Does Value Investing still works?

Popularized by investment legends like Warren Buffett, Seth Klarman and Benjamin Graham, value investing has been the mantra of many investors.

However, the concept of value investing has seemingly lost its shine due to the underperformance vs growth stocks as seen below.

So, the question on many investors' mind is this – “Does Value Investing still works?”

Unfortunately, the answer is not so straightforward because it requires a change in mindset which is explain below.

Evolution of Value Investing

Back in the era of Benjamin Graham, value investing is focused on buying neglected stocks trading below their liquidation value.

Fast forward to the 1990s – 2000s, Warren Buffett advocate value investing as buying stocks below their intrinsic value. This method has worked well for many value investors because they are predominantly looking at mature companies with good profitability and positive free cash flow. These companies include blue chip stocks like McDonalds’, Coca-Cola and American Express.

However, in this modern internet and fast-paced age, confusion sets in when we see how loss-making companies increasingly become multi-bagger stock winners at the end and value investors are losing out big time.

2 prime examples are Amazon and Netflix where they focus on building their market share earlier on (while suffering losses) and reach a certain inflection point where they can churn out free cash flow at a blistering pace while retaining their network effects.

Essentially, buying in Amazon and Netflix way earlier can still be considered as value investing. You simply need to discount back the positive cash flow will come streaming in at a much later stage.

Remember – value investing is buying less than what something is worth (even when the ‘worth’ is recognized only 10 – 20 years later).

3 Tenets of Value Investing

Given that the modern value investing needs a ‘perception shift’ and a much longer runway to materialize, here are some tenets for investors to take note of.

1. Economic Moat

A long-term investing strategy means investing in companies that possess a strong economic moat to fend off competition and disruptive technologies. A powerful brand, virtuous network effect, and economies of scale are some examples that can lead to sustainable pricing power and growth.

2. Keep your emotions in check

It is important not to be swayed by your emotions especially during a market downturn. By panicking and selling when prices drop, you’re going against the principles of value investing.

One good way to mitigate this is to practise dollar-cost averaging over the long run.

3. Focus on the long term

Peter Lynch, Warren Buffett and Charlie Munger are all proponents of investing for the long term simply because it harnesses the power of exponential growth.

When you focus on companies that can continue to grow in the long term, you are able to perceive things differently than someone who just want an overnight success.

Conclusion

To conclude, the idea of value investing will never go out of style because it is simply buying something for less than what it’s worth.

However, investors should recognize that the bulk of the technology stocks’ cash flows (and net worth) will come at a much later stage. Hence, investors should focus on companies with strong network effects and invest for the long haul.

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