A Survey of “Value Investors”
You may or may not have heard of David Einhorn. Within financial circles, though, he is quite influential. He was the most outspoken voice against Lehman Brothers, as told by the New York Magazine. His earlier battle against Allied Capital is chronicled in his book: Fooling Some of the People All of the Time. Einhorn is smart and charismatic, and he can often see things before others do.
The following is also true. Do you know why it’s so hard for the average person to understand the difference between investing and speculation? It is because smart people like Einhorn have subscribed to the “value investing” myth. This is Part I in a four-part series that we are running, where we survey the best-of-the-best who all subscribe to the “value investing” myth.
One of the best ways to detect a myth is to find two people at the top of any given field and find a word or phrase where their disagreement is substantial. So, today, we highlight a stark contrast between Warren Buffett and David Einhorn. Here are their respective positions:
The Buffett View
Wait, what did Buffett just say there?
Anybody that tells you, you ought to put your money into growth stocks or value stocks really does not understand investing. (emphasis added)
Ouch. If you keep watching to the end (you should), he does it again:
The real point is… We’re trying to put in cash now to get more cash back later on. And, if you do that the business grows, obviously, and you can call that value or you can call that growth, but they are not two different categories. I just cringe when I hear people talk about now it’s time to move to growth stocks or to value stocks or something like that. It just doesn’t make any sense. (emphasis added)
Ouch again. He is absolutely, 100% correct. You may recall our fifth-grader definition of investing: buying cheap apple trees. If we really want to be charitable, perhaps “value” indicates more of a steady stream of apples, say fifty a year, and “growth” signifies outcomes with higher variance, say, twenty apples in bad years and eighty apples in good years, with each occurring with 50% probability. However, variance does not make value disappear. In fact, a risk-neutral investor would value these two streams exactly the same way. What is the point of “growth investing” if one still needs to estimate the value of a stock to make an investing decision?
Certainly, there cannot be such a thing as a value stock or growth stock. True value comes not from the name but from the gap between price and value. The exact same stock can be an investment at a low price and pure speculation at a much higher price. Imagine this scenario: The price of a “value stock” goes up by 50% in one day with no news. Unless it was substantially underpriced before, the stock would have crossed deep into speculation territory. So where is the value in that?
As Aswath Damodaran explained (we put this quote in our Coinbase amicus brief also):
We have all these people telling you to buy a quality company. That's really bad advice. If you buy a quality company that everybody else recognizes as a quality company, you're going to pay through the roof. Good companies can be bad investments, and bad companies can be good investments. The sooner we recognize that, the healthier investing is going to be.
In Buffett’s view, the following is true (which we fully agree with):
1. There are no value stocks or growth stocks;
2. There is no value investing to begin with, and the word “value” is redundant.
The Einhorn View
Einhorn began ringing the alarm bells a while ago. Here is the critical excerpt from his Q3 2017 investor letter:
Even so, the market remains very challenging for value investing strategies, as growth stocks have continued to outperform value stocks. The persistence of this dynamic leads to questions regarding whether value investing is a viable strategy. The knee-jerk instinct is to respond that when a proven strategy is so exceedingly out of favor that its viability is questioned, the cycle must be about to turn around. Unfortunately, we lack such clarity. After years of running into the wind, we are left with no sense stronger than, “it will turn when it turns.” (emphasis added)
See his reference to growth stocks and value stocks? The “growth stocks vs. value stocks” distinction makes Buffett cringe, but for Einhorn, it’s an accurate description of the market.
There is something fundamentally wrong here. Buffett’s view and Einhorn’s view are hopelessly incompatible. This is not an agree-to-disagree scenario. This is a round Earth vs. flat Earth scenario. How is it possible that two renowned finance legends can be so far apart with respect to a couple of basic definitions?
The answer, of course, is that Einhorn is a believer in “value investing”
and Buffett simply isn’t.
If one believes in “value investing,” it is natural to ponder its future. Does Einhorn see better days ahead for “value investing”? Einhorn is clearly a believer, but he doesn’t believe “value investing” will come back.
And, as of a few months ago, on the Money Maze podcast, he was still pessimistic:
This interview is from the recent 2023 Value Investor Conference in London. The whole interview is worth watching, but the early segments are especially relevant for us. Here are some key of the key messages, edited for brevity, followed by our commentary:
Brewer: Oscar Wilde defined a cynic as somebody who knew the price of everything and the value of nothing.
Einhorn: That’s actually a really good quote, because I don’t think it describes the value investors but I think it describes the vast majority of market participants.
You know our view by now: It cannot describe value investors, because there is no such thing. It describes investors, period. What Einhorn is saying is the vast majority of the trades in the market are speculation, and very few are actually engaging in true investing. That, we certainly do agree with. What we don’t agree with is the characterization of investing as “value investing.”
Einhorn: I was a little startled to realize that there are still value investors left. They really are. This is really, really wonderful. I was glad we are not at the National History Museum or something with the dinosaurs.
The reference to “value investors” aside, this is an accurate description of the market trends. Einhorn is making the correct observation that fewer and fewer people are investing and more and more are speculating.
Einhorn: I've made the comment before that the value investing industry has had irreparable damage, is unlikely to recover in a material way.
Why would it? What Einhorn and other value investors don’t realize is that they have been selling themselves short for decades. They did not realize the power of what they were selling, despite fairly clear guidance from both Ben Graham, and Warren Buffett. “Value investors” were selling investing, period, not a type of investing. They were not niche players catering to a subset of investors, they were the only ones serving investors.
“Value investors” should be saying that they are the only ones investing out there and everybody else is speculating. Instead, they are largely boxing themselves into a little circle called “value investing.” By doing so, they inadvertently facilitated the selling of speculation under the guise of investing. They promoted “value investing” so heavily, that the market concluded there must be many types of investing (the fact that there are conferences dedicated to “value investing” like the 2023 Value Investor Conference in London is a result of this thinking). As a result, the appeal of true investing appeared to be much smaller than it actually was.
The irony is rich: If “value investing” is dying, its executioners are none other than its biggest proponents, the so-called “value investors.”
