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.
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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.
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