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Value Investors Need to Shift Away From Old Static Models

Over the years, value investing as a stock-picking methodology has grown in popularity due to the successes of famous investors such as Warren Buffett, Joel Greenblatt and Peter Lynch.

Their sagely advice on how to invest in the markets is one that many value investors (myself included) treat as something like “the spoken word” that came out of the Bible of value investing. Their advice gets repeated over and over, like a cliche that never fails to be used, and is set in stone – never to be altered or changed.

Value Investing Strategies Are Continuously Evolving

It is undeniable for a fact that many of the advice such as “rule number 1: don’t lose money, rule number 2: don’t forget rule number 1” and “be fearful when others are greedy and greedy when others are fearful” are timeless wisdom that should be followed, but the strategies in which we do value investing has changed.

It is unsurprising if you look at the history of fundamental investing. 

Over the last 100 years, we have been through many forms of value investing. It started from the Grahamian method (valuing stocks based on low Price to Book Values), to the post-WWII frenzy of buying high-dividend stocks using the Discounted Dividend Model (DDM), then to the 1960s model of selecting undervalued stocks by looking at high dividends alongside high earnings growth power, then to the 1980s emergence of Buffett and his strategy of high owner earnings or cash flow, and last but not least, to today’s model of Cash Returns on Invested Capital (ROIC).

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The Dynamism of Value Investing

Each model represents a different flavor of value investing. The point here is not to constantly chase new strategies to uncover value, but to acknowledge and understand that value investing is not a static methodology. 

By doing so, value investors benefit from the big-picture understanding that value changes its structure over time, and what used to be unrealized value from a certain value strategy may have a possibility of never being realized as notions of value change.

Proactivism in asset and portfolio management is key to minimizing such potential judgement errors and losses. Asset and portfolio managers who are attune to such insight will come out ahead of the curve and deliver better returns than managers who don’t.

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