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 response to the unrestrained financial frenzy that triggered the 1929 Wall Street stock market crash and ultimately led to the Great Depression. The prosperous 1920s were a period of post-war optimism, rapid industrial growth, urban expansion, and technological advancement. These transformative social changes were catalyzed to a certain extent by the increasing financialization of the economy and participation in the stock market. With the flourishing development of companies and unprecedented prosperity for ordinary people, the belief that “stocks will only rise” became deeply rooted in the public consciousness.
Of course, this trajectory driven by loose monetary conditions and excessive leverage was unsustainable. Furthermore, the lack of regulation and standardized corporate financial statements made it difficult for most investors to implement disciplined investment strategies. Insider trading was legal, and deceptive accounting practices went unchecked, making it extremely difficult to judge whether a stock was a wise investment. Therefore, the dominant investment approach at the time was essentially speculative and driven by herd mentality, ultimately leading to a severely overvalued market and a stunning collapse.
Graham, considered the father of value investing, witnessed this turbulent period and suffered significant losses during the Great Depression, prompting him to rethink his investment approach from first principles. In this process, he created a detailed framework to determine the true value or intrinsic value of stocks through fundamental research and analysis. Value investing, as opposed to the speculative bubble prevalent in the 1920s, is based on the idea that the market-clearing price of a particular asset does not always reflect its true underlying value. Instead, Graham viewed the market as an unstable pricing mechanism driven by investor sentiment, a concept reflected in his famous analogy where he compared the market to a business partner, “Mr. Market,” who is willing to buy and sell company stocks at different prices every day, depending on his mood. In other words, the market is a short-term voting machine but also a long-term weighing machine.
“The job of Mr. Market is to provide you with prices; your job is to decide whether it is to your advantage to act.” – Benjamin Graham, “The Intelligent Investor” (1949)
The Evolving Framework
In essence, value investing is purchasing something at a price lower than its actual value. Since Graham’s initial contemplation, this fundamental concept has become the core tenet of the professional investment community for nearly a century. His teachings inspired individuals such as Warren Buffett, who was Graham’s student at Columbia Business School in the early 1950s and later went on to achieve one of the most brilliant records in investment management history. However, over time, the elements of the value investing framework have evolved and adapted to the changing financial landscape. For example, Buffett’s value investing approach prioritizes more qualitative factors than the quantitative indicators relied upon by Graham, such as competitive moats, barriers to entry, and excellent management.
All these principles are deeply rooted in long-term fundamentals and are most commonly applied in traditional stock domains. However, it is worth considering how these principles apply to newer asset classes. Although Bitcoin is not a traditional security, it serves as a compelling case study that can be analyzed within this framework. By understanding the underlying support of the asset and the potential development trajectory of the network, there is ample reason to believe that Bitcoin represents a severely undervalued investment opportunity, and its investment thesis can be understood through the lens of value investing.
The Application of the Value Investing Framework in the Bitcoin Investment Thesis
We believe that long-term holding of Bitcoin represents a modern and rational interpretation of value investing. While this may seem counterintuitive to some, many fundamental elements of value investing can be directly applied to the investment case for Bitcoin. Let’s explore how the value investing concept deeply aligns with the case for Bitcoin:
(1) Long-term investment perspective:
Value investing requires investors to overlook volatility and be willing to wait for the market to recognize the true value of the asset. The best investments are those that can be held indefinitely. Within the value investing framework, Bitcoin’s historically significant volatility should not be viewed as a risk but rather an opportunity to be seized by maintaining a long-term investment perspective and tuning out short-term noise.
“The stock market is designed to transfer money from the Active to the Patient.”…”Uncertainty is actually the friend of the long-term value buyer.” – Warren Buffett
(2) Contrarian thinking:
Going with the crowd and chasing performance run counter to the value investing notion. Instead, investment decisions should be made from first principles and by identifying asymmetrical information. Widespread misunderstanding and lack of knowledge about Bitcoin (and our existing monetary system) have placed it perpetually in a contrarian investment position.
