Asset Management-Factoring the Intangibles Why Value Investing Lagged Since 2010

The Economist November 14, 2020 pp13-14 |Leaders|Asset Management “Beyond Buffett” “The agonies of traditional value investing are a sign of frothy stockmarkets-and a changing economy”

Chart from published February 2020

This week The Economist has an entire section on Asset Management. Please read for great detail. 2244 comments just as we read this we note that last week saw value-investing surge ahead of tech. So never don't throw the baby out with the bathwater as they say. Enjoy the chart above not from the article but from as published February 2020.

Summary of the Leader

Going back in time to the 1930s and 1940s Benjamin Graham, an investment guru of the day, advised investors to move beyond earlier models dating to 1914, which were dominated by “railway bonds and insider-dealing”, to using a more scientific approach based on “evaluating firms balance-sheets and identifying mispriced securities.” Warren Buffet followed and “updated these ideas as the economy shifted towards consumer firms and finance…” in what has been called value investing. As it turns out, that model underperformed in the last decade with a return on a dollar at $2.50 versus the market without them at $4.65. This last decade has been dominated by tech stocks that leverage intangible assets, like R&D and data. Such assets are booked as an expense rather than a cost. Meaning that the Top Ten firms’ investment, using traditional accounting, would have been valued at $700bn since 2010 rather than the actual, including intangible expenses, of $1.5trn. Tech firms, have other benefits as well as they can “scale up quickly and exploit network effects and they are less likely than traditional firms, like automobiles and oil etc., to be hit by liabilities regarding changing regulations surrounding carbon footprint. Many asset-management firms are “still only just beginning to get their heads round how to assess firms intangible assets and externalities.”