Lots of peo­ple seem to think the prin­ci­ples of val­ue invest­ing, as artic­u­lat­ed by Ben­jamin Gra­ham and War­ren Buf­fett, are out-dat­ed and, indeed, dead. But some top Aus­tralian investors dis­agree.

IS VALUE INVESTING OUT OF TOUCH?

Finance jour­nal­ist Rudi Filapek-Vandy­ck, of fnarena.com, sug­gests peo­ple cling­ing to val­ue invest­ing are “grown up, intel­li­gent and expe­ri­enced men ignor­ing or refus­ing to accept that the world, yes indeed, has changed pro­found­ly, and will con­tin­ue chang­ing for a lot longer.”

And it’s easy to under­stand why he feels that way. When the val­ue of tech dar­lings like After­pay and Xero are up 400–700% over the last two years, despite no real prof­its to date, who needs to both­er to look for tra­di­tion­al mea­sures of val­ue?

Rudi asserts that “many a typ­i­cal Val­ue investor has com­plete­ly ignored the seis­mic changes tak­ing place across the globe post GFC…. Growth has now per­formed (deci­sive­ly) bet­ter than Val­ue … in Aus­tralia… since ear­ly 2013.”

Top Aus­tralian val­ue investors dis­agree.

Tony Kynas­ton, a pro­fes­sion­al val­ue investor based in Syd­ney who has been a stu­dent of val­ue invest­ing for sev­er­al decades, is skep­ti­cal that the world has changed as much as Rudi would like to think. “I’ve seen this movie before and I know how it ends,” he says. “It feels like 1999 all over again.”

Kynas­ton, a for­mer Coles and Shell exec­u­tive whose share port­fo­lio has deliv­ered an aver­age return of 19.5% over the last twen­ty years, con­sid­ers him­self more risk averse than many oth­er investors. He is also my co-host on the week­ly QAV pod­cast where he teach­es his approach to val­ue invest­ing.

While he recog­nis­es that Growth stocks clear­ly have huge poten­tial, Tony says that, as an investor, “the hard thing is to work out how much to pay for them.”

“If you’re only buy­ing a stock because you hope the price is going to go up, then that’s spec­u­lat­ing, not invest­ing,” he says. “You might as well put the mon­ey on the track.”

“Besides,” says Tony, “every­body is a val­ue investor. We are all try­ing to pick stocks that will be worth more tomor­row. The dif­fer­ence is in how we deter­mine which stocks we believe have long-term val­ue.”

VALUE INVESTING STILL THE BEST APPROACH

Anoth­er Aus­tralian investor, Roger Mont­gomery of Mont­gomery Invest­ment Man­age­ment, agrees that val­ue invest­ing is still the best approach for con­sis­tent long term results. He believes the ASX is expe­ri­enc­ing bub­ble-type behav­iour. As a result, he has moved 24% of one of his domes­tic funds, and 30% of anoth­er, to cash, to hedge against a down­turn and to have dry pow­der ready to deploy when oppor­tu­ni­ties arise.

“Expe­ri­ence tells me that peo­ple are focused very much on the fear of miss­ing out. And when that fear of miss­ing out usurps the fear of loss, which it has done for the last 24 months, my expe­ri­ence tells me that we’re towards the end of the ral­ly and not at the start of it,” he said on our pod­cast recent­ly. “Prices have dis­en­gaged so much from val­ue.”

Roger also points to “record prices being achieved for col­lec­tables” with “ridicu­lous sums being paid for some things” as evi­dence that “we’re towards the end, and real­ly all you need is a black swan, some­thing nobody has been talk­ing about, and that’s enough to pop the bub­ble.”

Maybe the val­ue cyn­ics are right and this time it’s dif­fer­ent, as Alan Kohler also sug­gest­ed when he was on our show recent­ly. “I don’t think it’s like 1999, real­ly,” said Kohler. “I think it is dif­fer­ent. It’s always dif­fer­ent. It’s nev­er the same. Things are nev­er the same.”

“They said that in 1999, too”, replied Tony. “The mar­ket tends to rhyme, even though it doesn’t repeat.”

Mont­gomery says he’s com­fort­able with his val­ue invest­ing approach, even though there’s a lot of pres­sure to “swing” from the peo­ple sit­ting in bleach­ers, a ref­er­ence to War­ren Buffett’s favourite base­ball anal­o­gy. He is con­fi­dent that look­ing for val­ue in qual­i­ty busi­ness­es is “a less stress­ful and low­er risk” way of invest­ing.

Kynas­ton agrees. “What mat­ters to seri­ous investors isn’t your returns over a few years,” he claims. “It’s your aver­age return over decades. A con­sis­tent, sci­en­tif­ic approach to val­ue invest­ing is the most proven method­ol­o­gy for beat­ing the mar­ket long term.”

“It’s always a guess­ing game in the share mar­ket, which is why I like putting trust in the num­bers and hav­ing a check­list.”

As one of Tony’s favourite War­ren Buf­fett quotes goes: “Only when the tide goes out do you dis­cov­er who’s been swim­ming naked.”