Here’s why value investing went out of vogue and if investors will ever bother with it again

‘Value investing is dead!’ many have proclaimed. This is not entirely accurate, but there is little doubt that the strategy that built the empire of Warren Buffett and Charlie Munger has gone out of vogue. But to say it has gone out of vogue is different from saying the strategy is dead. So let’s take a look at just where it is now and if it has hopes of making a comeback. Spoiler alert: We think there’s hope.

What is value investing?

Buying good companies at a low price basically. This is contrasted with growth investing where you’re buying companies with growth potential that may be at a low price, but could be at a high price.

Companies you’re buying if you’re a value investor may have growth potential, but they tend to be more established. For instance, value investing could be betting on Woolworths (ASX:WOW) right now, betting it’ll bridge the gap in sales growth with Coles in due course. But growth investing would be buying a growing tech company, or perhaps a mining company.

When did it go out of vogue and when?

It is consensus that value investing went out of vogue sometime between the mid 2000s to the GFC, then growth investing overtook it in popularity. This happened because low interest rates meant money was cheap, and so many Tech Stocks – first the FAANG stocks and now the Magnificent Seven – made so many investors money.

If you’re a value investor, you never would’ve bought those stocks because they would’ve seemed overvalued (with a few exceptions such as the Corona Crash). You would have bought them thinking of their growth potential with no thought to the price.

The investors who gain from value stocks can buy them when no one else is – that is why they are able to pay a cheaper price – but recognise they are good companies anyway. Have you ever heard of the term ‘value trap’? That is where stocks may seem cheap but are sold off for an intrinsic reason that actually isn’t resolved and will continue to impact a company. How many investors took a punt on Star Entertainment (ASX:SGR) on its way down thinking it was just a dip.

And finally, even some of the most famous value investors have had their troubles. Warren Buffett overall made money during the era of low interest rates but made some mistakes in value stocks. One was buying airlines – he broke the golden rule not to buy airlines, thinking things were different because a series of mergers had left the US airline industry more consolidated. At last the biggest stock in his portfolio has long been Apple.

Why it might come back in vogue?

Well we’re in a new era for interest rates. We know that sub-zero rates haven’t been a thing since COVID. But even though rates are on the way down, we do not see rates returning to 2010s levels. With less money to go around, we see investors looking towards ‘value for money picks’.

We also see less momentum to buy growth companies like the Magnificent Seven as investors consider the multiples.

Warren Buffett once said that,’ Only when the tide goes out do you discover who’s been swimming naked’. In other words, sometimes growth stocks can let investors down and there is a push back to value.

Conclusion

The talk of value investing’s demise has been greatly exaggerated. Although growth stocks performed well for 15 years after the GFC, we are in a different era now where money is not as cheap and high-growth tech stocks (with further room to grow) are harder to find.

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