Death of Value Investing? Way Overstated

by: Todd Sullivan

A recent article said, "More than a few cynics have proclaimed value investing to be dead. Its plight hasn't been this dire since the height of the technology bubble." That bubble also led to a near decade of outsized returns for value investors.

Remember that tech bubble? It was the one before the recent housing bubble, remember? Berkshire's (BRK.a) Warren Buffett was mocked and called "out of touch". Yahoo (YHOO) traded at 144 times earnings. There were scores of $100 stocks that actually had NO earnings. Good times, until it all came crashing down.

What survived? Yup, "Out of touch" Warren's stock went on to almost triple over the next 7 years ("b" share climbed from $1790 to $4900 a share).

Meanwhile, shares of Microsoft (NASDAQ:MSFT), Yahoo, Dell (NASDAQ:DELL) fell and have never regained anything near their prior levels. There are countless other ones but most of those businesses no longer exist.

Value investing seems to be at its most valuable right when people proclaim its "death". It is ironic because that is often when we start getting interested in the stock of a company, when the masses hate it.

In Seth Klarman's "Margin of Safety", he says "Security prices sometimes fluctuate, not based on any apparent changes in reality, but on changes in investor perception."

He concludes his first chapter with this:

The financial markets offer many temptations to vulnerable investors. It is easy to do the wrong thing, to speculate rather than invest. Emotion lies dangerously close to the surface for most investors and can be particularly intense when market prices move dramatically in either direction. It is crucial that investors understand the difference between speculating and investing and learn to take advantage of the opportunities presented by Mr. Market.

When people begin to speculate about the demise of history's most successful investing strategy, emotions run the day and great opportunities will arise.

Disclosure: None

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