Why is it a Great Time to Be a Value Investor?

Value investing, often considered a traditional and old-fashioned approach, is now entering a golden age. In a recent podcast, Bob Robotti, a leading voice in value investing states, the economic environment today is rife with opportunities for those who are willing to dig deeper, perform rigorous research, and pick undervalued companies.

The anomalies of the past decade have distorted many investors’ perceptions of what “normal” looks like. Following the 2008 financial crisis, the world experienced an unusual period of low inflation, ultra-low interest rates, and a surge in index fund investing. This environment led many to believe that passive investing—simply following the market—was the only viable path. However, Robotti argues that this was an anomalous period, and we are now moving into a phase where stock-picking and value-based strategies are primed to outperform.

The Decline of Passive Investing Dominance

For over a decade, index funds reigned supreme. The prolonged low-interest-rate environment benefited large, growth-oriented companies, particularly in the technology sector. This gave rise to a belief that simply buying the market was the best way to ensure steady returns. Yet, this period was an exception, not the rule.

Today, the economic landscape is shifting. Inflation has returned, interest rates are higher, and many previously high-flying companies are starting to lose their shine. These factors create an environment where passive investing may no longer yield the same results. Instead, stock pickers—those who carefully analyze individual companies and their underlying value—are poised to shine once again.

The Restoration of Stock Picking

Robotti describes the current period as "the restoration of the fallen"—a time when the skill of stock picking is set to make a comeback. He believes that the competitive landscape is limited, with fewer people practicing active management than in previous decades. This scarcity of competition among stock pickers creates opportunities for those willing to put in the effort.

Investors who focus on undervalued, high-potential businesses can capitalize on today’s market conditions. Many of these businesses have been ignored or dismissed due to poor recent performance or the market’s obsession with short-term gains. However, poor performance often sets the stage for future opportunity. As capital moves away from certain sectors, the companies left behind can become deeply undervalued, creating potential bargains for discerning investors.

Why the Next Decade Belongs to Value Investors

Looking ahead, the next decade will be one of substantial opportunity for value investors. As the economy normalizes, industries that were once dismissed—such as energy, industrials, and old-economy sectors—are poised to benefit from structural changes. These industries, once hampered by overcapacity and poor performance, have undergone significant consolidation and restructuring. Now, they are well-positioned for growth.

Moreover, the “metamorphosis of the old economy,” as Robotti calls it, will provide fertile ground for value investors who can identify companies with strong fundamentals and growth potential. As investors begin to recognize the changing economic landscape, there will be renewed interest in undervalued stocks, further amplifying their potential.

In summary, September 2024 marks the beginning of a new era for value investors. With passive investing on the decline and significant opportunities emerging in undervalued sectors, the time is ripe for those who are willing to do the work to identify and invest in high-quality companies. As Robotti concludes, “This is the revenge of the stock picker,” and the future looks bright for those ready to seize it.