Interesting meme going around launched by an article in the Atlantic, entitled “What Would Warren Do?“. Megan McArdle raises some good points and the article and it’s worth a read.
Specifically, McArdle raises a couple salient issues:
- Inability to distill Buffett investing into systematic approach: As opposed to a more purely arithmetic approach that Graham espoused, Buffett seems to embody some special sauce. She says, “Buffett is the one who has, more than anyone else, refined and redefined value investing for a new era. He is the one who stopped hunting for superbargains and started buying exceptional companies, even if they weren’t available at fire-sale prices. But what makes a company “exceptional” is idiosyncratic. Warren Buffett is exceptionally good at asking the right questions”.
- More information erodes value investor advantage: “Value investors love to deride academics and the efficient-market hypothesis, but they can’t deny that stock-screening tools and other analytics have taken away many of the best bargains. At least some managers have lost the will to wait patiently for superdeals and have taken on more risk to get more return”
- Historical changing of rules: McArdle professes that she’s not sure that Buffett, if he were to start investing today would achieve the same level of success as he did. Here she is: “In many ways, it’s not even clear that Buffett could replicate his own success if he started out today. He built his reputation as an investor in an era when there were more opportunities for easy money, and these days, the news that Buffett has bought a stock is often enough to help support, or even boost, its price.”
Overall, it’s a good thought piece and requires some thought. McArdle approaches her subject with respect and asks good questions. I have some thoughts on the matter (which I’ll probably share in a later post) but want to point out a good piece on Greenbackd that answers The Atlantic’s hard questions and attempts to show why value investing is very far from dead.
Divergence from Graham methodology: Greenbackd takes offense at the assumption that Buffett has diverged from his mentor. In fact, Buffett himself denies this claim. According to the post, “Buffett’s divergence from Graham’s methods was not, however, a rejection of Graham’s philosophy. Buffett has said on occasions too numerous to quote that he still works within Graham’s framework and has said that his change was a function of the increasingly large sums of capital he had to invest, and not a problem with Graham’s approach.”
More information weakens value approach: Here, the blog focuses on the various flavors of value investing — from liquidation value investor to the intrinsic value investor. All are valid forms of the value approach “because the interpretation of that information is the key step.”
Absence of good opportunities: This statement seems to whet the value investors appetite. Greenbackd, and other value investors, salivate over statements like this. They typically respond with a “Great! That leaves more good eatings for us!”. He follows in kind. One important point made here is timing of the markets.
From Greenbackd:
There are plenty there. When those opportunities do disappear – and they will eventually – it won’t be because of all those supercomputers chasing them, it’ll be a function of valuation. Prices go up, and prices come down. When they’re up, it’s hard to find investable opportunities, and when they come down, it’s easier to do so. It has always been thus, and it will always be so. When there aren’t many opportunities around, that’s a signal from the market. It’s telling you to wait. As a friend of Greenbackd says, ‘Patience can be a bitter plant, but it has sweet fruit.’
