58 TheEconomistNovember 14th 2020
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t is nowmore than 20 years since the
Nasdaq, an index of technology shares,
crashed after a spectacular rise during the
late 1990s. The peak in March 2000 marked
the end of the internet bubble. The bust
that followed was a vindication of the
stringent valuation methods pioneered in
the 1930s by Benjamin Graham, the father
of “value” investing, and popularised by
Warren Buffett. For this school, value
means a low price relative to recent profits
or the accounting (“book”) value of assets.
Sober method and rigour were not features
of the dotcom era. Analysts used vaguer
measures, such as “eyeballs” or “engage-
ment”. If that was too much effort, they
simply talked up “the opportunity”.
Plenty of people sense a replay of the
dotcom madness today. For much of the
past decade a boom in America’s stock-
market has been powered by an elite of
technology (or technology-enabled)
shares, including Apple, Alphabet, Face-book, Microsoft and Amazon. The value
stocks favoured by disciples of Graham
have generally languished. But change may
be afoot. In the past week or so, fortunes
have reversed. Technology stocks have sold
off. Value stocks have rallied, as prospects
for a coronavirus vaccine raise hopes of a
quick return to a normal economy. This
might be the start of a long-heralded rota-
tion from overpriced tech to far cheaper cy-
clicals—stocks that do well in a strong
economy. Perhaps value is back.
This would be comforting. It would vali-
date a particular approach to valuing com-
panies that has been relied upon for the
best part of a century by some of the most
successful investors. But the uncomfort-
able truth is that some features of value in-
vesting are ill-suited to today’s economy.
As the industrial age gives way to the digital
age, the intrinsic worth of businesses is not
well captured by old-style valuation meth-
ods, according to a recent essay by MichaelMauboussin and Dan Callahan of Morgan
Stanley Investment Management.
The job of stockpicking remains to take
advantage of the gap between expectations
and fundamentals, between a stock’s price
and its true worth. But the job has been
complicated by a shift from tangible to in-
tangible capital—from an economy where
factories, office buildings and machinery
were key to one where software, ideas,
brands and general know-how matter
most. The way intangible capital is ac-
counted for (or rather, not accounted for)
distorts measures of earnings and book
value, which makes them less reliable met-
rics on which to base a company’s worth. A
different approach is required—not the
flaky practice of the dotcom era but a seri-
ous method, grounded in logic and finan-
cial theory. However, the vaunted heritage
of old-school value investing has made it
hard for a fresher approach to gain traction.Graham’s cracker
To understand how this investment phi-
losophy became so dominant, go back a
century or so to when equity markets were
still immature. Prices were noisy. Ideas
about value were nascent. The decision to
buy shares in a particular company might
by based on a tip, on inside information, on
a prejudice, or gut feel. A new class of equ-
ity investors was emerging. It included far-Diminished value
Value investing, made famous by Warren Buffett, is struggling to remain relevant
as an ever greater share of the economy becomes intangibleBriefing Investment strategies