Value’s Not Dead, It’s Just Sleeping.

Why Value Investing is set to make a Major Comeback

Official White House Photo by Pete Souza

As Joel Greenblatt of Gotham Capital so wisely stated “Warren Buffett says most people should index, and I agree with him. But Warren Buffett doesn’t index, and neither do I”.

A powerful statement as it conveys the strong conviction that two of the greatest investors have around Active Management. They believe in it so much in fact, that most of their own wealth is tied up in their respective funds. So it begs the question, why hasn’t value done well over the past 9 years?

To answer this question, its important to first note how the current investment landscape was created. Since the Great Recession, monetary policy along with Quantitative Easing has caused excessively low interest rates as well as a flood of capital to enter the markets.

A strong economic rebound since 2012 was supported by strong employment and wage growth. With such positive outcomes, optimism ballooned and investors along with consumers began taking on greater risk backed by excessively low interest rates.

With such high optimism in the market, asset prices and the S&P500 have become in Leon Cooperman’s opinion “adequately valued”; adding he’s “finding a lot of companies that are very attractively priced”. With such fair valuations in the market, this has undeniably made it extremely difficult for value investors to find any large bargains.

Bargains which could either be assets selling far below their intrinsic value or even assets selling at what Buffett likes to describe as “selling at attractive prices with long term growth potential”. But here at Ironhold Capital, we argue that value is not dead and will never be. As Howard Marks so often points out, the market is heavily emotion driven which “render(s) objectivity impossible and open(s) the door for significant mistakes.

We instinctively believe that as soon as there is a major correction in the market, investors will panic and capital will flee as it has done in previous recessions. This will in result create interesting buying opportunities once again for value investors to take advantage of.

Although we would also add that one major difference will be the amount of capital in the market which will likely make investing slightly more competitive than it was in say 2008 or 2001. But nevertheless, assets will sell far below their intrinsic values and value investors that act swiftly and selfishly will make up immensely for any losses they have incurred over the past decade.

Another major difference we see this time around is the amount of “dumb money” (so to speak) circulating in passive investment vehicles such as ETFs and Indexes. With an ever-increasing stock market, investors have found more value in indexing which has allowed them to avoid hefty active management fees.

But the draw-down to this strategy we believe is that most ETFs are chasing crowded investments in equities and sectors bound to make a major correction. When this correction eventually takes shape, these investors will have no way to react and will realize massive losses to their portfolios. On the flip-side though, we, the Value Investors will be there to pick up the pieces and reap the rewards we’ve been ever so patiently waiting for this past decade.