The “Writing on the Wall” piece in today’s WSJ concludes that traders killed value investing. The author, David Weidner, implies that hedge funds and computerized trading have changed the game from what was once a long-term game to a short-term game. Mr. Weidner says:
Today, a hedge fund investing billions using a quantitative formula can stall a stock; a couple hedge funds aligned can turn a profitable company into a Dow laggard. Toss in a few short sellers and you have the great Wall Street collapse of September 2008.
It wasn’t always this way. Before the machines and the shorts took over Wall Street, stocks were evaluated by an underlying company’s prospects. Buy-and-hold investing ruled the day. Investors such as Warren Buffett and Bill Miller were the models.
Curious choice of “models”. Regular readers know that I have debunked the Bill Miller myth. He can’t create alpha to save his life. He’s been nothing but a value fund manager on beta steroids for years and his risk adjusted returns prove it. As for Buffett – he’s a more complex outlier. While Buffett has sold the “value” approach hook line and sinker a look under the hood proves that Buffett does a lot more than value investing. What Mr. Weidner fails to note in his article is that Buffett started as a hedge fund – Buffett Partners. He used the fund to buy Berkshire and then essentially became the first ever activist investor. Buffett likes for you to think that he just reads balance sheets all day and let’s everyone else manage his $150B empire, but that’s just not accurate. Buffett scrutinizes every aspect of a deal in the same way that a private equity fund or hedge fund would. He sells this folksy next door persona, but Buffett is far more complex than he leads on. Although most of Buffett’s long-term returns came from a few names (Coke, Geicco) he is actually more active than many think. His derivatives and currency trades over the years are far from “value investing” and his entire insurance business is more like an option writing strategy than anything else. The myth that Buffett is a pure value investor is just that – a myth.
Fortunately, investors have evolved. Investors are realizing that there are no holy grails in investing. Value investing made a handful of people super rich – that doesn’t make it a holy grail. It just means it worked well for a few people, but Buffett’s alleged value approach is praised because he is so filthy rich. Modern day investors are evolving and realizing that buy and hold doesn’t work all the time for everyone.
In summary value investing wasn’t killed. It’s just not as widely used. An entire generation of Americans were tricked into thinking that the U.S. economy would grow forever. The last 10 years have been quite a wake up call. Like a good pitcher in baseball, investors are learning that you need more than one pitch in your arsenal if you’re going to create good risk adjusted returns. Traders didn’t kill value investing. The evolution of investing just drowned it out. And Bill Miller didn’t do anything to help….