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The origin of value investing
The emergence of the concept of “value investing” in the late 1920s was no accident. This school of thought, pioneered by Benjamin Graham and David Dodd at Columbia Business School (CBS), was largely a reaction to the unbridled financial practices that triggered the Wall Street crash of 1929 and ultimately led to the Great Depression. Fanatic reaction. The Roaring Twenties were a period of postwar optimism, rapid industrial growth, urban expansion, and technological advancement. These transformative social shifts have been catalyzed in part by an increasingly financialized economy and a surge in stock market participation. As businesses boomed and ordinary people experienced unprecedented prosperity, the belief that "stocks can only go up" became firmly entrenched in the public consciousness.
Of course, this trajectory, driven by easy monetary conditions and excessive leverage, is unsustainable. Additionally, the lack of regulation and standardized corporate financial statements prevents most investors from implementing a disciplined investment strategy. Insider trading is legal and deceptive accounting practices go unchecked, making it extremely difficult to determine whether a stock is a wise investment. As a result, the dominant investment approach at the time was speculative in nature and driven by a herd mentality, which ultimately resulted in the market being grossly overvalued and ultimately crashing in spectacular fashion.
Graham—considered the father of value investing—witnessed this tumultuous period firsthand, suffering severe losses during the Great Depression, which prompted him to rethink his investing approach from first principles. In the process, he creates a detailed framework that uses fundamental research and analysis to determine a stock's true value, or intrinsic value. Value investing, as distinct from the speculative bubbles that prevailed in the 1920s, is based on the idea that the market clearing price of a particular asset does not always indicate its true underlying value. Instead, Graham viewed the market as an unstable pricing mechanism driven by investor sentiment, a concept captured in his famous analogy to investors' business partners called "The Market." Mr." who is willing to buy and sell company stock at different prices every day, depending on his mood. In other words, the market is a short-term voting machine, but it is also a long-term weighing machine.
“Mr. Market’s job is to give you prices; your job is to decide whether it’s advantageous for you to take action.” – Benjamin Graham, The Intelligent Investor (1949)
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evolving architecture
Simply put, value investing is buying something for less than its actual value. This basic concept has been a core tenet of the professional investing community for nearly a century, since Graham's original thinking. His teachings inspired the likes of Warren Buffett, who was Graham's student at Columbia Business School in the early 1950s and went on to create one of the most brilliant achievements in the history of investment management. Over time, however, elements of the value investing architecture have evolved and adapted to the changing financial landscape. For example, Buffett's value investing approach prioritizes more qualitative factors—rather than just the purely quantitative metrics Graham relies on—such as barriers to competition, barriers to entry, and management excellence.
All of these principles are rooted in long-term fundamentals and are most commonly applied in the traditional stock industry. However, it is worth considering how these principles apply to newer asset classes. Although Bitcoin is not a traditional security, it is a compelling case study that can be analyzed within this framework. By understanding the fundamental underpinnings of the asset and the likely trajectory of the network, there is a strong case to be made that Bitcoin represents a severely undervalued investment opportunity, and that its investment thesis may be understood through the lens of value investing.
The application of value investing framework to Bitcoin investment thesis
We believe that holding Bitcoin for the long term represents a modern rationale for value investing. While it may be counterintuitive to some, many of the basic elements of value investing can be directly applied to the investment case for Bitcoin. Let’s explore how the concept of value investing fits deeply into the thesis for Bitcoin:
(1) Long-term investment perspective: Value investing requires investors to be able to ignore volatility and be willing to wait for the market to recognize the true value of assets. The best investments are those that can be held indefinitely. Within a value investing framework, Bitcoin's historically huge volatility should not be viewed as a risk, but as an opportunity that can be seized by maintaining a long-term investment perspective and blocking out the short-term noise.
"The stock market is designed to move money from the active to the patient." ... "Uncertainty is actually the long-term value buyer's friend." - Warren Buffett
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(2) Contrarian thinking: Following the crowd and chasing performance run counter to the concept of value investing. Instead, investment decisions should be made from first principles by identifying information asymmetries. The widespread misunderstanding and lack of understanding about Bitcoin (and our existing monetary system) has kept it in a contrarian position.
