Here’s a great interview at Advisor Perspectives with the value investing firm First Eagle titled – The Timeless Advantage of Value Investing. During the interview the First Eagle team was asked – can the success of value investing persist when so many investors have been schooled in the works of Graham and Dodd?
Here’s their response:
First Eagle: There are many people who have learned Graham and Dodd value investing, in part through colleges, in the past decade or two. Those numbers are more than dwarfed by the folks who have gone on to get MBAs and take other courses and are pursuing growth-oriented trends. Most people I meet socially are excited by their personal dotcom, app, software, venture capital or crypto adventure; very few are captivated to devote a lifetime to the practice of value investing.
Secondly, sometimes people take the wrong lessons from instruction. There’s a large pool of capital that has tried to replicate historical value returns through a purely statistical approach, focusing on low price-to-earnings strategies. But we recognize that sometimes the most important assets of a company are intangible in nature – the strength of market position and the quality of governance, for example. We spend a lot of time on things that you can’t simply quantitatively screen for, and that’s an important differentiating factor.
To invest globally, many of the opportunities we find are held by holding companies or have complex capital structures where just a pure, quick filtering of the numbers won’t highlight the underlying economic reality. There’s no way to take the simplified public history and statistically identify those opportunities. If you’re going to be a value investor, you’ve got to commit yourself to being an expert as an analyst. That takes a long time, and there are not that many people willing to do it.
As important as the analysis is, the thing that is even more scarce is temperament. We observe very few people who are willing to invest with a five- to 10-year horizon. Most people are investing over far shorter horizons. To apply a value approach to find good businesses, you must have a flexible global opportunity set and to be willing to sit on the sidelines when opportunities are lacking. We don’t see many people willing to be global or willing to not force money to be put to work.
In general, there’s not a lot of humility in investing, and the vast majority of the industry spends its efforts trying to predict the future with precision. We, on the other hand, value humility and thus spend more time taking advantage of market moves after they happen rather than trying to predict them.
The bulk of incremental flows have not been to value. They have been to passive strategies, which are, by their nature, price agnostic. We view a strategy allocating passively all-in to markets as risky, given valuations and where we are in the cycle, including the geopolitical and debt risks. On the other hand, being all-out of markets is also risky because the return on cash is well below money supply growth.
There’s no substitute for a thoughtful, selective, curated participation in the world’s opportunities. That’s what we spend our time doing at First Eagle. I encourage people to study value investing, but unfortunately many more people are captured by the allure of the lotto ticket.
You can read the entire interview here – Advisor Perspectives: First Eagle: The Timeless Advantage of Value Investing.
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