The Dividend Cafe - Will People Ever Care about Value Again?

Episode Date: June 13, 2025

Today's Post - https://bahnsen.co/4n1XYOG Understanding Value vs. Growth Investing: Insights from Dividend Cafe In this week's Dividend Cafe, the focus is on value investing, contrasted against growth investing. David delves into current investor mentalities, reinforcing time-tested investing principles with a historical context to understand risk and reward. Citing a verse from Proverbs, the discussion highlights the importance of valuation and the common missteps in modern investing. The talk explores various outcomes based on initial valuations, using examples like Apple, Google, and Peloton. The emphasis is on the need to avoid overpaying for 'hot' stocks and the pitfalls of following the crowd. The episode concludes by advocating for a balanced approach that integrates both value and growth strategies, stressing that valuation is a critical factor in investment success. 00:00 Introduction to Value Investing 01:10 Biblical Insights on Investing 02:02 The Psychology of Buying Investments 03:42 The Risks of Overpriced Investments 06:07 Historical Examples and Lessons 10:51 Valuation and Operating Performance 13:22 The Essence of Economic Thinking 15:05 Supply, Demand, and FOMO 16:50 Value vs. Growth Investing 23:21 Potential Catalysts and Risks 26:13 Conclusion and Final Thoughts Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Hello and welcome to this week's Dividend Cafe, recording here from the Newport Beach studio where I am excited to talk to you today about value investing and in a way talk about value investing by talking about growth investing and unpack some way talk about value investing by talking about growth investing and unpack some of the things that are happening right now that I believe reflect some real concerns

in many investors' mentality. The goal out of today's talk will be to reinforce very time-tested principles and do so with a little bit of a more recent history overview that I think will be useful in us understanding risk and reward in the context of these terms of value and growth. I don't believe the investors have fully walked away from caring about value, putting it a little differently, caring about valuation. But I do believe that they're caring about it right now in a, shall we say, flawed way.

So let me unpack it a little. I don't do this a lot in the Divin' Cafe, but I'm going to do it today and not worry at all about anyone who might be bothered by it. Many people know the Listing Divin' Cafe. I happen to be a man of faith and a professing Christian, but I don't quote a lot Bible verses in Dividing Cafe, although maybe I should do it more. This verse I quote today though as real application to the topic at hand. I remember my late father preaching about this because it's a funny verse, but

in Proverbs chapter 20 verse 14 it says, it's no good, it's no good, says the buyer, and then the buyer goes off and boasts about the purchase. And there's this kind of comedic reflection of someone saying, oh boy, this is a pretty bad deal, I guess I'll do it, and then they turn around and be like, yeah, it was a great deal. And I think it reflects that even many thousands of years ago, there's always been an embedded understanding that a transaction often has to be good at the time of purchase. I'm not sure I fully agree with the cliche that money is always made at the

buy, but I certainly believe that buying something cheaper indicates a better opportunity than buying something more expensive. Now this is basic, you know, tautology as they say, or at least as I say, and yet there are things that ought to be intuitive to us, that what you pay for something matters. I think it's surreal that we even have to have this conversation when it comes to investing, that buying at an attractive price is a good thing, yet the fact of the matter is that we do have to say it because there has become a school of thought. The important thing when you get an investment

is that it feel good when you're buying it, not that you believe it's going to feel good later. And I think it's very backwards. The fact of the matter is it's not always supposed to feel good at the time you buy it, that in fact, the various distress or headwinds or concern about something that makes it attractively valued is itself the opportunity and that it doesn't feel like it at the time and sort of like our funny merchant in the proverb, he may say like this is no good but then really

is excited for where the future opportunity could go even though we can't say that at the point of a transaction. We are in a state of modern era investing in which the point of investing for many people is to take something that's already up 1000%, that is already very, very popular and be able to go brag about the fact that, hey, I just bought this big thing, that every single person you could possibly talk to believes is a hot investment. And that doesn't mean it can't get hotter. And in fact, some of the most popular and well-known ones have indeed done just that. But it does speak to the fact that our comfort zone is now gone from the Proverbs 2014 idea

to the opposite. Let's brag about it, not feel like, oh boy, I can't believe I'm doing this, and then the opportunity is more embedded in it must certainly go higher. Now, first of all, there is a kind of implicit greater fool theory in a lot of it that I don't think people consciously think through, which is if they were to recognize this investment is already pricing in

a lot of the great opportunity that exists in the fundamentals of the company, what their excitement would have to be is that they just simply believe there's somebody else out there who will pay even more for what is already priced in, that great opportunity. And that can work out just fine. But it isn't really a future looking notion.

