During his recent interview on the Meb Faber Podcast, Michael Mauboussin discusses modern value investing, emphasizing the importance of buying assets for less than their intrinsic value while considering the expectations priced into stocks.

He stresses flexibility in identifying opportunities and the challenge for value investors in recognizing unexpected growth. Mauboussin acknowledges that while some principles like valuing cash flows remain constant, economic and investment trends are subject to change.

He references historical shifts, such as the transition from dividends to buybacks, to illustrate how traditional rules can evolve. He advises focusing on observing market changes rather than attempting to predict them.

Here’s an excerpt from the interview:

Mauboussin: You know, value investing has always been, and I think should always have been, about buying something for less than what it’s worth. The way I would translate that in more modern terms is figuring out what expectations are priced into a stock.

What you want to do is buy low expectations and sell high expectations. Multiples or yield or other measures might give us an indication of which pond we should be fishing in, but the multiples or the yields are not the answer—they’re steps in the right direction.

So, part of it is just to be really as flexible as possible and say, “Where are the opportunities, and where are expectations mispriced?” The most difficult thing, if you’re more of a value-oriented person, is stepping out and saying, “Maybe the growth is going to be faster than what we’ve anticipated or what we’ve seen in the past.”

I’ll just say that related to that, if you told me there was going to be a group of companies that would be this big, that would grow as fast as they’ve grown, as profitably as they’ve grown. I think I would have not believed you—literally not believed you. So, for the folks who had the insights to anticipate that those things could actually unfold, it’s been great.

The answer to all this is that there are hard and fast rules—there are immutable things, right? Buy something for less than it’s worth, the value is the present value of future cash flows, all those kinds of things. If we meet in 50 years, we’ll still be saying those same things, I believe.

But there’s a whole lot of stuff that’s mutable, like how is the economy changing, what is the nature of investment, what does that mean for the ability to grow, and what do the profiles of returns on capital look like?

You mentioned, even roughly in my career, the watershed change from dividends to buybacks. There are funny stories—you probably know this—but in 1957 was the first year that the yields on stocks dropped below the yields on high-quality bonds. Market veterans were like, “This is the end of the world,” right? I mean, I think it did revert briefly, but basically, that whole rule of thumb got thrown out the window for the rest of time.

So, you have to keep that open mind as far as to say, “What’s going on out there?” But, to state the obvious, it’s super, super difficult. Like you said, even in the last few weeks, we’ve seen almost—violent might be a big word—but pretty strong shifts in how the market has behaved as a consequence of certain inflation figures and economic data, and so on.

I always like to joke that when I write about something, it typically is at the point at which it’s sort of maxed out. So, any kind of concentration—I’m not sure if it’s perfectly maxed out. I’m really trying to observe and not predict, and that’s a very big distinction here.

I just want to say, “Here’s what’s going on” versus “What’s going to happen?” I don’t know what’s going to happen, but it is interesting just to collect facts and see what’s actually happened already.

You can watch the entire interview here:

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