger initially took advantage of the fact that there used to be much more opportunity to find these inefficiencies, because information was used much more inefficiently (via mountains of paper records). That’s not the case any more with huge amounts of digital information available along with the technology to process it as quickly as it becomes available.
So-called "value ETFs" mostly don't contain stocks that I consider value stocks. A value stock's price at the time of purchase must be below the historical average market P/E multiple, with a reasonable growth rate expectation and analyst forecast. It should not have a high LT debt-to-capital ratio, and it should pay a stable dividend. If you look into those "value ETFs," there is a lot of garbage. Some companies from their portfolio were good value stocks many years ago, but they still keep them in the portfolio now, even though growth and expectations have deteriorated substantially. As a passive ETF investor, you would end up much better with a simple SPY/SPX or even BRKB than with those so-called value ETFs. Just compare the charts if you don't believe me.
Here is what Buffett says about value investing (in his 1992 BRK shareholder letter):"In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value—in the hope that it can soon be sold for a still-higher price—should be labeled speculation (which is neither illegal, immoral nor—in our view—financially fattening).
Whether appropriate or not, the term “value investing” is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics—a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield—are in no way inconsistent with a “value” purchase."
Value investing is a strategy. Index funds are a vehicle. The two can and do coexist, even more so than any other such pair because their risk profile (conservative) and time horizon (long term) are so well aligned.
Exactly. What makes it index investing is low fees and simple, objective stock selection without human judgement. There are various well-studied criteria for value stocks.
An S&P500 index does stock selection too, it's just picking large-cap stocks instead of value stocks.
Large/Small are not correlated to value/growth. I for instance, invest pretty much all my money on ETFs such as ISCV, that invest on companies that fit the small and the value criteria. Over the decades, these two factors combined seemed to be the ones that on average gave the most returns.
Former Financial Advisor [This is not personal financial advice]:
Stock prices go up and down, but usually your goal is to buy stocks low and sell them high.
Growth investing looks to trending sectors and companies and lets say 'bets' on a certain future playing out and thus being good for certain companies.
Value investing is an investment strategy where you deep dive on the financial fundamentals of a company and determine your own measure of worth, or what is sometimes called a fundamental value. In essence your own financial calculations give you a fundamental value that you think the stock is "actually" worth.
Having done this for a number of companies you then keep track of the market, and when, and only when, the stock price drops below your own fundamental value price then you buy.
Munger and Buffet would pair this approach to also planning to hold the stock for the long term and see themselves as owning part of the business over many years.
Often a stock might drop when the growth story turns against it (eg. AI is more exciting than crypto stories now), and this is likley when Value investors would get into a stock as it was now below their fundamental valuation and hence predicted on their models to go back up over time.
Mutual fund managers can often be classified as having a value or growth or index approach (and others). And for most normal investors it's usually good advise to take advantage of diversification and back a few different approaches in building a long term focussed portfolio.
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EDIT: My hobbyist, lay understanding, this is not investment advice, I likely have errors in my understanding
I've seen Growth and Technical investing be contrasted to Value. Growth being looking for companies which have not actualized revenue goals but appear to be able to do rapidly(they're growing, look for the ones that grow fastest), Technical is looking at trends and patterns (they're trending, catch the trend and get off before others do).
In my lay understanding Value investing looks for margins of safety through companies which are worth more on the books than they're shares are selling for, or where their cashflows make them look attractive relative to bonds of their equivalent grade. An example might be if AAPL took a nose dive and was selling for less than $167B (which is their cash on hand) that'd be an excellent Value play.
Or assume their equivalent bond rate was Single-B (Currently 9.5%) and their Price to earnings rate was less than 10.5 --> Buying AAPL would be similar to buying a Grade B bond for less than the current market rate.
Growth is about future value, which is subtilty different from what you said. You make predictions on what the company will earn in the future.
Value by contrast is looking at current earnings.
