Fortune

The Death and Life of Value Investing

The growing dominance of technology companies has forced some of the world’s most successful investors—including Warren Buffett himself—to reexamine their assumptions. Here’s how they’re handling this adapt-or-die moment.

AT THIS 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 was changing, and the tech companies that value investors used to haughtily dismiss were here to stay—and were 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?

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

You're reading a preview, sign up to read more.

More from Fortune

Fortune9 min read
Decoding the Market’s Messages
A RECESSION IS WRITTEN IN THE STARS; BIG LOSSES DON’T HAVE TO BE. HERE ARE FIVE NUMBERS TO WATCH TO SPOT A BEAR MARKET BEFORE IT EATS YOUR SAVINGS.
Fortune2 min read
Neue Batterien
The German government has made a big bet on batteries. But is the investment in the right place?
Fortune2 min read
When Plus Is a Minus
TWO PLUS ONE EQUALS THREE. In the span of that many weeks, consumers were introduced to a trio of subscription services promising to add to their lives: Apple News+ and Apple TV+, plus one from Disney, aptly titled—Disney+. (See our article on page 1