At last year’s annual Berkshire Hathaway meeting in Omaha, Warren Buffett, the high priest of value investing, uttered words that would have been grounds for excommunication if they had come from anyone but him.
Buffett began his career nearly 70 years ago by investing in drab, beaten-up companies trading for less than the liquidation value of their assets—that’s how he came to own Berkshire Hathaway, a rundown New England textile mill that became the platform for his investment empire. Buffett later shifted his focus to branded companies that could earn good returns and also to insurance companies, which were boring but generated lots of cash he could reinvest. Consumer products giants like Coca-Cola, insurers like Geico—reliable, knowable, and familiar—that’s what Buffett has favored for decades, and that’s what for decades his followers have too.
Now, in front of roughly 40,000 shareholders and fans, he was intimating that we should become familiar with a new reality: The world is changing, and the tech companies that value investors used to haughtily dismiss are here to stay—and are immensely valuable.
“The four largest companies today by market value do not need any net tangible assets,” he said. “They are not like AT&T, GM, or Exxon Mobil, requiring lots of capital to produce earnings. We have become an asset-light economy.” Buffett went on to say that Berkshire had erred by not buying Alphabet, parent of Google. He also discussed his position in Apple, which he began buying in early 2016. At roughly $50 billion, that Apple stake represents Buffett’s single largest holding—by a factor of two.
At the cocktail parties afterward, however, all the talk I heard was about insurance companies—traditional value plays, and the very kind of mature, capital-intensive businesses that Buffett had just said were receding in the rearview mirror. As a professional money manager and a Berkshire shareholder myself, it struck me: Had anyone heard their guru suggesting that they look forward rather than behind?
The Big Debate
There is a deep and important debate going on in the investment community, one with profound repercussions for both professional money managers and their clients. Some believe that Buffett is right—that we have become an asset-light economy and that value investors need to adapt to accommodate such changes. Noted value managers like Tom Gayner of Markel Corp. and Bill Nygren of Oakmark Funds, for instance, count companies like Amazon and Alphabet among their top holdings. The fact that these stocks often trade at above-market valuations—a factor that once scared away orthodox value investors—hasn’t deterred them, because the companies’ futures are so bright that they’re worth it.
Other value managers like David Einhorn at Greenlight Capital and Bruce Berkowitz at Fairholme are betting on the very same old-economy companies that Buffett long favored. Berkowitz, Morningstar’s domestic equities Manager of the Decade from 2000–10, has seen his performance suffer this decade, thanks to positions in AT&T and, most notably, Sears Holdings, which declared bankruptcy earlier this fall. Einhorn’s performance has also suffered; his largest position is GM, and he says he has been short what he calls a “bubble basket” that includes Tesla, Netflix, and Amazon.