Both are predictions of the future value, one just weights the current earnings high. While you often have a bias to one, generally you should consider both. Don't buy current income if growth says the company will collapse. Don't buy growth if the company won't grow to support the value in the future.
Most people buy exciting stocks, not cheap stocks (cheap relative to intrinsic value).
Value stocks are by definition boring and unknown. Think iron ore mines, regional banks, house builders, carpet makers, and other yawn-fest-profit-machines.
If it's well known and great value, it's got to be boring. For the most part, they're just completely unknown though - most people could name maybe 5 public companies, nevermind 100.
In addition to getting in on the 'value investing' train early, they built their fortunes because they were there with capital in the 1960s, the best time to begin a 'buy and hold' strategy.
Back in the '60s and '70s, stock market capitalization grew roughly in line with GDP. But from the 1980s onwards, it grew at a level that far outpaced GDP growth [0]. So investors who were already wealthy in the '60s had the capital necessary to take advantage.
> investing of any kind was wildly out of reach for the common man
Oh baloney. I signed up for a Schwab account and started buying stocks at my first job long before the internet. My dad started buying stocks in the 1940s on his military pay (never much). Elevator boys were famously buying stocks in the 1920s.
All the "reach" required was some get-up-and-go to sign up for a brokerage account. It didn't cost anything. They didn't check your tax returns or do a credit check.
The whole point of the stock market was to sell stock to anyone who would buy it.
So that is about $3k in todays money you had laying around and could risk. Are you sure you are well attuned what is within the reach of the common man?
Many "financial advisors" will put you in funds with high expense ratios that give them a good sales commission, then take another 1% of assets under management on top. Eventually people wise up and move elsewhere.
Value investing is “an investment paradigm that involves investing in stocks that are overlooked by the market and are being traded below their true worth”.
Correct me if wrong, but I don’t think index funds come under that paradigm.
It depends on how the index is constructed. A market cap index cannot be value investing. A market sector index is almost surely not value investing (unless that entire sector is undervalued).
An index constructed specifically using value measures as the criteria for inclusion can be (at least arguably so).
But then also a fund or an index fund or an Index ETF wouldn't be complete without ethical review for the sustainable competitive advantage given e.g. GRI+#GlobalGoal sustainability reports.
When you own enough of a company to bring in a new team.
I think the larger point is that public capital markets have become steadily more efficient. There are no "value stocks" anymore because nothing is overlooked by the market, those old opportunities have been arbitraged away. Modern computing systems have made it practical to look at every stock every day, so all stocks now trade at their "true worth" because all publicly available information gets instantly priced in.
Now pretty much the only way for investors to (legally) beat the market is to do proprietary research in ways that others can't easily copy. You need information that no one else has.
As a counter-argument, you usually need to read a lot into the reported numbers, for example read the 10K notes for multiple years in the past. That's the only way to know that the 3B in assets showing up on the balance sheet for "goodwill", to use one easy example, are not really worth 3B. There are many more-nuanced factors that work alike. The reported numbers are what the accountants think might fly under GAAP, and the accountants work for the CEO, who has a say in the accounting "intent".
To test whether markets are perfectly efficient, just look for large movements over time. If a stock goes up 20% in a year, the market might have undervalued it last year, or is overvaluing it this year. It's unlikely the it was correctly valuing it at both times. In the absence of a Covid-19 pandemic, act of god, etc. of course.
You could say that the market just takes "investor sentiment" into account, and is therefore still efficient. But value investing is a strategy that looks for misplaced investor sentiment and exploits it. If that's the way you define an efficient market, than I'd say an efficient market is no obstacle to a value investor.
> If a stock goes up 20% in a year, the market might have undervalued it last year, or is overvaluing it this year. It's unlikely the it was correctly valuing it at both times. In the absence of a Covid-19 pandemic, act of god, etc. of course.
Or the company has grown its revenue by 20% in 1 year which isn't necessarily unheard of. Or they significantly beat the expectations of analysts / their own guidance. In all of those cases the stock could have been correctly valued & still experienced growth.
