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

Fortune4 min read
The Internet Space Race
THE NEXT BILLION PEOPLE who get connected to the Internet may be looking to the heavens. That’s where a race is on to provide online access from fleets of satellites, led by a who’s who of tech and several deep-pocketed startups. The aim is to help
Fortune24 min read
Paul Cox Has A Radical Theory For What’s Causing Alzheimer’s. Here’s Why We Should Listen.
IN A SMALL LAB IN JACKSON HOLE, Wyo., 65-year-old Paul Cox believes he’s closing in on a treatment that might prevent Alzheimer’s disease. And ALS. And a host of other neurodegenerative diseases, for that matter. Cox, we should point out, isn’t a neu
Fortune2 min read
Remembering Herb
ON A VISIT to Southwest Airlines’ headquarters in Dallas, employees strolling the corridors stop to chuckle at a kind of mirth-filled museum depicting its legendary cofounder hugging and mugging. Workers can gawk at a life-size cutout of Herb Kellehe