What I believe is important to say is that there are a few things that can happen when one is buying an investment that already has very great prospects, that there is already an expectation of tremendous growth that's reflected in this thing we call valuation. And I believe it will be important for us today to walk through those outcomes to get an idea of why I feel the way I do about this topic. My bias towards value-oriented investing comes from the study of some of the greatest investors we've ever seen, the Buffetts and Grams and Ackmans and Teppers and icons of the world that the notion of something being uncomfortable at the time of purchase increases expected rate of return. And so I just would like to see more people turn on its head the notion that unpopular

is bad and already popular is good. It ought to be counterintuitive to us, but in fact it's become very conventional. The interesting piece about this is people might look at the momentum growth world and just say, well, what could really go wrong? And you know, it's funny, if you bought to like, let's just say the NASDAQ, the end of 2021, and you go, it's up so much, but you're up a whopping five, five and a half percent per year because it then drew down a bunch and then it had a really good 23 and 24 and it's competed around this

year way down but then back up a bit, not back to high but nevertheless recovered. But from the beginning point to end point in that little period, it's a very subpar return actually but not down. And you know I do talk a lot about the lessons from 2000 where the Nasdaq did drop meaningfully about 78% and it took 15 years to recover. So there is a risk just in the nature of what drawdowns might be, but even apart from the violent downside like that prior example, there's also a possibility of just more muted growth when you buy something very overpriced that even if it does okay

and muddles through, you end up later on just saying, wow, it was up 20 here but down 20 there and we're all said and done and it really wasn't up all that much. I don't think people are thinking of it that way and I think an awful lot of growth investors, very candidly, have never seen any sizable type of downside, so they haven't ever felt the need to check what their real world view is on investing, what their actual thesis of the case is, and I'm hoping that will cause people to do that here today. Let's say you have a company that has already gone up 1000%, it's been very successful, it's

really doing well and there's big expectations for the future. It is not my view that any company already up 1000% can't go up more. In fact, it's my view that the generational success stories are going to do just that and there are a million past examples and there will be plenty more future examples. But let's just look at from that point of time when a company's already gone up a bunch, now you enter it at that time, the question then becomes what's going to happen from here? And if a company does very well and has great returns because they've done very well, and so then the optimism for the future really increases and that valuation goes way up. Then going forward, the company could exceed even that optimistic expectation.

And that's likely going to create a very good outcome for the investor. Even if you buy it after initial great returns and even if you buy it after the valuation reflects optimism for the future, including huge optimism for the future, if it exceeds those optimistic expectations, that's a great outcome. So that's on the table. But then another thing that could happen is that exact same chain of events, and the valuation goes up and there's high optimism for the future, and it doesn't exceed that optimistic expectation, but it meets it.

There you're going to get a suboptimal outcome. May not be catastrophic. The operating performance was good, but the investor returns will likely be muted because the person who sold to you after the optimistic valuation increase, they captured all the premium. You paid them for the premium of the future, and then it just stayed level. It met but didn't exceed what had been priced in for the future. And then the third is very, very common, and unfortunately the real bad one, which is the

company does very well, great returns our experience because of how well it did. There's then big optimism for the future and boost up valuation, but then it underperforms that optimistic expectation. And that can lead to catastrophic outcome for investor, both because of difficult operating performance and the valuation. Now, if we were just using kind of examples of these types of companies, the first scenario I describe,

you could think of your Apples and Googles over the last 20 years. The second you could think of like a Cisco in 1999, it absolutely met expectations, but it didn't exceed those wild expectations. The expectations were so high, it ended up being very subpar. Back in the day, Elise, it's certainly done much better last 10 years.

