Is Value Investing Dead? Nope. Here’s Why.
Is value investing dead? Not according to its performance or famous value investors like Warren Buffett and Charlie Munger. Value investing is alive and well.
Value investing is all about buying undervalued stocks at prices much lower than they’re actually worth. Benjamin Graham coined the term in the 1930s. Though an older strategy, here are three top reasons why it’s too soon to bury value investing just yet.
- Value stocks have outperformed growth stocks every decade since the 1940s (not counting the 2010s).
- Value stocks tend to remain stable or grow during periods of high inflation and interest rates.
- Value investing is still the go-to strategy for many successful investors, including Warren Buffett.
Value investing outperforms growth investing over the long term.
Although past performance doesn’t indicate future results, value stocks are still winning over the long term compared to growth stocks.
Growth investing is about finding companies that are priced ABOVE what they are worth right now. Growth stocks normally win in the short term. Value investing is about finding companies that are priced BELOW what they are intrinsically worth. It performs well over time as the stock price eventually matches the value of the company. Buy low and sell high.
Let’s look at data compiled by Nobel Prize laureate Eugene Fama and Dartmouth professor Kenneth French. The study seeks to answer if value stocks outperform growth stocks.
Source: MPI Stylus Solutions
According to this study, growth stocks outperformed value stocks by 7.8% annually since 2010. And it’s true that value investing returns are much lower than they were in the 1990s and before. As such, many investors are flocking toward growth investing, investing in growth stocks such as Tesla and Shopify. Some value investors are losing patience.
But if you look at 10-year periods, value stocks have outperformed growth stocks over every decade since the 1940s. What happened in the 2010s appears to be an outlier.
And here’s the thing: it’s difficult to measure the true success of value investing on a yearly or even a decade basis. Why? Because it’s a long-term game. Value stocks have been historically volatile. They can have a bad run for years before eventually going back up.
Hint: With value investing, emphasis is placed on businesses that will perform well into the future. Of course, value investors can invest in value traps – stocks that are cheap for a reason. These “value stocks” will then underperform. Watch out for these types of stocks by completing a fundamental analysis.
It thrives during high-interest rates and inflation.
According to research, value stocks actually do well in poor economic conditions, such as high-interest rates and high inflation.
Amidst the current economic turbulence, this fact is good news for value investors. According to the Bureau of Labor Statistics, the annual inflation rate in May 2022 was 8.6%, its highest level since 1981 (note: inflation is the rise in the price of goods and services).
Regarding interest rates, the U.S. Federal Reserve hiked interest rates by 0.75 percentage points in July 2022, taking its benchmark rate to a range of 2.25%-2.5%.
Value stocks perform better or remain stable in high inflation periods. Growth stocks perform better when inflation is low.
According to Rob Arnott, the founder and chairman of Research Affiliates and a longtime advocate for value investing, “High inflation is good for value. It increases uncertainty about the future and makes it harder for companies to plan. Boring, steady-as-you-go businesses become more attractive.”
Value stocks are also less affected by rising interest rates. Interest rates go up to help battle inflation. According to AQR, the correlation between value stock returns and interest rates over 40 years is only 0.03. This number shows little to no correlation between the two variables.
Value investing is still Warren Buffett’s go-to strategy.
Warren Buffett began value investing based on the investment philosophy of his mentor Benjamin Graham, the father of value investing. As of 2022, Buffett had a net worth of more than $96.4 billion and is the world’s fifth-wealthiest man.
Below are key facts about some of Buffett’s value investments:
- Coca-Cola. In 1987, he invested more than $1B in the company. Now, the dividends from this investment earn more than half the original investment amount yearly.
- American Express. Buffett first invested in American Express in 1963. Buffett’s Berkshire Hathaway now owns 151 million shares and gets about $260 million annually in Amex dividends.
- Bank of America. BAC makes up 12.7% of Berkshire Hathaway’s portfolio. The current yield is 2.5%, based on annual payments totaling $0.84.
So how did Buffett use value investing to become so wealthy? Buffett invests in high-quality companies at bargain prices.
Buffett avoids investing in companies he doesn’t understand, such as technology companies. He makes sure he understands the company, its stock, business model, etc.
Once he has a company he understands, Buffett completes a full fundamental analysis and calculates the company’s intrinsic value. If the stock’s price is significantly lower than the company’s intrinsic value, Buffett will likely invest.
“Warren doesn’t outperform other investors because he computes odds better. That’s not it at all,” says Bill Gates. “Warren never makes an investment where the difference between doing it and not doing it relies on the second digit of computation. He doesn’t invest—take a swing of the bat—unless the opportunity appears unbelievably good.”
While Buffett might be the most well-known value investor, he’s not the only one to profit from this strategy. Other strong value investors today include:
- Seth Klarman. Net Worth: $1.5 billion
- Charlie Munger. Net Worth: $2.1 billion
- Michael Lee-Chin. Net Worth: $1.7 billion
- Mohnish Pabrai. Net Worth: 1.8 billion
These successful bargain hunters prove that value investing can be a worthwhile investment strategy.
Take the leap with value investing.
Granted, value investing is difficult as it becomes popular and more mainstream. It’s much harder to find undervalued companies at bargain prices.
Still, as many investors continue to jump on hot, new investments or panic as the market shifts, you can take advantage of value stocks. Here’s how to get started:
- Learn how to find undervalued individual stocks in this article.
- Consider investing in value ETFs if you don’t want to invest in individual stocks. Your money is invested in a basket of public companies that are undervalued based on metrics such as the price-to-earnings ratio (P/E ratio) and price-to-book (P/B).
Want to learn more? Taking an online course is an excellent way to become a solid value investor. Sign up for the Value Investing Bootcamp: How to Invest Wisely on Udemy. This course helps you learn how to value invest, step-by-step. Check out the course here to discover value investing.