This article on Does Value Investing Still Work was written by Josh Klein. Josh is a private investor and a commercial real estate analyst from New York City. He combines balance sheet health with operational efficiency in his personal account. Article image (Creative Commons) by 3dman_eu, edited by The Broken Leg.
Are Graham and Dodd’s strategies, philosophies, and practices outdated? In the age of nearly unlimited information at the push of a button, is there truly any way to beat the street? Does technology make value investing a zero-sum game? These questions – amongst others – have slowly surfaced as technology continues to push boundaries and achieve the impossible. However, value investing is not dead. Don’t believe? Read along to find out why.
Value Investing Still Work: Voting Machine vs. Weighing Machine
Graham famously stated that the market – in the short run – is a voting machine, but in the long run, it’s a weighing machine. Put another way – the market gyrates between various values based on short-term headlines, news, and reports, but over the long term, all quotes will eventually revert back to their true underlying value.
In the age of technology, information travels at the speed of light. In an instant, as a piece of news drops on the internet, investors have the immediate ability to act. As creatures of habit, greed, fear, and anxiety guide our every move. An overflow of emotions leads the vast majority of the public markets to hyper-respond without fully absorbing the information. This phenomenon results in a large amount of short-term stock fluctuation, despite little impairment to the stock’s intrinsic value. Although company information and investment reports might be more transparent, the information overload leads to short-term disparity between a stock’s price and value. Value investing still work because deep value analysis focuses on the long-term weighing machine instead of the meaningless voting machine. By paying little attention to the background noise, deep value investors can focus more on tangible areas of value such as earnings and assets.
However, as technology makes information more readily available, how does value investing still work ? Shouldn’t the news that impacts the stock price today reveal the potential threats or strengths that will relate to the intrinsic value of tomorrow? To answer that question, one needs to delve into the three aspects of investment edge: informational, analytical, and behavioral biases.
Value Investing Still Work: Informational, Analytical, and Behavioral Biases
Generally, three different avenues bring about investment edge: informational, analytical, and behavioral. In today’s market environment, very few – if any – have an informational advantage. The SEC requires all public companies to share financials and reports related to their businesses. For anything that might have been left out, media outlets, blogs, and research filings ensure their exposure.
Analytical advantages exist, but not to the same extent as they used to. There are hundreds – if not thousands – of articles on investment modeling, analysis, and screening. There are always unique ways to look at an investment; however, for the most part, investment strategies are pretty universal. Most investment shops perform discounted cash flows, asset valuations, and industry comparison analyses. Unfortunately, it is much harder now than it was in the days of Graham to have a leg up on a stock analysis. So, how does value investing still work ? The answer lies with behavioral bias.
Value investing thrives off impatience. While others listen to the background noise, it is those with stonewall conviction and strength that are able to outperform the crowd.
Value investors need to know how to say no when others are saying yes. They need to buy when there’s blood in the streets and sell when others are greedy. They need to stomach declines of 20%-50% and be willing to buy more when the market doesn’t seem to agree with their investment theses.
Value investing is not for the weak. Yet, despite its intuitiveness, that is the very reason it still exists. There is one more reason why value investing still exists in the age of technology: crowd psychology.
Now more than ever, the crowd influences investors. During the age of Graham in the late ’20s, crowd psychology existed, but to a lesser degree. Information wasn’t shared as rapidly, and consumer sentiment wasn’t as uniform among all retail investors. Now that information advances rapidly, mainstream ideas immediately draw investor support, making it all the more difficult to establish contrarian viewpoints.
As seen during the dot-com bubble, investors overhype new “life-changing” advancements. Today’s dot-com industries – crypto currency and marijuana stocks – are perfect examples of this overexcitement. As these new technologies and regulatory advancements emerge, it will be increasingly difficult to think differently — making way for the few and far between who are able to stick to a sound deep value investing strategy.
Value investing in the age of technology still works – without a doubt. Perhaps, it works more than ever before. As Graham stated so many years ago, the market is a voting machine gyrating between prices and constantly diverging away from stocks’ intrinsic values. In the long run, however, the market always reverts back to its intrinsic value. As long as you keep that in full focus, execute your deep value strategies with conviction and behavioral strength, and avoid the crowd’s love for the next best thing, you’ll surely outperform the market and balloon your portfolio returns.
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