And then like a peloton out of the COVID moment would be an example of just a ridiculously optimistic valuation for the future, not being able to come close to meeting it, and then obviously a bloodbath for investors. Just I'm putting a few names around the potential scenarios you could connect this with. But what all three have in common is that the valuation was the operative variable at play, not necessarily the price and not necessarily the results. The operating performance in the second outcome was very good, but the investor results were poor because of valuation. The price was already high in the first outcome,

but the investor results were still very good because the operating performance exceeded the valuation. And obviously, the double bad of the third scenario was both high valuation and poor operating performance leading to the worst possible outcome. Price matters to the extent that it reflects valuation that is either good or bad. The price is not predictive or causative. And even operating performance, this is sort of the whole point of Benjamin Graham's intrinsic value investing, operating performance matters to the extent that it is above or below evaluation. What Graham's valuation model that was largely replicated

by Warren Buffett was that you discounted future cash flows to a net present value, and that value might be higher than the current stock price, meaning the stock was at a discount to its intrinsic value, or it could be at a premium, meaning the value was already reflected and then some. If a company grows at 25% and it's expected to grow at 40, that's not a good investment. If a company grows at 7% when it was expected to grow at 4%, that could be a very good investment. This

is what I basically mean about valuation being so important. This is why the relevance of what is going on at the time of purchase matters. Most people are gonna be more excited to go to the bar on Friday night and brag about buying an investment that's gonna grow 25 or 30% a year going forward than they would be to brag about a company that's gonna grow six or 7%. But those two data points don't tell you

future expected results because they have to be taken in the context of what expectations for future growth were measured in valuation. I hope this all makes sense so far. But here's the issue. Everybody knows that valuation matters. In every single thing we do, we do not say, you know what, I really, really love steak, and so it just doesn't matter

what I pay because I'm going to like the steak anyways. So yes, I will go spend $1,000 for the steak. We rather take our taste and our appetites and our preferences and various risk reward trade-offs if we're thinking about a business decision or a hiring decision. When we do economic calculation, almost in real time, we're instantaneously doing some form of valuation. This is the essence of economic thinking

and economic activity. It reflects the thinking of valuation. Now, obviously, there are some things that are just awful and you go, I don't want to do this awful thing at any price, but there are plenty of things that are not awful that you do want to do, but you don't want to do at a certain price. Scarcity can drive some of our freedom around this, but so can our own cost benefits analysis. So it's very easy for a steak lover like me to use the steak example because I'm in a position I can afford a very expensive steak and I

really love steak and whatever I pay for a steak I'm going to like it and yet I'm not going to pay a astronomical price because of the just basic intuitive reality of value assessment. Why would we think this becomes any different when it gets to investing? We do it in day-to-day business decisions, we do it in day-to-day consumer decisions, and of course we ought to be doing it in asset price decisions as well. Now look, I think that there is a supply-demand reality here that unfortunately becomes complicated. There is only so many shares available of XYZ hot stock

and you basically will have investors that just want to buy the hot stock no matter what and whether it's a shiny object, whatever know, whatever. It could be a very good company. It could be not a shiny object. It could be not a Peloton 2020 situation. It could be a growing company. But then the valuation gets, it ought to temper the appetite for it because the attractiveness of the investment is measured by that supply demand reality. And what I mean by this is that you don't want

your own FOMO, fear of missing out, to get in the way of what you know to be a reasonable price. And when something is hot and successful and popular, and there's only a certain amount of shares available, that's bidding the price up, and it would be hot and popular and there's only certain amount of shares available that's bidding the price up and it would be hot and attractive and successful for everyone if it just stayed at a level of valuation and then had the operating results that you rightly believe were going to happen because we'll just assume you were going to be right about that.

The valuation is the thing that is going to temper the attractiveness or lack thereof of the investment. And I would argue that too many times it is not tempering, that XYZ is good regardless of whether it is 20 times, 40 times, or 80 times earnings, and this leads to some very difficult outcomes. The irony in a lot of this, and this is something I've learned over the years from a really great investor by the name of Richard Bernstein, is that we believe growth investing

is rooted to this great optimism for the future. There's just gonna be such great growth, there's such innovation. We don't have to worry about what we're paying for it because I have an optimistic view of what's gonna happen into the future. But in a lot of ways, that's actually very backwards. I think value investing is making an optimistic view of the future.