>To test whether markets are perfectly efficient, just look for large movements over time. If a stock goes up 20% in a year, the market might have undervalued it last year, or is overvaluing it this year. It's unlikely the it was correctly valuing it at both times. In the absence of a Covid-19 pandemic, act of god, etc. of course.
It's not the investment thesis, it's a thought experiment to test market efficiency. It's a test to see whether markets are always efficient, and to me demonstrates that they are not, and that value investing might be an interesting thesis to pursue still.
People have been saying for decades that value investing is not possible since the market is too efficient. My point is that it is not efficient enough to prevent value investing from being a successful strategy.
The efficient market hypothesis has been dogma for about half a century, but there's a lot of academic research showing that value and various other factors outperform anyway. There are all sorts of structural and psychological reasons they might persist; e.g. a short-term bias among fund managers, who tend to lose investors if they underperform a few quarters.
The research does say that value doesn't work quite as well as it did decades ago.
There is no reliable evidence that value investing still outperforms the market on a risk-adjusted basis. Everyone knows the trick now so the trick no longer works.
There's no reliable evidence that it doesn't, either. Value has never been something that works all the time. You have to put up with lagging performance when growth stocks are ascendent, which could be a reason that value keeps working in the long term. Time will tell whether it has its day again.
This doesn't happen any more. Back then you could find companies with a cap that was LESS than the money they had in the bank. Those were no brainer deals.
This strategy was actually pioneered by buffets mentor Benjamín graham. By just blindly following a formula you would do value investing by calculating NAV vs market cap.
Buffet took it one step further. He calculates another type of value called intrinsic value and that relies on other factors rather not just the ratio of assets to cap. Part of it relies on consistency of revenue, growth and qualitative aspects of the business as well.
> This doesn't happen any more. Back then you could find companies with a cap that was LESS than the money they had in the bank. Those were no brainer deals.
For a while, Yahoo was famously worth less than its stake in Alibaba. But it was also not clear whether shareholders could get management out of the way to stop destroying value.
> This doesn't happen any more. Back then you could find companies with a cap that was LESS than the money they had in the bank. Those were no brainer deals.
Plenty of companies trade at a discount to book value. I found over a thousand with a stock screener.
Value investing has very little to do with investing in ETFs/indexes. By definition, investing in an ETF can't be value investing, because value investing is about picking (yes, picking) stocks that are undervalued. And that implies going against the market. The complete opposite in buying into the market through an ETF.
VTV (to name the biggest one) has been consistently either tracking below or severely underperforming the S&P. If there is value to be found, that's not there.
I found this out the hard way when I saw an email from vanguard saying they would be charging me $25/year/fund unless I signed up for e-delivery AND moved all my accounts over to their brokerage.
Vanguards death by a thousand nickle-and-diming-cuts has begun.
Yes. I got that too. I don't want their brokerage, just their funds. I'm paying the $25/year fee. I want separation of functions, for security reasons.
In the annual letter to shareholders on 2014, it was suggested that both [Ajit] Jain and Greg Abel could be appropriate successors for Warren Buffett as CEO of Berkshire Hathaway.
That is a good question. With Gen Z being trained to only be interested in get rich quick schemes and having a TikTok attention span, we may never see another great pure fundamentals investor for a long time.
"The youth of today love luxury; they have bad manners, contempt for authority, disrespect for elders, and love talking" ~ Socrates, 432 BC.
The only older than elders writing off the youth is the youth proving them wrong. Let's hope some follow Charlie's quote instead: "If you've got anything you really want to do, don't wait until you're 93. Start now, and don't stop!"
You do realize that societies rise and fall, right? Greek culture was falling from its golden age around the time of that quote (regardless of who actually said or wrote it). Things would soon get so bad Plato recommended his disciples drop out of society into a sort of monasticism.
Munger is gone, Bogle is gone, Buffett is 93. Who takes up the mantle of value investing now?