Value stock investing is a strategy that involves selecting stocks that appear to be trading for less than their fair value. It was popularized by Benjamin Graham and David Dodd in the 1930s and further advanced by Warren Buffett and others. Below, we offer a selection of academic and real-world studies that support Value investing.
1. Gotham Funds (Joel Greenblatt)
Background:
Joel Greenblatt is a value investor and was a professor at the Columbia University for more than two decades. He and Robert Goldstein run Gotham Asset Management, a value-oriented investment firm that runs long/short and long-only strategies.
Strategy:
Mr. Greenblatt was a special situation value manager who specialized in spinoffs and corporate restructuring activities between 1985 and 1994 for Gotham Asset Management’s predecessor, Gotham Capital. Gotham writes of its investment philosophy, “We select our long and short stock portfolios for the funds based on valuation. Our process begins with a research effort that seeks to value all of the companies within our research universe of U.S. large and mid-cap companies… We believe that although stock prices often react to emotion over the short term, they generally trade toward fair value over the long term.”
2. Templeton Growth Fund (John Templeton)
Background:
John Templeton was a master contrarian who became known for “avoiding the herd” and “buying [stocks] when there’s blood in the streets.”
Strategy:
The name of Mr. Templeton’s Templeton Growth Fund does not indicate there’s a heavy Value bend, but the fund’s strategy highlights four main points:
· Search Globally. We believe bargains have no borders when searching for the best investment opportunities.
· Seek Value. We search worldwide for stocks selling at prices we believe are low relative to their true value.
· Perform Fundamental, Bottom-Up Research. We conduct in-person visits and perform extensive fundamental research to model a company’s potential future earnings, cash flow and asset value relative to its stock price.
· Practice Patient, Long-Term Investing. We evaluate a company’s potential for earnings and growth over a five-year horizon.
Outcome:
From the fund’s inception in 1954 through May 31, 2024, the Templeton Growth Fund has grown at an average annualized rate of 11.19% with a sales charge. The cumulative return since inception is 158,864%.
3. Fidelity Magellan Fund (Peter Lynch)
Background:
Peter Lynch made a fortune with the investing mantra “invest in what you know.” Mr. Lynch rose from an intern at Fidelity Investments in 1966 and was named the head of the Magellan Fund in 1977. The fund benefited from its small size –just $18 million– which allowed it to reach into all corners of the market. When Mr. Lynch retired in 1990, the fund had more than $14 billion in assets and presently has $33.7 billion of AUM.
Strategy:
The Magellan Fund’s factsheet says the investment approach “seeks to identify high-quality growth stocks benefiting from long-term “mega trends,” as well as the three “B’s” – brands, barriers to entry and “best in class” management teams – using a proprietary quantitative screen and bottom-up fundamental analysis.”
Outcome:
From the fund’s inception in 1963 through May 31, 2024, the Fidelity Magellan Fund has grown at an average annualized rate of 15.87% compared to the S&P 500 index’s annualized return of 10.46%. The fund’s cumulative return since inception is 813,364%, compared with the S&P 500’s 43,476% return.
4. Berkshire Hathaway (Warren Buffett)
Background:
Warren Buffett is usually referred to as the most successful value investor of all time and certainly is one of the most well-known. He took over Berkshire Hathaway in 1965 and transformed the ailing textile-focused company it into a diversified behemoth. Mr. Buffett’s strategy of buying undervalued businesses and holding their shares for long periods of time has earned him fame, fortune and followers.
Strategy:
Mr. Buffett focused on acquiring undervalued companies with strong fundamentals and growth potential, preferring to approach ownership as if he owned the entire company (Berkshire often does in the more recent years), rather than simply as a stockholder. He seeks out businesses with competitive advantages and consistent cash flows, while worrying less about timing and management competency.
Outcome:
Under Buffett’s leadership, Berkshire Hathaway’s stock price has grown from $19 per share in 1965 to over $600,000 per Class A share in recent years, demonstrating the long-term success of value investing and a buy-and-hold strategy.
5. Sequoia Fund (Bill Ruane)
Background:
Bill Ruane was an American investor who launched the Sequoia fund in 1970. Mr. Ruane met Warren Buffett at an investment conference and the duo were lifelong friends. While Mr. Ruane passed away in 2005, the Sequoia Fund is managed by a five-person investment committee and has $3.2 billion under management as of December 31, 2023.
