History of Value Investing
Value investing arose from the work of Columbia Business School professor Benjamin Graham – although he never used the term. Graham, who died in 1976, was one of the most influential investors the stock markets have known. He developed his ideas about successful investing during the Great Depression and co-wrote, with Columbia colleague David Dodd, the classic 1934 text, Security Analysis. He followed this 15 years later with The Intelligent Investor.
These two books set out the foundations of what is now known as value investing.
Graham introduced the concept of a stock’s ‘intrinsic value‘, defined as the value the company would have if it were sold wholly, today.
Graham compared this intrinsic value to the current market price, looking for situations where he could buy a stock for less than his reckoning of intrinsic value. The further the stock’s market price was below intrinsic value, the wider he considered his “margin of safety.”
Graham and Dodd’s theory was hugely influential on several generations of investors but became most famous when applied by US investor Warren Buffett – the investment world’s Don Bradman, Roger Federer and Pelé in one. This is a small injustice to his partner Charlie Munger, vice-chairman of the pair’s publicly traded investment company Berkshire Hathaway and acknowledged as a brilliant investor in his own right.
Buffett & Munger
Buffett is the chairman, CEO and largest shareholder of Berkshire Hathaway, an American multinational conglomerate holding company. He is also consistently ranked among the world’s wealthiest and influential people. Munger, lawyer and investor, is Vice-Chairman of Berkshire Hathaway.
Buffett’s and Munger’s stated aim is to increase Berkshire Hathaway’s per-share (net assets) value at a rate that, over time, modestly exceeds the performance of the S&P 500 index, the broadest measure of the US stock market. They have certainly done that. In the 48 completed years (1965–2012) Buffett and Munger have been at the helm of Berkshire Hathaway, per-share value compounded at 19.7% per annum. Over the same period the company’s benchmark, the S&P 500 Index’s total return (capital growth and dividends) was 9.4% pa. The strategy has consistently outperformed the S&P 500.
Since 1965, there has never been a five-year period during which Berkshire Hathaway’s gain in book value did not exceed the gain of the S&P 500. There have been 43 such five-year periods.
There are many other noted value investors, for example Michael Larson, whose Cascade Investment manages both the Bill & Melinda Gates Foundation and the Gates’ personal fortune; Martin Whitman, who runs the Third Avenue Value Fund; and Seth Klarman, who runs hedge fund the Blaupost Group.
Author of Buffett Step-by-Step: An Investor’s Workbook, Simmons specialises in managing equity and fixed income portfolios using value investing principles and a lecturer on corporate valuation at two business schools.