The Evolution of Value Investing: Past, Present, and Beyond
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Considering the popularity of value investing, it is somewhat surprising that a paper recently published by Joseph Calandro in the Journal of Investing was the first formal attempt to categorize the development of this highly-effective and influential school of thought over time. The following article summarizes this categorization of value investing’s past and present and offers suggestions on what its future may hold.
Founding Era: 1934 to 1973
The “official” founding of value investing can be dated to 1934 with the publication of Benjamin Graham and David Dodd’s seminal book, Security Analysis. The strategic concept upon which value investing was founded is as insightful as it is simple; namely, that assets purchased at prices for less than their liquidation value (estimated as current assets less total liabilities or “net-net value”) provide an opportunistic and relatively low risk form of investment (where risk is defined as the possibility of loss) due to the “margin of safety” afforded by the discount from liquidation value.
Over time, some investors would come to base margins of safety off of earnings power and even growth value in addition to the balance sheet. Exhibit 1, taken from Professor Bruce Greenwald’s popular book Value Investing: From Graham to Buffett and Beyond, profiles the different approaches of modern value investing, as well as some of the professionals associated with each approach as of the book’s publication.
The cornerstone of value investing has always been, and will always remain, firmly grounded in the margin of safety principle, regardless of how any specific margin may be estimated. The Founding Era effectively ends with the publication of the 1973 edition of Graham’s immensely popular book, The Intelligent Investor, which distills lessons from Security Analysis to a non-professional audience. Shortly after the book’s publication, in 1976, Graham passed away at the age of 82.
Post-Graham Era: 1973 to 1991
The start of the Post-Graham Era coincides with the great 1973–74 bear market which, amongst other things, presented numerous investment opportunities akin to those seen at the beginning of the Founding Era. Therefore, it was not coincidental that such a market environment saw the ascendancy of a number of highly-successful value investors such as Gary Brinson, Jeremy Grantham, John Neff and others.
–Joseph Calandro, Jr. and Frederick J. Sheehan