Howard Marks is worried that value investors have lost the plot. In his January 2021 memo, “Something of Value”, he writes that their obsession with cheapness—or more specifically, with a naïve definition of cheapness—has confounded their ability to spot genuine value. This focus on “cheap” as a byword for “value” above all else has arguably produced some nasty results. For example, according to Morningstar, large-cap value funds underperformed large-cap growth funds by 32% last year, in their fourth straight year of underperformance. That underperformance has made many value investors question whether something has fundamentally changed.
Marks traces value investors’ woes to what he dubs the “false dichotomy of value and growth” or the idea that there is a sharp delineation between the two. He argues that value investors must abandon this false separation and consider intangible traits too, like competitive advantage, economic moat, and long term potential for earnings growth. Broad structural trends relating to macroeconomics, demographics, or technology also weigh heavily on investment returns in the long run, and investors who simply focus on firm-specific fundamentals may miss the forest for the trees. According to Marks, “successful investing has to be more about superior judgments concerning (a) qualitative, non- computable factors and (b) how things are likely to unfold in the future.” In other words, they must also study the big maps.
We think that’s absolutely right.