In his latest interview with Dave Lee on Investing, Tom Gardner discussed value investing today and how it’s changed from the days of Peter Lynch saying, “That wasn’t the case during the Peter Lynch years of following companies, opening stores and malls that had to raise capital and get leases and get product and manage inventory, like the Nine West’s of the world are gone.” Here’s an excerpt from the interview:
I think it changes and has been and I think of people like Bill Miller who helped to change that thinking a little bit, and like Mason, and that is that it shouldn’t be only or even primarily about valuation.
Value investing should concentrate on what creates value, sustainably, less recklessly, let’s say perhaps with less volatility.
We know that the best performing stocks in the public markets are the most volatile but it doesn’t mean those are the only performing companies. And the portfolio that my dad is interested in at the age of 82 is different than the portfolio I’m interested in. And different in the portfolio that my nieces and nephews are interested in.
My dad would say 10 baggers aren’t that compelling to me right now at 82. I mean he’s very much out in technology investing but he’s buying stabler companies. Like his large positions in winning large tech companies and has for a long time.
But dad has said to me don’t be a value investor in technology because those companies that look cheap probably have missed the last innovation cycle and it’s very hard to leap back forward and be relevant. Usually it takes acquisitions and that’s got its own risk associated with it.
So I would say value investing for me, if I were to define for the next 10 years that I’m going to be a value investor, I would focus on two things.
I would focus on mid-cap and larger companies for the stability. When you start to get to large caps historically over a rolling 10-year period you have a much higher rate of profitability among those companies than small and micro caps but you obviously have a lower return. So I’m going to trade the return for the stable business.
And the second thing just to trot out some numbers that won’t make for good video but if we all begin to develop metrics around the stability of a company’s growth rates and cash flows because it’s natural and particularly in kind of boom times for the market that you only want to buy the company growing 50 percent a year. Or it’s 38% a year and it’s accelerating, those become the only companies that people latch on, and you get a lot of momentum investing around that and that’s not necessarily bad though, that is a great slice of companies to be invested.
But if you start to look at how they manage their balance sheet, how inquisitive are they, what’s their goodwill as a percentage of their total assets. What gross profit do they generate from every dollar of working asset investment.
So when we start looking at some financial metrics we’re going to lose a slice of innovation and we’re going to lose small mid cap but we’re going to go very capital efficient mid and large cap companies.
Which to me for example would highlight Shopify and Zoom as more value investments, even though when we look at their valuation value investors traditionally would throw their arms in the air and say that’s insane but from a value sustainability and and low volatility I think you’re going to get in companies like that in ServiceNow, and that’s not going to be Fiverr and Fastly and Cloudflare.
You can watch the entire interview here:
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