Site url:
Pagecontext: org.apache.jasper.runtime.PageContextImpl@5fde4f24
page.keywordsOffshore investing

Tom Delic | 19 July 2021

Value Investing Redux

Share this article

Having been in consistent print since its first publication in 1949, Benjamin Graham’s ‘Intelligent Investor’ has, along with ‘Security Analysis’, provided the philosophical foundation to thousands of successful investment practitioners over the decades. However, as Mark Twain said, “A classic is something that everybody wants to have read, and nobody wants to read”. Open almost any page of those two texts however, and your mind will be enriched with the ideas and thoughts of Graham, and like most literature that has survived the test of time, you will soon realise why.

The concepts laid down by Graham over 70 years ago sets an investor up with a sound, rational, mental framework to deal with the vicissitudes of a hyperactive stock market, that swings between the emotions of a broken-hearted teenager and a toddler’s first taste of chocolate. But what does Graham not say? Is the consensus view of value investing in line with the thinking of Graham or has time distorted and twisted the interpretation?

Leaning on the work of Eugene Fama and Kenneth French, investing is often reduced to nothing more than quantitative pigeonholing. A fund manager strategy or a point-in-time valuation ratio of a listed equity can then be boxed neatly into categories, pitted against one another in an endless race where investors are pressured to pick a side. Today, the consensus is “value” investing is losing the race, with “growth” investing in an unassailable lead. Perhaps though, there are no “style” sides and instead a footrace exists between investment and speculation, which can often feel like a marathon. This takes us back to Graham.

Graham’s core tenets seek to teach us how to act like investors rather than speculators. The margin of safety concept sits at the heart of this approach and simply advises that the investor should only purchase securities where a gap exists between their conservative estimate of intrinsic value, and the price at which the security is being offered. In Graham’s words, “the function of the margin of safety is, in essence, that of rendering unnecessary an accurate estimate of the future”.

The example of Microsoft provides an illustrative example of Graham’s concept in practice. From 1999 to 2012, Microsoft’s free cash flow yield increased from 1.6% to 13.1%1 , with equity holders of the company suffering a -42% total return over the period2. The speculative era of 1999 had faded away and in 2012, an opportunity for a conservative investor was available.

Value investing today is assumed to be a blind investment in the optically cheap but in ‘Security Analysis’, Graham emphasises that “an investment operation is one that can be justified on both qualitative and quantitative grounds”. A cursory glance at the data in 2012 would have shown you that despite the share price halving since 1999, the business was fundamentally strong, with consistent revenue and cash flow growth over the period3 and Microsoft Windows remaining the dominant operating system in an ever-increasing world of computer usage

1,2&3Bloomberg Finance L.P.

Share this article

In case you missed it

13 JULY 2021

A black swan
passes by

By Robert White, CFA

As is often the case with sport, parallels can be found in markets. Firstly, markets give everyone the opportunity to have as many shots as you like before you become successful, as opposed to footballers who have just one attempt during a shootout.

05 JULY 2021

Past performance is
not indicative of
future results

By Gary Moglione

“Past performance is not indicative of future results” is a warning on most investment material that everyone knows but not many people seem to actually implement into their decision making.

28 JUNE 2021

Patience is a

By Stephen Nguyen, CFA

Being patient in the face of adversity is key to a happy life, and a healthy investment portfolio. Good things truly do come to those who wait.

We and our selected partners use cookies to enhance and personalise your experience on our website.Please see our cookie policy for more information.

To enhance your user experience on our site, learn more about our supported browsers

Your browser's cookies are disabled. Enable cookies to ensure our website functions correctly. View our Privacy Notice.

Tell us more!

We're always looking for ways to improve your online experience. Please take a moment to complete the
2-minute questionnaire.