Charlie Munger, the legendary figure who worked alongside Warren Buffett at Berkshire Hathaway, has always been a guiding force in the investing world. With his passing, there’s a big question mark hanging over the future of value investing – the strategy he so famously championed. In simple terms, value investing is about finding great companies at good prices, but lately, that’s been getting tougher.
Munger didn’t just help Buffett pick stocks; he revolutionized his entire approach. Initially, Buffett was all about cheap stocks, but Munger steered him towards quality. This shift is what transformed Berkshire into the giant it is today, boasting a huge portfolio and ownership of companies.
What Impact Did the 2008 Financial Crisis Have on Value vs. Growth Stocks?
The investment world shifted dramatically when it comes to Value vs growth stocks especially after the 2008 financial crisis. Growth stocks, which are all about future potential, started doing way better than value stocks, known for being undervalued. With lower interest rates, it became cheaper for companies to grow and for stocks to become more attractive compared to safer bets like government bonds. This shift favored growth stocks more than the traditional, undervalued value stocks.
With the Federal Reserve hinting at cutting rates, some are wondering if value stocks can make a comeback anytime soon. Munger himself, in his final months, acknowledged how tough it had become for value investors. The easy picks were all gone, he said. To keep up with the market, investors had to diversify, even into some high-value tech stocks.
Yet, many who learned from Munger are sticking to his methods: understand the real worth of a company and jump on the opportunity when it presents itself.
Buffett’s early strategy, heavily influenced by Benjamin Graham, the father of value investing, was all about buying average companies at low prices. A classic example is his investment in Sanborn Map in the late 1950s, which turned a tidy profit. But Buffett later realized this approach had its limits, especially for building a sustainable business.
How Have Berkshire’s Strategic Investments Paid Off Over the Years?
Munger’s influence was a game changer. He pushed Buffett towards a new mantra: forget buying just any business at a great price; focus on buying great businesses at good prices. This strategy is what made Berkshire a powerhouse in the U.S. market, with massive cash reserves and a stellar stock portfolio featuring big names like Coca-Cola, American Express and Apple.
Take Berkshire’s investments in Coca-Cola and American Express, for example. These weren’t just good deals; they were strategic, long-term investments that paid off massively. Berkshire’s growth has been phenomenal, dwarfing the S&P 500’s performance over the years.
Value investing isn’t what it used to be. In a world where everyone has access to the same information, finding hidden gems is harder than ever. This means the approach to value investing has to evolve. Mario Gabelli, a notable investor, points out this shift, emphasizing the need for a more sophisticated strategy. He also credits Munger for broadening the scope of value investing from just cheap buys to long-term, quality investments. His investment in BYD, a Chinese electric-vehicle maker, is a prime example of this modern approach.
In 2008, Berkshire Hathaway made an investment of approximately $230 million in the electric vehicle company BYD. Fast forward to 2021, and this investment had grown substantially, with the value of Berkshire’s holdings in BYD reaching $7.7 billion. Today, BYD stands as a major competitor in the electric vehicle market, rivaling industry leaders like Tesla.
What Was the Golden Era of Value Investing?
In the world of investing, there’s a style called value investing that used to be really successful. Back in the day, from 1970 to 2007, these value stocks (which are basically stocks that seem underpriced) did better than growth stocks (the ones expected to grow quickly) by about 7% a year. Goldman Sachs Asset Management did a study on this.
But things changed big time when the 2008 financial crisis hit. The Federal Reserve, basically the central bank, cut its main interest rate super low to help the economy. They did this again in 2020 when COVID-19 struck.
Here’s the thing: lower interest rates don’t affect all stocks the same way. Growth stocks, the ones from companies expected to grow a lot, benefit more. Value stocks, on the other hand, are more about what you can earn soon, not far into the future.
Because of this, growth stocks can really jump in value when interest rates drop. For example, the Russell 3000 Growth index, which tracks fast-growing companies, went up by a whopping 700% in 15 years! The Value index, with more conservatively priced companies, only went up 200%.
This trend has especially helped big tech companies recently. From the end of 2019 to 2023, stocks in companies like Nvidia, Tesla, Apple, Microsoft, and Alphabet more than doubled or even tripled. The S&P 500, a broader market index, only went up 48%.
So, what should someone who likes value investing do? Munger, a big name in investing, thinks it’s wise to mix in a few of these high-performing tech giants.
What’s Warren Buffett’s Approach to Tech Stocks?
Berkshire Hathaway, led by Warren Buffett, followed this advice. They invested heavily in Apple, and now it’s their biggest stock holding, worth over $156 billion. Buffett used to be wary of tech stocks, but he changed his mind about Apple, seeing its strong retail presence and loyal customers.
Buffett himself once wrote that all investing is really about finding value. It’s not about paying more for a stock, hoping to sell it at an even higher price—that’s more like gambling.
In 2022, there was a hint that value stocks might make a comeback. The Fed raised rates to fight inflation, making immediate cash-generating investments more attractive. Big tech stocks dropped, and for the first time since 2016, the Value index did better than the Growth index.
But then, in 2023, the stock market got all excited about artificial intelligence (AI). Investors rushed into tech stocks, leading to the Growth index outperforming the Value index again.
But there’s caution in the air too. Some experts think this situation is a bit like the dot-com bubble in the late 1990s. Even though the internet was a big deal, it was hard to tell which companies would win in the long run. Experts think value stocks might start outperforming growth stocks soon.
Now, some value investors are trying something different. They’re looking at cheaper stocks in every industry, even tech, where it’s hard to find bargains. Others stick to the classic approach of buying really undervalued stocks, regardless of the industry, following lessons from Buffett and Munger, focusing on industries they know well.
Final Thoughts
In short, while the rules of the game have changed, Munger’s legacy lives on. His teachings continue to shape how everyone thinks about investing, highlighting the importance of focusing on quality and long-term gains in a rapidly evolving market.
