The Landscape Has Changed For Traditional Value Investing
Bruce Greenwald is a professor at Columbia University’s Graduate School of Business and the author of the books Value Investing: from Graham to Buffett and Beyond and Competition Demystified: A Radically Simplified Approach to Business Strategy. The blog cites a recent podcast with him where he highlights why value investing as it has been traditionally understood (buying low P/E, P/B stocks) may not work in today’s context. He cites the evolved nature of today’s leading businesses which are not truly represented by the accounting standards that were suitable for traditional businesses.
“So I think, as you know, value has not done well, and sort of primitive value especially. Which is just low P/E, low market to book, has not done well for almost 10 years now. I think that the obvious cause is that we are shifting from a real asset heavy manufacturing and industrial economy to a software, service driven economy where really most of the capital is intangible. and you see that on the balance sheet.
So people who are going to try and look at traditional tangible book value are going to miss most of where the value is across firms and the ones who sort of look cheap on tangible book value are going to have very bad intangibles, and are not going to do particularly well.
So I think it’s much harder to assess asset values today because there is so much in intangibles than it was historically. And I think that’s affected the value community. If you dumb it down.
I think what goes along with that is a lot of the accumulation of intangibles, acquiring a book of business, developing a product portfolio, gets expensed. It doesn’t appear as investment. It gets expensed and therefore not included in profits. So that again, if you want to do a proper profit calculation you’ve got to sort of add back that investment. And again that’s a complicated process.
So I think the traditional metric that in an industrial economy, manufacturing economy, people depended on as value investors are just not there anymore. That means they’re going to have to construct income statements and balance sheets for themselves.”