Something of Value

Oaktree Capital Memo, January 2021

The False Dichotomy

The investing world has long been divided into two camps: "growth" investors and "value" investors. Value investors buy cheap things. Growth investors buy things that will grow.

This distinction, while useful for categorization, is ultimately misleading. Warren Buffett said it best: "Growth and value investing are joined at the hip."

Every intelligent investment is a value investment. The question is always: what is this asset worth, and can I buy it for less? Growth is simply one of the inputs into the value calculation.

Why This Debate Has Intensified

The past decade saw growth stocks—particularly technology companies—dramatically outperform value stocks. This led many to conclude that value investing was "dead" or at least permanently impaired.

But consider: the technology companies that drove these returns weren't overpriced by any historical standard. Apple, Google, Amazon, and Microsoft generated enormous cash flows, grew rapidly, and had durable competitive advantages. Buying them wasn't a bet against value investing. It was value investing at its finest.

The mistake wasn't in the concept of value—it was in the value investors' definition of "cheap." Many value investors refused to own technology companies because they didn't look cheap on traditional metrics like price-to-book or price-to-earnings. This rigidity caused them to miss the greatest wealth creation in history.

The Real Lesson

The best investors are neither pure growth nor pure value investors. They are simply investors who understand businesses deeply enough to assess what they're worth and disciplined enough to buy only when the price is right.

This means:

1. Being willing to pay higher multiples for truly exceptional businesses
2. Being willing to buy "boring" businesses when they're absurdly cheap
3. Never confusing low price with good value, or high price with bad value
4. Understanding that competitive advantage—the moat—is the single most important factor

The Uncomfortable Middle

The hardest position in investing is the middle—owning things that are neither obviously cheap nor obviously expensive, where the outcome depends on your assessment of intangible factors like management quality, competitive dynamics, and secular trends.

But that uncomfortable middle is where the best long-term returns live. The obvious opportunities have already been priced in. The truly terrible situations are avoided by everyone. It's the nuanced, uncertain, requires-real-thought situations that offer the best risk-reward.