> Every financial advisor and 401k plan recommends index funds by default, and it is how the vast majority of people and organizations store their wealth. It doesn't need any more cheerleaders or icons. It had simply become synonymous with investing at large.
This is passive investing, not value investing.
Value investing is very much active investing, otherwise how would you select the undervalued assets?
Value investing is about finding undervalued companies and buying them while avoiding the properly valued or over valued companies. It has nothing to do with ETF's or index funds.
The term "value investing" is confusing because it is used in two different ways:
The first way it's used is to describe buying stocks that are cheap relative to their current financial characteristics (price to book, price to earnings, price to FCF, etc). This approach is usually contrasted with "growth", which would refer to investing in companies with a compelling thesis and bright future ahead of them.
A second way the term "value investing" is used is to describe the approach of Buffett/Munger where the investor compares the current price to the present value of the future cash flows and seeks a margin of safety above that.
You can do passive investing in the first approach. Just go buy ETFs that weight towards value metrics, like Vanguards $VTV value ETF. You can't really do passive investing in the second approach, aside from investing money in the funds of people who do that for you.
You’ve just described the same thing twice. You have a model for how to value a company, and you look for examples of market inefficiencies. Buffet/Munger initially took advantage of the fact that there used to be much more opportunity to find these inefficiencies, because information was used much more inefficiently (via mountains of paper records). That’s not the case any more with huge amounts of digital information available along with the technology to process it as quickly as it becomes available.
So-called "value ETFs" mostly don't contain stocks that I consider value stocks. A value stock's price at the time of purchase must be below the historical average market P/E multiple, with a reasonable growth rate expectation and analyst forecast. It should not have a high LT debt-to-capital ratio, and it should pay a stable dividend. If you look into those "value ETFs," there is a lot of garbage. Some companies from their portfolio were good value stocks many years ago, but they still keep them in the portfolio now, even though growth and expectations have deteriorated substantially. As a passive ETF investor, you would end up much better with a simple SPY/SPX or even BRKB than with those so-called value ETFs. Just compare the charts if you don't believe me.
Here is what Buffett says about value investing (in his 1992 BRK shareholder letter):"In addition, we think the very term “value investing” is redundant. What is “investing” if it is not the act of seeking value at least sufficient to justify the amount paid? Consciously paying more for a stock than its calculated value—in the hope that it can soon be sold for a still-higher price—should be labeled speculation (which is neither illegal, immoral nor—in our view—financially fattening).
Whether appropriate or not, the term “value investing” is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics—a high ratio of price to book value, a high price-earnings ratio, and a low dividend yield—are in no way inconsistent with a “value” purchase."
Value investing is a strategy. Index funds are a vehicle. The two can and do coexist, even more so than any other such pair because their risk profile (conservative) and time horizon (long term) are so well aligned.
Exactly. What makes it index investing is low fees and simple, objective stock selection without human judgement. There are various well-studied criteria for value stocks.
An S&P500 index does stock selection too, it's just picking large-cap stocks instead of value stocks.
Large/Small are not correlated to value/growth. I for instance, invest pretty much all my money on ETFs such as ISCV, that invest on companies that fit the small and the value criteria. Over the decades, these two factors combined seemed to be the ones that on average gave the most returns.
Former Financial Advisor [This is not personal financial advice]:
Stock prices go up and down, but usually your goal is to buy stocks low and sell them high.
Growth investing looks to trending sectors and companies and lets say 'bets' on a certain future playing out and thus being good for certain companies.
Value investing is an investment strategy where you deep dive on the financial fundamentals of a company and determine your own measure of worth, or what is sometimes called a fundamental value. In essence your own financial calculations give you a fundamental value that you think the stock is "actually" worth.
Having done this for a number of companies you then keep track of the market, and when, and only when, the stock price drops below your own fundamental value price then you buy.
Munger and Buffet would pair this approach to also planning to hold the stock for the long term and see themselves as owning part of the business over many years.
Often a stock might drop when the growth story turns against it (eg. AI is more exciting than crypto stories now), and this is likley when Value investors would get into a stock as it was now below their fundamental valuation and hence predicted on their models to go back up over time.
Mutual fund managers can often be classified as having a value or growth or index approach (and others). And for most normal investors it's usually good advise to take advantage of diversification and back a few different approaches in building a long term focussed portfolio.
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EDIT: My hobbyist, lay understanding, this is not investment advice, I likely have errors in my understanding
I've seen Growth and Technical investing be contrasted to Value. Growth being looking for companies which have not actualized revenue goals but appear to be able to do rapidly(they're growing, look for the ones that grow fastest), Technical is looking at trends and patterns (they're trending, catch the trend and get off before others do).
In my lay understanding Value investing looks for margins of safety through companies which are worth more on the books than they're shares are selling for, or where their cashflows make them look attractive relative to bonds of their equivalent grade. An example might be if AAPL took a nose dive and was selling for less than $167B (which is their cash on hand) that'd be an excellent Value play.
Or assume their equivalent bond rate was Single-B (Currently 9.5%) and their Price to earnings rate was less than 10.5 --> Buying AAPL would be similar to buying a Grade B bond for less than the current market rate.
Growth is about future value, which is subtilty different from what you said. You make predictions on what the company will earn in the future.
Value by contrast is looking at current earnings.
Both are predictions of the future value, one just weights the current earnings high. While you often have a bias to one, generally you should consider both. Don't buy current income if growth says the company will collapse. Don't buy growth if the company won't grow to support the value in the future.
Most people buy exciting stocks, not cheap stocks (cheap relative to intrinsic value).
Value stocks are by definition boring and unknown. Think iron ore mines, regional banks, house builders, carpet makers, and other yawn-fest-profit-machines.
If it's well known and great value, it's got to be boring. For the most part, they're just completely unknown though - most people could name maybe 5 public companies, nevermind 100.
This is passive investing, not value investing.
Value investing is very much active investing, otherwise how would you select the undervalued assets?
Value investing is about finding undervalued companies and buying them while avoiding the properly valued or over valued companies. It has nothing to do with ETF's or index funds.