Value investing, or choosing stocks believed to be trading at less than their intrinsic value, is often considered a tried-and-true strategy. But the environment has changed drastically in the past few years; tech behemoths dominate the market, global interconnection continues to increase, and policy changes have become ever more difficult to anticipate.
The foundational principles of value investing are as relevant today as when Benjamin Graham and David Dodd published their seminal Security Analysis. However, today's market presents unique challenges and exciting opportunities for the value investor. To succeed, we believe it’s necessary to look beyond traditional metrics and embrace a broader definition of what makes a company valuable.
Let’s look at how we can adapt a value investing strategy for today's market, with a focus on valuing intangible assets and exploring global opportunities.
Traditionally, a company's value has been tied to its physical assets: factories, machinery, and inventory. Value investors could analyze a balance sheet, calculate a company's book value (total assets – total liabilities), and look at the price-to book ratio to identify companies they thought were trading on the cheap.1
Today however, many of the global market’s premier companies have few physical assets. Their value comes from intangible assets such as software, brand recognition, intellectual property, and network effects.
Companies like Google, Meta, and Microsoft* don't own massive factories with significant capital equipment. Their measurement of value comes from code, user data, and the ecosystems they've built.
Relying on traditional metrics like the price-to-book (P/B) ratio can be misleading for these businesses, as it excludes intangible assets. Consequently, they can appear overvalued on a price-to-book basis when in fact they could be outstanding long-term investments.
To find value in a tech-driven market, you have to expand the analytical toolkit. Instead of looking at book value, consider metrics that measure the strength of a company's intangible assets:
By looking at these metrics, you can get a clearer picture of a company's true intrinsic value, even if its P/B ratio seems high. The goal remains the same—finding a disconnect between price and value—but the method of finding that value has changed.
Investors who limit themselves to the domestic market are overlooking a world of potential opportunities. While the U.S. is home to many of the world’s leading companies, compelling valuations can often be found in international and emerging markets. These markets are frequently less efficient than the U.S. market, meaning there could be a greater chance of finding hidden gems.
Emerging markets, in particular, can offer exposure to rapidly growing economies and burgeoning middle classes. As incomes rise in these countries, often too does consumer spending, creating a powerful tailwind for emerging markets companies. However, investing globally comes with its own set of challenges.
Before investing in a foreign company, it’s even more vital to do rigorous research. Here are some key factors to consider:
Despite these hurdles, the potential rewards from global investing could be significant. By carefully researching and diversifying your holdings, it’s possible to find attractive value investments in many different markets.
The world is constantly changing, and the stock market is no exception. While the tools you use in value investing have to adapt, we believe the core principles are timeless. The goal has always been and will always be to buy a business for less than it is truly worth.
By expanding the definition of value to include intangible assets, and by broadening your horizons to include global markets, you can continue to apply the powerful logic of value investing in today's environment.