"It's always easiest to follow the crowd; and sometimes, it takes a lot of courage and conviction to stand out. However, staying away from the crowd is an essential component of long-term investing success." - Seth Klarman
(3) The power of compound interest rates of return: The concept of compound interest in value investing is similar to a snowball rolling down a hill; with time and patience, small gains can accumulate and multiply the value of the investment. Importantly, this mathematical concept can also be applied to the hidden depreciation of currencies – recognizing the slow and hidden ways in which inflation erodes purchasing power is key to understanding Bitcoin’s value proposition.
"It's clear that a change of just a few percentage points can have a huge impact on the success of a compounding (investment) plan. It's also clear that the impact grows larger over time." - Warren Buffett
(4) Comfort with concentration investing: In value investing, a less traditional notion is that investors should embrace concentration investing, rather than agreeing with the common view that portfolio diversification is crucial. When investors truly understand an asset's intrinsic value, they should size their investments based on that belief, even if it results in a more concentrated portfolio. In the context of Bitcoin, a deeper understanding of the technology, its unique properties as a digital store of value, and its overall adoption trajectory could lead to extraordinary investments.
"Diversification is a protection against ignorance. It doesn't mean much if you know what you're doing." - Warren Buffett
(5) Management excellence: The core principle of value investing is the excellence and integrity of the company’s management team. Investors should pay close attention to leadership to ensure that the stewards of their capital are both capable and trustworthy. When comparing this view to Bitcoin, an interesting similarity emerges. Bitcoin is not based on a tangible team of executives, but on carefully written code and an immutable monetary policy. Trust is not built on fallible human beings, but on the absolute mathematics that govern the protocol. Therefore, the appeal of Bitcoin in the "excellent management" industry is that it provides investors with a transparent and predictable financial tool without human intervention.
"Modern life creates successful bureaucracies, and successful bureaucracies breed failure and stupidity." - Charlie Monger
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(6) Competitive barriers and entry barriers: Value investing attaches great importance to competitive advantages to ensure that the company maintains its advantages and maintains its position in the market. Bitcoin’s origins are often referred to as a “flawless concept,” representing a profound first-mover advantage in creating digital scarcity. Bitcoin’s growing network effect, combined with its unparalleled degree of decentralization, supports its dominant market position. As a result, any new entrant trying to replicate or introduce similar digital scarcity will face insurmountable obstacles, reinforcing Bitcoin’s inherent value proposition.
"The key to investing is not to assess the impact an industry will have on society, or how much it will grow, but to determine any company's competitive advantage and, most importantly, the durability of that advantage." - Warren・Warren Buffett
Value investing isn’t dead yet
Just as the mainstream media has often declared "Bitcoin is dead" throughout its history, "value investing is dead" has been declared countless times over the past few decades. In fact, the mantra of “growth at all costs” has dominated markets in the 21st century, and the continued shift from “active” to “passive” index investing has also played a large role in the perception that value investing is ineffective because Stock market performance is increasingly concentrated in a handful of mega-cap growth stocks. That being said, value investing will always fall out of favor to some extent due to the human tendency to pursue performance.
"Value investing has no appeal to the masses. If the masses had appeal, you would never get a bargain." - Arnold Vandenberg Furthermore, over the past few decades, continued devaluation and artificially low costs of capital have been achieved through currency printing. This phenomenon is one of the reasons why growth stocks are favored over value stocks. However, although "value" strategies have underperformed "growth" strategies in the stock market, the basic principles of value investing have timeless value. Value investing represents the ability to foresee future growth before an asset's financial condition becomes apparent or before the market realizes its true value potential.
"When the gap between reality and perception becomes large, opportunities arise." - François Rochon
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Just like Bitcoin, value investing will never go away. They may appear unpopular for a long time, but for investors willing to put in the effort to deeply understand the full value potential of digitally native, energy-enabled, cryptographically secure, open source, equitable distribution, and scarce commodities, there are There are asymmetric opportunities. Benjamin Graham, Warren Buffett, and many of their disciples may not realize it yet, but they have provided a useful toolkit for understanding the investment case for Bitcoin.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reprinted with permission from: "MarsBit"
Original author: Brian Cubellis
