Value Is Dead. Long Live Value Investing
Value (investing) is dead. Long live value investing. Such certainly seems to be the mantra as investors continue to pile into growth stocks while rationalizing valuations using methodologies which historically have not worked well.
However, as with all things when it comes to investing, be careful when declaring any asset or investment strategy dead. Such was a point made recently by Research Affiliates. The media has a long history of declaring sectors, markets, or strategies “dead” based on past performance. From August 1979 — when Business Week declared the “death of equities” — to July 2019, when the Financial Times questioned whether emerging markets investments make sense anymore.
In most cases, those were pivotal periods when what was believed to be “dead,” came roaring back to life.
Looks Like 1999
In late 1999, the media suggested that “investing like Warren Buffett was the same as driving ‘Dad’s ole’ Pontiac.” The suggestion, of course, was that “value” investing was no longer a viable investment strategy in the new “dot.com” economy where “growth” was all that mattered. After all, in the “new world,” it was indeed “different this time.”
Less than a year later, investors wished they had adhered to Warren Buffett’s buying value strategy as the “Dot.com dream” emerged as a nightmare for many unwitting individuals.
However, it wasn’t just stocks either. In 2007, individuals were chasing the “momentum” in the real estate market. Individuals left their jobs to pursue riches in housing. They were willing to “pay any price” under the assumption they would be able to sell higher. Of course, it was not long after Ben Bernanke uttered the words “the subprime market is contained,” the dreams of riches evaporated like a “morning mist.”
In 2020, investors are again chasing “growth at any price” and rationalizing overpaying for growth. As we discussed just recently:
“Such makes the mantra of using 24-month estimates to justify paying exceedingly high valuations today, even riskier.”
20/20 In 2020
“Earnings per share” have been heavily manipulated over the last decade through a variety of gimmicks from “cookie jarring reserves,” to massive “share buybacks.” However, “revenue” is a different matter.
Unfortunately, investors are vastly overpaying for sales as well. Scott McNeely discussed the irrationality of paying 10x sales for a company, then CEO of Sun Microsystems, in 1999 in a Bloomberg interview. To wit:
“At 10-times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10-straight years in dividends. That assumes I can get that by my shareholders. It also assumes I have zero cost of goods sold, which is very hard for a computer company.
That assumes zero expenses, which is hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that expects you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10-years, I can maintain the current revenue run rate.
Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those underlying assumptions are? You don’t need any transparency. You don’t need any footnotes.
What were you thinking?”
Many of the most popular “growth” stocks fit this insanity.