Trends Watch: Outlook for Value Investing

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks with Bob Robotti, President & CIO, Robotti & Company.  

What is your outlook for value investing?

The opening to Ben Graham’s book Security Analysis is prophetic to today’s world: “Many shall be restored that are now fallen and many shall fall that are now in honor.”

We are excited about the outlook for value investing. I’m like a kid in a candy store. We believe we are at the advent of the restoration of that fallen investor and think we’re entering a new Golden Age for value investing, stock picking and active management. It is a rhyme to when I graduated from college and walked into Tweedy, Browne Company’s office in 1975, just after the 1973-1974 stock market correction. What came next was the original Golden Age for value investors. Many of the greats like Warren Buffett, Graham and Tweedy, Browne made a name for themselves in that period. Today, we see a confluence of factors very similar to that 1975 period that foster a compelling environment for value and active managers.

Where do you see the greatest opportunities and why?

Not only do we see value, in general, as being attractive, but we believe there are tremendous opportunities in industrial-focused businesses located in North America. Industrial and energy intensive businesses have developed huge competitive advantages against the rest of the world after experiencing four decades of being competitively disadvantaged and losing out to lower-cost competitors like China. The underlying economic dynamics are driven by natural gas – an extremely strong, low-cost, lower-carbon, and plentifully available resource which provides a competitive advantage that North American industrial businesses will enjoy for at least a decade. This phenomenon is also being backed by fiscal policy and government spending bills like the Inflation Reduction Act (“IRA”) and the CHIPS Act. Effectively, we’re throwing accelerant on top of a burning fire. We think two major macroeconomic themes will be the driver of global economies in the decades to come. The first we call Globalization 2.0, not just China. We think people misidentify “de-globalization” and those blanket statements misappropriate what’s going on. The world’s not de-globalizing: it’s re-globalizing, and we think places like Southeast Asia are great benefactors. The second major theme is navigating the energy transition amidst a period where we think the demand for energy in all forms will skyrocket. Our investments are major beneficiaries of these identifiable and powerful macro trends.

What are the greatest challenges you face and why?

One of the biggest challenges, in spite of the proven economic merits of many companies we’re invested in, is that investors continue to ignore the economic facts. Many of the businesses we’re looking at or invested in trade at valuations that do not reflect their true economic value. Markets can take a long time to realize and correct these discrepancies. So, I think navigating that reality and accumulating the knowledge and research to gain strong conviction in the theses for companies will be extremely important going forward. Major markets are mispriced or have little-to-no margin of safety and substantial latent risks. Free money has distorted capital flows and allocations, yet the underlying economic landscape has changed. Capital is still invested in yesterday’s winners and is frozen, unsure of what happens next. Capital needs to catch up with the new paradigm.

What keeps you up at night?

Nothing really jumps out at me at the moment. Based on my decades of experience I tend to think recency bias always has people thinking that it’s never been worse than today. The truth is that the world has always gone through difficult crises and managed to come out the other side. Obviously, there are always concerns about short-term hurdles at every company/business and that the world economy always faces the threat of a recession or depression. Our view is to understand and predict what happens to our investments in three-to-five years and beyond; more often than not, greater macro issues are solved, and things tend to get better. One of the big recent concerns is that the world is going to have a recession or concern about where interest rates settle, and people freak out over these things. In reality, there’s been a worldwide recession for over a year. The world’s number two economy and engine of the world’s growth for decades, China, is exporting that recession to the rest of the world, especially Europe. This too will pass. The future will be bright. Remember that Economics 101 will always prevail. The underlying supply/demand dynamics are the root of everything. The companies we’re invested in today have very modest valuations and are experiencing their own supply/demand cycles and imbalances.

The views and opinions expressed above are of the interviewee only, and do not/are not intended to reflect the views of EisnerAmper.