There are lies, damned lies, and lies about value investing.
A version of this article originally appeared on our US site, Fool.com.
I'll admit it: value investors aren't the life and soul of the party. We're usually the underdressed ones who stink-bomb conversations with lines like "Social media is a fad, but let me tell you about this micro-cap asbestos manufacturer!"
But we're not all boring, cynical, curmudgeonly folks. And we didn't get this way because we were born old souls. Here, in advance of the lollapalooza that is the Berkshire Hathaway (NYSE: BRK-A.US) (NYSE: BRK-B.US) annual meeting, are three debunked myths about the artful science that is value investing and its practitioners.
Myth No. 1: Value investing is for old people
Value investing is like extreme couponing, only for your stocks. The idea is that you buy businesses at discounts to their true worth and wait for time, fundamentals and management to help unlock that value.
It doesn't help matters that the face of value investing, Berkshire's Warren Buffett, is that of an octogenarian. But there are plenty of smart, young investors who have embraced the concept of buying down-on-their-luck businesses at fire-sale prices.
Some young investors tell me they prefer growth over value because they're looking for high-octane results while they can still afford to take on some risk. You can make growth investing work for you, but robust empirical research (link opens PDF file) shows that buying cheap stocks instead of high-priced ones is a winning formula over the long term. In his classic book The Future for Investors, Wharton professor Jeremy Siegel explains that stocks with the lowest price-to-earnings (P/E) ratios outperformed those with the highest by almost five percentage points annually and with lower volatility from 1957 through 2003. And instead of high fliers, the list of the top surviving firms includes predictable slow-movers Colgate-Palmolive, Hershey (NYSE: HSY.US) and PepsiCo (NYSE: PEP.US). So while you can beat the market by investing in high-priced stocks, you're swimming against the tide.
Myth No. 2: You can't beat the market buying large-cap stocks
Not so. Case in point: Coca-Cola (NYSE: KO.US). Coke might have one of the most widely followed, easiest-to-understand businesses in America. You'd think that means the stock's price is almost stapled to its real worth, or intrinsic value, but that's not the case. Get a load of this chart:
KO data by YCharts
The same Coke shares that sold for an absurd 61 times earnings in 1998 fell by 58% in value over the next five years. And since they hit their low in 2004? They're up a cool 102% -- plus dividends. Coke's century-old business is as simple and widely followed as any, but patient investors who preyed on Mr Market's emotions could have bought or shorted Coke's stock at points where it was obviously under- or overvalued. Rinse, repeat.
Myth No. 3: Tech is a no-no
Value hounds are right to be sceptical of high-flying tech stocks: Valuations are rich and competitive advantages can be fleeting. One day you're MySpace and the next, well, you're MySpace. But growth isn't a bad word and investors shouldn't live in the past. The pace of technological change is accelerating, business life cycles are shrinking, and the most important, world-altering businesses are the likes of Apple, Google and Facebook.
Buffett himself, whom many value investors hide behind for their rationale of avoiding technology, said just last year at Berkshire's annual meeting that he would make learning more about investing in tech companies a top priority if he were an investor just beginning his career today. Lo and behold, he backed up the truck and bought almost $11 billion worth of IBM shares.
Moving cautiously into the tech sector isn't a betrayal of value investing principles. Instead, we're entering an age where some of the biggest potential gains for value investors lurk in the murky, tough-to-value waters of out-of-favour technology companies -- two of my favourites are Google and eBay.
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> The Motley Fool owns shares in Google.
