One of the first things you learn at Financial Advisor school is the difference between growth and value. And, like any decent salesman on Wall Street I learned to tell a story about it. And it goes something like this….
There’s Growth — this is like buying the new hot car. Could you get it cheaper waiting to buy a used one next year? Sure. But this car, it’s amazing. And you might even be willing to pay more than sticker price for this car, right? Abso-freaking-lutely. Because if you don’t, you’ll have to wait. And who wants to wait when there are so many opportunities between you and the steering wheel over the next year? And — chicks. Chicks dig hot cars. And you dig chicks…
So, you need it now. And you will have it now. Screw it if you’re paying a bit more today, in a year from now you’ll have a perma-grin so wide people will swear you’re The Joker. That’s Growth Investing.
And then there’s Value Investing…
This type of investing is basically like shopping at Walmart. As an investor you’re trying to get the best price you can for whatever it is you’re trying to buy. It’s just that simple. And based on all of the information you have at your finger tips about the past, and projections about the future, you’re trying to assess what the prospects are for that investment and how cheaply you’re getting it.
Now, there’s all kinds of value investors: Deep Value — the people who like to buy shit when it’s really really shitty (and boy that can get ugly quick, i.e. Bill Miller loading up on financials in 2008)– or there’s the Relative Value investors, I liken them to the Old Navy shopper — wouldn’t be caught dead in a Walmart — maybe a Target, because that’s kind of hip –but these investors love everything they see at Banana Republic– which is basically the same shit with an extra stripe or two. They want to be hip but with value pumping through their veins they’re too cheap to actually buy anything from Banana Republic, even if it’s on sale. Hehem…excuse me, they’re too thrifty. Instead, they pay full price at Old Navy. That’s Relative Value.
There’s more too. Josh Brown’s guide to mutual fund brochure decoding is pretty much all you need to read for the full gamut.
Now, in the larger scheme of things here’s how this whole Value/Growth thing works…. when Value is in favor, usually Growth isn’t — and vice versa. And it makes perfect sense. Why? ’cause Growth is greed and Value is fear. Value is — I wanna invest but I don’t want to pay too much. It’s cautious, it’s now. Usually a little slower. Growth is not. It’s generally a bit more focused on the promise of a better tomorrow, forward looking. Both of them want to make money, but the focus in approach is pretty different. Case in point, the early 2000s…
If you didn’t have anything in your portfolio but Large Growth companies you were a moron. Intel, Microsoft, Cisco… you know the names. I remember one of my hotshot clients calling me a fu%king moron… to my face. Everybody said Warren Buffett was done. Fried. Irrelevant. And then one day, someone big sold — and all that greed in the market turned to fear. And all those long-only managers in the mutual fund industrial complex who have a mandate to keep your money invested in the shittiest of markets found the “new” religion of value investing overnight, again. And… eventually Warren looked really smart, again.
And anyone who wasn’t value-focused said the same thing as the top popped — “Find me the cheapest thing possible…”
And all that greedy growth money then pours into value. And then value gets ridonkulously expensive and then growth actually starts to look cheap. Growth becomes the new value. I’m pretty sure that was a headline somewhere at some point. And this cycle, repeats, over and over…. It’s the Yin and Yang of investing. It’s not absolute, or exact, but over time it’s the nature of how things work naturally in this man-made world of investing.
Over at Business Insider they have a contributor post up from Ashvin Bachireddy, who’s a partner over at Andreessen Horowitz, the Venture Capital firm that’s been an early investor in the likes of Twitter, Sykpe, Instagram, Groupon, and Zynga to name a few. And he’s penned a piece called “The Death of Value Investing.”
Now, what the A-man & the rest of his investment team try to do really well is to find the next growth opportunity, before anyone else. So, right off the bat we have a growth guy talking about value, which wreaks of bias. And, of course, past performance is no guarantee about how clueless they are somedays.
So, I’m open — I’m assuming Ashvin is a super smart guy when I start reading his piece. This is not some schlock firm. He may even be very good at what he does.
But, frankly, after reading his article I cannot believe anyone would ever give him any money to invest, ever. Why? Because he says some really, really dumb shit.
Actually he doesn’t even just say dumb shit, he actually types it and then presumable spell checks it, gives it to his friends to read, sits back and takes a deeply fulfilled sigh, and then still hits publish; for the entire world to read…
He writes stuff like this:
Since I started my career as an investor, value investing was the holy grail of investing.
