The Magnificent Seven are so last year. Cash cows are the new kings.
Subscribe to enjoy similar stories. The investing secret that helped make Warren Buffett a multibillionaire isn’t working anymore, though probably not for the reason you would think. Every decade or so someone will declare that the Berkshire Hathaway boss has lost his touch—usually a cue for the reasonably priced stocks he prefers to come roaring back.
Even so, value investing the way that Buffett’s mentor Benjamin Graham practiced it and Nobel Prize-winning economists defined it decades later has had too few rebounds recently. The reason isn’t that the “Magnificent Seven" stocks such as Nvidia, Apple and Tesla have rewritten the law of gravity. Value investing just needed a tuneup.
A slew of exchange-traded funds, many without “value" in their names, have given it one. The classic value factor was described in a landmark paper by economists Eugene Fama and Kenneth French in 1992, and it was compelling: A portfolio of stocks that were cheap relative to their book value trounced flashier stocks to the tune of thousands of percentage points over the decades. But the professors’ results covered a period when companies’ value was mostly in property and machinery rather than brands and intellectual property.
Fifty years ago, less than a fifth of the S&P 500’s assets were intangible. Today it is well over four-fifths, and many top-performing companies like Microsoft are “asset-light." The results tell the story: Analysts at fund manager Lord Abbett point out that a low price-to-book-based portfolio returned 519% between 2002 and the middle of last year. One based on free-cash-flow yield did more than twice as well.
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