The rise of the consulting industry, armed with cheap computing power and an abundance of stock-specific data, has harmed the industry, because according to them, a “value” investor is one who holds statistically cheap stocks and a “growth” investor is one who holds statistically expensive stocks. The truth is somewhere … well, actually it’s a lot more complex, and the consulting industry’s crude segmentations don’t capture it.
The values of value investing
The problem is that managers now feel that the composition of their portfolios has to fit in a specific “box.” I remember talking to a friend who runs a mutual fund that is considered to be a “growth” fund. We’d been discussing a stock, which was actually his idea, and then he said “I think you’ll make a lot of money on it… but we can’t buy it; it’s a value stock.”
I organize a conference every summer called VALUEx Vail. Vail is a quaint, beautiful, ritzy ski resort town tucked away in the gorgeous Rocky Mountains, about 100 miles from Denver.
One day I received an e-mail from a reader asking why I – a value investor – would have a conference in an expensive place like Vail. He suggested that as a true value investor I should hold the conference in a hotel somewhere by the airport where prices are much cheaper. His precise comment was, “I thought value investors were supposed to like cheap stuff.”
This e-mail challenged my value-investment-hood. It made me question my value investing “values.” Was that reader right? Was I straying from value investor traditions? Maybe I should rename the conference VALUEx Motel 6 and hold it at a $36-a-night, remote airport hotel?
I recognized that the notion was slightly silly, but it started me pondering: What are the values of value investing?
Let’s think about the bible of value investing – Ben Graham’s 1949 The Intelligent Investor. Graham spent a lot of time talking about cheap stocks. He defined them as the ones that trade at single-digit price-earnings multiples, trade at a discount to book value, or trade below their cash value (net-nets).
Graham placed great emphasis on statistical cheapness – his flavor of value investing is tangible, staring you in the face. It requires very little imagination. You just need to close your eyes, plug your nose, take a deep breath and buy whatever you scrape off the bottom of the stock market abyss – what Warren Buffett calls the cigar-butt approach to investing.
But if the only thing you get out of Graham’s teachings is to buy statistically cheap stocks, then you are shortchanging yourself. This analysis is one-dimensional and ignores much that is important.
In one of my articles, I called Charlie Munger “Warren Buffett’s sidekick.” Jeff Matthews, a friend and the author of Pilgrimage to Warren Buffett’s Omaha, sent me an impassioned note saying, “Charlie is not a ‘sidekick’! Charlie changed Buffett’s investment philosophy. Sidekicks don’t do that.”
He went on: “At Munger’s 90th birthday party, Buffett pulled out an old, yellowed letter that Munger had written back in the day where Munger actually told Buffett explicitly that he had to change – that the cigar-butt stuff wouldn’t scale, that it was better to buy good businesses even if the price wasn’t dirt cheap.
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