A lesson for value investors from investor Howard Marks

Value investors need to open their minds, says US investor Howard Marks. But why is he saying it now?

Howard Marks of Oaktree Capital is a highly successful distressed-debt investor, whose regular memos on markets and investing are widely regarded as “must-reads”. His latest piece addresses the “value” versus “growth” debate. He raises some good points on the debate, worth highlighting here – but there’s another interesting point about his letter, which I’ll get to later.

As Marks notes, value investing has its roots in an era when information on companies was much harder to come by and investment management was “a cottage industry” rather than the massive business it is today. As a result, in the early days it was easier to hunt down companies that were obviously cheap – trading for less than their book value (see below), for example. Now that the hunt for information is far more competitive, it stands to reason that, outside of market panics, it should be much harder to find such obvious bargains. Moreover, the pace of change today is far greater than it was in Warren Buffett’s early days, for example. 

This means that value investors need to look beyond using valuation ratios that can be readily analysed by “a finance student with a laptop” and also avoid being wedded to the idea that “what goes up must come down”. Instead, they should take a lesson from growth investors and be willing to “thoroughly examine situations – including those with heavy dependency on intangible assets [see below] and growth into the distant future – with the goal of achieving real insight”. In short, narrow value investors run the risk of being too dismissive of innovation and of missing out on stocks that look overpriced today, but are in fact bargains relative to their prospects.

It’s a failing I daresay many MoneyWeek readers recognise (I certainly do) and Marks is right to say that investors need to take a range of approaches to valuation, rather than relying on just one metric or strategy. 

However, there’s another reason why Marks’ letter is interesting – the timing. When bull markets approach a top, there’s a phenomenon known as “bear capitulation”. This is where well-known, long-term sceptics finally throw in the towel and admit they might be wrong. They typically do this just in time to see their scepticism proved right. 

Marks is an experienced investor. While his observations on the evolution of value are well expressed, they’re not new. The fact that he presents these views as something of an epiphany, combined with the fact that he’s previously been, if not exactly bearish, then certainly cautious on the current boom, makes me think that his shift in sentiment is yet another indicator to add to the large collection we already have to support the view that today’s bubble in US tech stocks is running on borrowed time. 

Recommended

I wish I knew what contagion was, but I’m too embarrassed to ask
Too embarrassed to ask

I wish I knew what contagion was, but I’m too embarrassed to ask

Most of us probably know what “contagion” is in a biological sense. But it also crops up in financial markets. Here's what it means.
21 Sep 2021
Why is the UK short of CO2 and what does it mean for you?
UK Economy

Why is the UK short of CO2 and what does it mean for you?

The UK is experiencing a carbon dioxide shortage that could lead to empty shelves in supermarkets. Saloni Sardana explains what’s going on and how it …
21 Sep 2021
What to invest in to beat soaring energy prices
Investment strategy

What to invest in to beat soaring energy prices

As gas and electricity prices hit the roof, John Stepek explains how to invest to offset higher energy bills.
21 Sep 2021
Are Spacs just for suckers?
Investment strategy

Are Spacs just for suckers?

This year has seen a big boom in activity by special purpose acquisition companies (Spacs) in the US and the Spac craze is spreading to other markets…
21 Sep 2021

Most Popular

The times may be changing, but don’t change how you invest
Small cap stocks

The times may be changing, but don’t change how you invest

We are living in strange times. But the basics of investing remain the same: buy fairly-priced stocks that can provide an income. And there are few be…
13 Sep 2021
Two shipping funds to buy for steady income
Investment trusts

Two shipping funds to buy for steady income

Returns from owning ships are volatile, but these two investment trusts are trying to make the sector less risky.
7 Sep 2021
Should investors be worried about stagflation?
US Economy

Should investors be worried about stagflation?

The latest US employment data has raised the ugly spectre of “stagflation” – weak growth and high inflation. John Stepek looks at what’s going on and …
6 Sep 2021