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Laton Spahr, a senior portfolio manager of the value fund over at asset management giant Oppenheimer Funds, had a quote in The Wall Street Journal last week that I've had trouble getting out of my mind.
The article tackled whether or not value investing is changing in the new world order of insanely high stock prices, which have presented a so-called "existential crisis" for the value-oriented ilk I belong to.
Mr. Spahr said, "One of the toughest things is being able to articulate what value investing is anymore."
He went on to say that older, traditional methods of valuing companies have changed, and standards must be lowered to allow for the ownership of overpriced, growth-oriented behemoths like Alphabet Inc. (Nasdaq: GOOGL) and Apple Inc. (Nasdaq: AAPL).
After careful consideration, I have arrived at the inescapable conclusion that this argument is a load of you-know-what.
The quality of traditional methods of valuing companies has not changed in the slightest. Identifying bargain stocks based on the share-price discount to the value of the assets of the company still works. So does finding bargains based on a low price relative to the free cash flow produced by the company.
I can find plenty of strong companies trading at unreasonably undervalued prices, even with the S&P 500 trading near its highest levels in history. What I can't find are enough bargain stocks to fill up a multibillion-dollar portfolio.
The concept of buying companies for less than they are worth and selling for more than they are worth lies at the heart of value investing. It has worked and always will work incredibly well for individuals looking to build a nest egg or save up for their kid's tuition.
But I find it hard to sympathize with fund managers like Mr. Spahr who need to swell the size of their funds in order to generate the massive fees that pay exorbitant bonuses so they can rent office buildings in Midtown Manhattan.
The only reason these managers are trying to expand the value-investing ethos is to create higher fees for themselves with little concern about what it means for their clients' long-term returns.
The Wall Street types like to fiddle with the idea of value investing because it has simply never worked for them. It's never been a profitable strategy for those investing enormous sums of money.
All you have to do is look at the greatest value investor in the history of the world to see the truth behind why value investing works better for regular investors like us…
About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of "Max Wealth" and Heatseekers.