Howard Marks is famous as a star value investor and aggressive trader whose Oaktree Capital has grown to manage billions of dollars for large investors around the world, raking in billions for himself. Marks’s talent for finding undervalued distressed securities speaks to the power of value investing; as a way of identifying mispricings and inaccuracies in the market, the conventional mathematical methods of value investing have been employed by Marks’s firm to buy up distressed assets at a discount and sell them when they came to a fairer value. Thus, Marks can be considered one of the old guards of value investing, alongside Charlie Munger and Warren Buffett.
Yet Marks has penned an 18-page memo to investors that makes a cogent argument for growth investing, arguing that the conventional DCF valuation model at the core of value investing both isn’t as valuable as it once was and was never as valuable as many had assumed. He makes the powerful and somewhat controversial argument that many value investor stars of the past, most notably Benjamin Graham and Buffett, actually made their biggest windfalls with a kind of growth investing. Arguing that GEICO was a growth stock, and pointing out that Buffett’s recent Apple (AAPL) investment has been one of his best, Marks goes on to point out that a focus on the immutable characteristics that provide growth stocks their momentum can produce superior returns to a focus on undervalued companies. He also goes so far as to say this has been true for a long time, well before the various tech revolutions that have boosted stocks since the dot-com bubble of the late 90s.
Whether Marks’s argument is right or not is beside the point; what it does point out is that even the most traditional of the old guard is rethinking what value investing really means and how useful it really is, and this is likely to change the characteristics funds look for in analysts in the future. Being very good at Excel and knowing how to create valuation models has been decreasingly useful for funds over the last few years as software automates those tasks; now a more ineffable ability to sniff out trends before they happen is being seen in the investment world as a much more important tool. But that’s a lot harder to define, systematize, or teach. Possibly that ability cannot be cultivated or consistently found within one specific analyst, making finance a lot harder as a field.
While there are no easy answers to these questions now, that they are being asked demonstrates that we are in a pivotal moment in finance where the old rules are increasingly being thrown out even before new ones are written. And the people who do write those new rules will likely be increasingly successful, and rich, before they do.