“To resist change is like holding your breath – if you persist, you will die”. Lao Tsu
It seems no style of investing has a more dogmatic, rear-view mirror approach than classic value investing. Even the word “value” is a loaded term that is self-evident, and its wildly positive connotation seemingly cannot be questioned. What investor in their right mind would ever say they like buying expensive assets? We also always look for mispriced value, but the question is, how is “value” defined?
Some of best companies in the world that are consistently compounding great wealth for shareholders are always expensive – and they should be. We are prime believers that price is what you pay and value is what you get. Companies that have compounded long-term shareholder value such as Amazon, Pool Corp., Jack Henry, and Chemed have never been conventionally cheap on backward-looking metrics.
Thinking back, a quote by Charles Darwin stands true for companies: “It is not the strongest of the species that survives, nor the most intelligent, but the one that is most adaptable to change”.
We would rather pay a fair price for a great business than a great price for a fair business.
Here are some of the lessons that we’ve learned:
- All else equal, buying great businesses at a fair price is far better than the opposite.
- We do not think all “value stocks” are bad investments, but that much more scrutiny should be placed on easily observable, classic value stocks, as their fundamentals have possibly deteriorated creating a value trap. Because of crowding and market efficiency due to algos, there are many more value traps than ever before.
- We do not think all growth stocks or all non-cheap stocks are good investments. In fact, most turn out to be poor investments. There are plenty of absurdly overvalued, problematic businesses out there that will make terrible investments.
- We do not think all of the principles from 1950–1980s value teachings are obsolete, but rather think they are generally far too crowded, and most low-hanging fruit has been arbitraged away.
The environment is ripe to embrace these lessons, as in recent years, there have been many notable investors experiencing multi-year periods of mediocre to poor performance. They’ve publicly complained that the “market is dumb” because many classic Dodd/Graham value investing strategies keep underperforming.
Like finding new classic rock, paying .60 for assets “worth” $1 can still turn up a winner. But for every Imagine Dragons that finds a following, most new efforts end up falling short of the nostalgia we get from the sounds of a bygone era. For our money, the best approach has been a) awareness of the price we’re paying but most important b) confidence in the businesses we own.
Disclosures
Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward looking statements cannot be guaranteed.
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment and tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.
Advisory services offered through Aptus Capital Advisors, LLC, a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. More information about the advisor, and its investment strategies and objectives, is included in the firm’s Form ADV, which can be obtained, at no charge, by calling (251) 517‐7198. ACA-20-129.