The Holy Grail? Dude. Ashvin…. Psst. There is no Holy Grail. Any investor worth their Net Asset Value knows that. That’s like one of the first lessons you learn, aside from the market closes at 4pm EST not PST. Momentum isn’t the holy grail. Buy and Hold isn’t the holy grail. Trend-following isn’t the holy grail. Venture Capital is definitely not the holy grail. I’m not even sure the Holy Grail is the holy grail. But is Value Investing the backbone for a lot of the way pricing models are constructed? Sure, because it’s also the backbone of fundamental analysis. Yeah, not so much the holy grail…
Then Ashvin lays out a classic strawman argument as the wall for his entire thesis that even one of the little pigs wouldn’t put together:
Well, times are changing — the destructive power of technology is starting to break down companies faster than ever.
His idea is that somehow, now, in this moment of our enlightened humanity, technology is choke-holding Value Investing to its death by using this example….
The classic case is Research in Motion (RIM). In January 2007, RIM was trading at a high 55x PE multiple. Over in Cupertino, a computer company called Apple had reinvented itself as an MP3 player company and was now unveiling a new phone set to launch in the summer. By the end of December 2009, market share for Apple’s iPhone iOS as a percentage of US smartphone OS was 25% while RIM had increased from 28% to 41% in that same period. Though RIM had grown market share, fears of iOS growth had toppled the PE multiple to ~17x.
Ashvin. I don’t mean to pick on you, really. Can you come over here for a second, buddy? I wanna talk with you again.
So… what you’re talking about isn’t actually the death of Value Investing at all. You’re talking about one of the pitfalls associated with Value Investing, the Value Trap… Watching any company like the slow train-wreck that is Microsoft or more recently JC Penney or Best Buy or pretty much the entire soft-serve yogurt franchising industry… and you’ll find yourself saying, man it can’t get any cheaper than this. And then it does. And then it does again. Or watching a momentum growth stock, lose it’s momentum… like say, RIM.
See, at the end of the day, whether you like heads or tails, there are limitations to picking a side of the Value/Growth coin AND your assumptions can always be wrong. Actually in this case, your assumptions are very wrong. But in the case of an investor’s assumptions, growth or value, being wrong is always a possibility — that will never, ever change. It can always go lower, even if you’re a growth investor. Especially if you’re a growth investor sitting on companies like Zynga, or Groupon, or Foursquare or… probably 3/4 of the other names in your firm’s portfolio right now. But I kid.
Now — Maybe most naively, you argue that the reason Value Investing is dead is because of technology…
With technology upending markets, remaining a value investor is a death sentence.
Like this thing called technology is new or something. Like Twitter is soooo revolutionary. And software is actually going to kill everything.
I’m not saying it’s not (in 140 characters or less) — I’m just sayin.
Let’s not forget what the lightbulb did to the oil lamp industry value and growth investors. Or the car did to all of the saddle manufacturing value and growth investors. Is this time any different really? No. It’s not. It never is. Technology is not new. It may look different, and feel different but the only thing that would be truly different right now is if the world physically stopped spinning. And then who cares about how awesome you are at either, Growth or Value?
Your idea that because development & process efficiencies exist and product cycles are exponential isn’t actually anything new. A samurai sword could take months to make 200 years ago and only a few would ever be able to own one. Now I can buy three, in the aisle next to the sixteen different color choices I have of the same v-neck t-shirt I’ll be buying from my nearest superstore. And, that’s not the death of Value Investing — I almost can’t fathom the number of value companies that actually extract more value by using technology. The same technology you’re asserting is removing companies like them. That’s silly. You’re just realizing that this process is more obvious and apparent; that’s actually all that’s on display here.
Because that’s just the way technology works. Always has, always will.
So in most of what you’ve written, my friend — and I’m only telling you all of this because I care so much about the truth sometimes & especially when it comes to stuff like this — your head is just so far up your ass I don’t even know where there’s a hole to yell into to make sure you’re okay.
And for someone at your level to hack out such a piece in the face of all this truth; truth and wisdom that an investor of your skill level (and your firm’s background) should have attained years ago, especially in the wake of the biggest lesson ever for your profession — the Dotbomb era; It’s telling.
What it’s telling me is that I’m probably pretty smart to keep telling most of my clients to move their money into index funds — which own Growth and Value. This is 101 stuff.
But what do I know? I’m just some schmuck with a blog. You’re a partner at Andreessen Horowitz for chrissakes.