Exactly what inspires the scorn often heaped upon value investors is hard to know. Perhaps it's simply jealousy born of its proponents long-term outperformance of the market (see Buffett’s Superinvestors of Graham-and-Doddsville), or maybe that many don’t fit the typical fund manager profile and shy away from the limelight (who, for example, until very recently had ever heard of Ted Weschler?).
Somehow, despite all the evidence to the contrary (see here), it’s never too hard to find a value-basher, often at the time when the approach is needed most.
Recently, for example, the Australian Financial Review ran this article on the death of the 'buy and hold strategy’. Buffett, often extolled as the poster boy for ‘buy and hold’, is quickly dismissed as his strategy tends to ‘work best in a rising market’. The author, Bianca Hartge-Hazelman, goes on to quote analysts arguing volatility is the new norm, rendering ‘buy and hold’ an outdated mode of investing.
'Buy and hold' or 'Long-term'?
What irks me is not the criticism as such—I welcome debate—but the fundamental misunderstanding of value investing. Whilst Buffett et al are often labelled as ‘buy and hold’ investors—indiscriminately buying and holding stocks for the flimsy reason markets always (eventually) go up—they’re really ‘long-term’ investors. And the two are subtly, yet significantly, different.
Of course just holding a stock indefinitely is a silly strategy, and is basically akin to index investing.
Value investing, on the other hand, is about buying stocks for less than they are worth; hopefully a lot less. And not being precious about what you own, if there’s better value elsewhere we’ll sell up and move on (see The buy and sell strategy (sign up for a free trial to access)).
Value investors tend to hold stocks for a long period of time for two main reasons.
First, realising value takes time. Just because you buy a stock doesn't mean the market suddenly realises it’s under-priced. Often you have to wait years for your investment thesis to play out, but we’re a patient lot and are happy to wait.
Second, valuation isn’t an exact science, especially for companies at either end of the spectrum (it's easier to value an 'average' company). And as regular buyers of quality businesses (such as Computershare or Cochlear) we're keen not to sell too early, and are happy to let the stock price drift over our upper valuation. This leeway tends to lead to long holding periods.
Combined both factors mean value investors have a tendency to own stocks for a long time. But not indiscriminately. Each stock is selected individually and is never just a case of 'holding and hoping'.
Time to buy
Declaring the death of value investing is, perhaps, one of the clearest contrarian indicators you’re ever likely to get. Commentators claimed the death of value-investing in early 1970s, late 1980s and late 1990s, and we know how that turned out.
Maybe I’m just stubborn, but value investing is far from dead. Buying cheap assets remains the best long-term investment strategy, regardless of the economic environment. Indeed, if we are facing a decade of sub-par economic growth a disciplined focus on value may be more needed than ever.
Have you noticed a more ‘anti-value’ attitude in the press? Or do you agree, has value had its day?