Legendary value investor David Einhorn declares value investing dead, but a new type of value rises from the ashes to outperform.
In a recent interview on Bloomberg, successful value-investor David Einhorn detailed the wreckage of professional value investing. He stated, “there have been serious changes to the market structure,” and “most value investors have been put out of business.” Quotes like these could lead to investors to think the value style is dead. After several ineffective years for value investing, it is natural that managers and clients alike have given up on the style. However, before crafting a tombstone for value, investors might want to think about the other side of the trade.
No One Knows What Anything is Worth
In fact, Einhorn goes on to say, “the other side of that is nobody knows what anything is worth so there are an enormous number of companies that are dramatically misvalued.” I agree with Einhorn that this lack of competition makes value investing stronger than ever. The less people doing valuation work means the less securities will trade based on their fundamentals. This creates opportunities , but there is also a dilemma for fundamentally-focused investors: how do companies close the valuation gap?
To unleash value, companies require a catalyst like a special dividend or stock repurchase. Einhorn phrases it as “eventually, we’re going to have to get paid by the company.” Having a focus on value when other investors are passive means value investors can hand-pick companies that trade at extremely attractive valuations but are also shareholder friendly. The lower a company’s valuation, the higher the free cash flow, and the easier it is to purchase material amounts of stock. Firms that have been orphaned and ignored by passive and algorithmic investors can control their own destiny through value-generated catalysts.
This is the new twist adaptive value investors have put on the father of value investing, Benjamin Graham’s, style. Other types of value-factor investing with blanket purchases of low price-to-earnings stocks could be disadvantaged in this new world where value-trained managers are a rarity. Low valuation companies are often cheap for a reason, and without the company taking fate into its own hands, corporations may stay cheap and become permanent value traps. The modern value investor must add “how will the valuation gap close” to their research arsenal to succeed amidst the ghosts of value investors past.