“Going with the crowd is always the easiest; sometimes, it takes great courage and conviction to stand apart. Yet, avoiding the crowd is an essential part of long-term investment success.” – Seth Klarman
(3) The power of compounding returns:
The compound interest concept in value investing is akin to rolling a snowball down a hill; over time and with patience, small returns can accumulate and multiply the value of an investment. Importantly, this mathematical concept can also be applied to the covert depreciation of currency – realizing that inflation erodes purchasing power through a slow and covert manner is key to understanding the value proposition of Bitcoin.
“It is obvious that just a few percentage points’ difference can have a huge impact on the success of a compounding (investment) plan. Equally obvious is the fact that, over time, this impact becomes increasingly significant.” – Warren Buffett
(4) Comfort with concentrated investments:
In value investing, a non-traditional notion is that investors should embrace concentrated investments rather than embrace the widely accepted view of portfolio diversification as being crucial. When investors truly understand the intrinsic value of an asset, they should scale their investments based on this belief, even if it leads to a more concentrated portfolio. In the context of Bitcoin, a deep understanding of the technology, its unique attributes as a digital store of value, and its overall adoption trajectory may lead to unconventional investments.
“Diversification is protection against ignorance. If you know what you are doing, it makes little sense.” – Warren Buffett
(5) Excellent management:
The core principle of value investing is the excellence and integrity of a company’s management team. Investors should closely monitor the leadership to ensure that the managers of their capital are both capable and trustworthy. When comparing this viewpoint to Bitcoin, an interesting parallel emerges. Bitcoin’s foundation lies not in a tangible management team but in meticulously written code and an immutable monetary policy. Trust is not built on fallible individuals but on the absolute mathematical principles governing the management protocol. Therefore, Bitcoin’s attractiveness in the “excellent management” realm lies in its lack of human intervention, providing investors with a transparent and predictable financial instrument.
“Modern living creates successful bureaucracies, and successful bureaucracies breed failure and stupidity.” – Charlie Munger
(6) Competitive moats and barriers to entry:
Value investing places great emphasis on competitive advantage, ensuring companies maintain an edge and preserve their position in the market. Bitcoin’s genesis is often referred to as a “flawless concept,” representing a profound first-mover advantage in creating digital scarcity. Bitcoin’s ever-growing network effect, coupled with its unparalleled decentralization, supports its dominant position in the market. Therefore, any attempts to replicate or introduce similar digital scarcity by new entrants would face insurmountable barriers, reinforcing the intrinsic value proposition of Bitcoin.
“The key to investing is not evaluating how much an industry will affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage.” – Warren Buffett
Value investing is not dead
Just as the mainstream media has often declared “Bitcoin is dead” throughout its history, over the past several decades, “value investing is dead” has also been pronounced countless times. In fact, the slogan of “pursuing growth at all costs” has dominated the market in the 21st century, and the continuous shift from “active” to “passive” index investing has played a significant role in the perception that value investing is ineffective, as the performance of the stock market has increasingly concentrated on a few mega-cap growth stocks. Nonetheless, due to human behavioral tendencies to chase performance, value investing will always be somewhat unfashionable.
“Value investing is not appealing to the masses. If it were, you’d never get a bargain.” – Arnold Van Den Berg
Furthermore, the continuous devaluation through currency printing and artificial reduction of the cost of capital over the past several decades has been one of the reasons for the preference for growth stocks over value stocks. However, despite the underperformance of “value” strategies versus “growth” strategies in the stock market, the fundamental principles of value investing have eternal value. Value investing represents the ability to foresee future growth before the financial condition of the asset is apparent or before the market recognizes its true potential value.
“When the gulf between reality and perception becomes very large, opportunity arises.” – François Rochon
Just like Bitcoin, value investing will never disappear. It may seem unpopular for a long time, but for investors willing to put in the effort to deeply understand the full potential value of digital native, energy-backed, cryptographically secure, open-source, fairly distributed, scarce commodities, there exists an asymmetric opportunity. Benjamin Graham, Warren Buffett, and many of their disciples may not have realized this yet, but they have provided a useful toolkit for understanding the investment case for Bitcoin.
