In his latest Q3 2020 letter to investors, Gary Mishuris, Managing Partner at Silver Ring Value Partners, provides some great answers for value investors who are asking the following questions:
“What is going to cause this stock to get re-valued by the stock market?”
“Are value investors just missing growth stocks?”
And, “Is this time different?”, in which he provides some great quotes from Benjamin Graham’s book Security Analysis regarding investment in the latest market darlings at any price. Here’s an excerpt from that letter:
Is this time different? Over the last 100+ years we have seen waves of innovation and innovative companies. To list just a few, think about radio companies in the 1920s, Nifty Fifty companies in the 1960s and the internet companies in the 1990s. Technology has changed drastically: from horse buggies to cars to commercial air travel; from telegraph to telephone to smartphone. What would someone 100 years ago think about color TV, which we all take for granted?
Here is the point. New technology is… not new. There have been many waves of companies with powerful demand trends driving their sales growth and seemingly unstoppable business models. A few have done marvelously well both as companies and as investments. However, the experience of investors investing in all of these companies as a group has been terrible. Why? Because in their mad rush to catch the wave, capital was deployed with little regard to the price of the investments.
If you possess the skills to find the few long-term technology winners in advance of the market price becoming so high that future investment returns are likely to be unattractive – then more power to you. I know myself, and I know that I do not have that skill. I suspect that of the investors who are currently patting themselves on the back and enjoying the temporary stock market validation, many also do not possess that skill. Only they do not know that yet.
Benjamin Graham, when he wrote Security Analysis in 1934, addressed this well. He had just witnessed the mad rush towards new market darlings of the 1920s followed by the bust of the Great Depression. Having observed human nature up close during this boom and bust cycle, he had this to say about growth investing irrespective of price:
“Considering the 1927–1929 period we observe that since the trend-of-earnings theory was at bottom only a pretext to excuse rank speculation under the guise of “investment,” the profit-mad public was quite willing to accept the flimsiest evidence of the existence of a favorable trend. Rising earnings for a period of five, or four, or even three years only, were regarded as an assurance of uninterrupted future growth and a warrant for projecting the curve of profits indefinitely upward.” – Security Analysis, 6th Edition, page 364
“We incline strongly to the belief that this last criterion—a price far less than value to a private owner—will constitute a sound touchstone for the discovery of true investment opportunities in common stocks. This view runs counter to the convictions and practice of most people seeking to invest in equities, including practically all the investment trusts. Their emphasis is mainly on longterm growth, prospects for the next year, or the indicated trend of the stock market itself.” – Security Analysis, 6th Edition, page 375
Does any of this sound familiar? How little things change in investing.
You can read the entire letter here:
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