A bunch of value investors got together at Columbia University today for the annual celebration of Graham and Dodd—those Columbia B school profs who wrote the 1934 tome Security Analysis and inspired generations of investors (Warren Buffet among them) with the philosophy that the way to make money is to buy good companies on the cheap and then let the market, over time, discover how much those companies are actually worth.
By some measures, it’s the perfect time to be a value investor. Thanks to the whole financial tumult/market freak-out situation, there’s a lot of cheap stuff out there. “Everything we buy goes down every day, but we look at the economics and the price and they’re some of the best opportunities we’ve ever seen,” said David Abrams of Abrams Capital Management. More than one of today’s panelists has gotten into distressed debt. Seth Klarman, who runs The Baupost Group, said that “it’s sad” to be buying from panicked, out-of-their-mind sellers—including some of the “best trading desks on Wall Street”—who are being forced to unload assets because of plunging valuations and redemptions. But he’s doing it, they’re all doing it, because this is how value investing, in the long run, comes out on top.
Emphasis on long run.
I should be careful here, since I’m helping out the guy in charge of the Heilbrunn Center for Graham & Dodd Investing with a book he’s writing, but I would be remiss in my journalistic duties to not point out that value investors have taken a real beating of late. The average large-stock value mutual fund was down by almost 24% over the past year at the end of September—even worse than those funds employing the mirror strategy of “growth” investing.
As financial companies have been driven further and further into the ground, many value managers have loaded up on more shares, convinced that the market was wrong about what those companies were worth. Some of those firms—and I think you know which ones I’m talking about—are now worthless or close to it. It’s arguably harder to be value investor at a publicly traded mutual fund than at a firm with private clients, since money at mutual funds comes and goes much more rapidly based on performance—a real problem when your outlook is to hold securities over long periods of time. But even some of the panelists today copped to less-than-stellar performance of late.
So one of the questions asked was, Will recent events make people regard the strategy of value investing differently going forward? Abrams said he’s never seen a strategy as successful as value investing over a long period of time. Kind of a “it’s better than any other form of government” argument. Howard Marks, who chairs Oaktree Capital Management, won the intellectual-honesty-of-the-day award by saying that there would be value-investing successes coming out of this period—but not everyone would wind up in that category.