Strategy:
According to the company’s website, the Sequoia Fund is a concentrated, long-only, value-oriented equity strategy focused on domestic mid- and large-cap companies. While the team researches and owns a wide range of businesses, they prefer quality companies run by outstanding management teams that can grow their earnings attractively over long periods of time.
Outcome:
Between November 1986 and May 31, 2024, the Sequoia Fund has returned 5,163% (11.14% annualized) after fees, compared with 4,654% (10.84% annualized) for the S&P 500 index. The record, we think, is solid given that Value investors have had a challenging time keeping up with soaring Tech-oriented Growth stocks over the last decade or so.
6. The Prudent Speculator (Al Frank and John Buckingham)
Background:
Al Frank, a relentless bargain hunter who believed in a diversified portfolio of undervalued stocks, began delivering his message in four double-spaced pages in a newsletter initially called The Pinchpenny Speculator and later The Prudent Speculator. In the first edition, Al wrote, “After several years of helter-skelter buying and selling, I learned that successful speculating is more a matter of character than mathematics, analysis, or luck. Obviously, the latter are required, but the great gains and losses seem to occur in consequence to individual psychology… Essentially, the PS method is to “buy low and sell high.” Low refers to “undervalued” (in the marketplace) stocks, and high refers to fully- or overvalued stocks.”
Strategy:
Al Frank’s The Prudent Speculator strategy holds both dividend and non-dividend paying stocks and seeks broad diversification via exposure to a significant number of major market sectors and industry groups through roughly 70 to 90 positions. The manager employs a go-anywhere style focused on uncovering bargain-priced stocks independent of market capitalization.
Outcome:
The Prudent Speculator has evolved from a humble newsletter with Al hoping to sell 100 copies to a full-fledged Wealth Management enterprise and team that manages nearly $1 billion for individual investors. As the TPS strategy approaches its 50th anniversary in 2027, John Buckingham and his team have kept Al’s Value-oriented investment foundation as the North Star.
7. Eugene F. Fama and Kenneth R. French
Background:
Doctors Gene Fama and Ken French developed the three-factor model, which described stock returns as a function of their excess expected market returns, outperformance of small companies (versus large) and outperformance of Value stocks (versus Growth).
Outcome:
The three-factor model was eventually expanded to five factors, which added profitability and business investment measures. While the research has been performed in a broadly academic setting, the influences of the work have spread far and wide, with many real-world money managers using the findings as the foundation for their own work.
8. AQR Capital (Cliff Asness)
Background:
Cliff Asness, a student of Doctor Gene Fama at the University of Chicago’s Booth School of Business, left academia and went to work for Goldman Sachs Asset Management before founding AQR Capital. The Economist wrote, “The idea of factors came from two economists, Eugene Fama and Kenneth French, and was put into practice by Cliff Asness, a student of Mr Fama, who in 1998 founded AQR Capital Management, an investment firm that runs one of the world’s largest hedge funds. Quant funds like AQR program algorithms to choose stocks based on factors that were arrived at by economic theory and borne out by data analysis, such as momentum (recent price rises) or yield (paying high dividends). Initially only a few money-managers had the technology to crunch the numbers. Now everybody does.”
Strategy:
AQR’s Large Cap Multi-Style Fund seeks to outperform capitalization-weighted indices through a disciplined, multi-factor investment approach that provides exposure to well-known drivers of returns, or investment styles.
Outcome:
AQR’s strategies are largely quantitative and performance has been hit-and-miss lately. Still, Mr. Asness’s firm had $99 billion in assets under management at the end of 2023 and continues to attract interest for its quantitative approach and continuous investment research.
Case Studies for Value Investing
These case studies highlight the success and staying power of Value investing. We believe that through a relentless focus on undervalued assets, thorough research and willingness to stay the course, investors with the long-term in mind can grow their wealth.
Kovitz Investment Group Partners, LLC (“Kovitz”) is an investment adviser registered with the Securities and Exchange Commission. This report should only be considered as a tool in any investment decision and should not be used by itself to make investment decisions. Opinions expressed are only our current opinions or our opinions on the posting date. Any graphs, data, or information in this publication are considered reliably sourced, but no representation is made that it is accurate or complete and should not be relied upon as such. This information is subject to change without notice at any time, based on market and other conditions. Past performance is not indicative of future results, which may vary.