There's a whole lot of companies that are going to do well, and therefore I can be selective in the price I pay. I'm going to get a better return by me being more selective when I pay. Where growth says, I have a pessimistic view of the future, there's not gonna be that much growth in the future, so I gotta overpay for where there is good growth. So you look at the three or four, or shall we say mag seven, most popular names, I gotta overpay for those names, because God knows nothing else is gonna do well. Now I'm not saying everyone thinks that,

and I'm not saying that very many people think it consciously or explicitly, but I do very much believe that's the implicit rationale for high-priced growth investing versus value investing. I think value investing is actually, contains a much more optimistic view of the future. It gives you a permission structure to be valuation sensitive because you think there's a whole lot of ability out there to improve results, to do good things,

to have talented management, to innovate, produce profits. And yet you say, I want to, in that ecosystem, be selective, and in growth you're saying, I can't afford to. I've got to just go get my hands on the most expensive things I can because nothing else is going to grow adequately. I would really encourage people to think through that a bit. The idea that we're in a moment, I preface this whole Divinity Cafe by saying, well, people over care about value again. And the idea is, look, the growth stuff's done so well,

what are we gonna do? You know, the funny thing is that if you look at when the new century, new millennium began, it was over 20 years until growth had caught up to value, 20 years until growth had caught up to value. That the returns coming into this new century, new millennium, starting in the year 2000, we were past 2020, past COVID, before growth caught up to value. There are extensive periods where things can go the other way. Now what was the issue that caused that?

Because that's in a period where yes, the first decade was obviously a very bad decade for growth, but the fang period from 2010 to 2020 was the golden years of growth. What is the reason that value outshallformed growth for over 20 years? And the answer is entirely the valuation at the beginning point. And you could say, well, you're cherry picking the timeline, but that's the whole point. You have to cherry pick the timeline to make the point of what hypothetically can happen at a given point of entry. And we're at a given point of entry right now.

I mentioned the NASDAQ went on a 15-year period of subpar performance, and by subpar I mean underwater, didn't recover its initial level until 15 years later. But that was not, that peak level in NASDAQ that then crashed was not catalyzed by any specific event. There was not a war, there was not a recession, there was not a major macroeconomic event or company failure. It obviously was not even catalyzed by a change of outlook or prospect for the internet itself. We did not go back to a dial-up modem world. We did not reject e-commerce. If anything, I would argue the web outperformed what were very robust expectations for what

it would mean to our way of life. Now, when I say that the internet outperformed, I certainly recognize that a whole bunch of companies that were caught up at it at that moment proved to be the failures that they were. that moment proved to be the failures that they were, but the NASDAQ breaking in 2000 was not merely about 25-year-old party kids running dot coms and billion-dollar valuations and they had no revenues. There were actual incredible companies that powered the internet and powered our country's technology ecosystem that broke as well.

What catalyzed that was not event driven, it was a bubble that burst. And this is the issue, is bubbles are often not recognizable until after they burst. Now, I don't believe what Alan Greenspan once said, that you never know you're in a bubble until after it's burst. I think you can know something's a bubble. I think it was painfully obvious that dot com was a bubble in the late 1990s, and I think it was painfully obvious that housing was in a bubble in 2005. But what I mean is you don't know in identifying something as a bubble how much more the bubble

can blow before it bursts. And this is the really difficult thing that speaks to a character. It certainly speaks to an intelligence, but it speaks to a metal for value investors, a resilience, a grit that I think is at the core of what makes one a good investor and certainly is something that I take extremely seriously as a professional investor and feel reasonably proud at this need, how I've wanted to cultivate this in my own investing habits as a fiduciary over the years.

You have to hold that metal when you believe the things are in a bubble and the bubble is going bigger and bigger and bigger. The temptation for many investors to join the fear of missing out crowd in those moments is absolutely overwhelming. But that ability to resist the seduction of that moment is extremely important. And yet, I'm going to talk more about bubbles in a couple weeks in the Dividing Cafe. What we're dealing with right now in the growth moment, I would argue it may be that eventually what calls an end to this party is a valuation burst, which is what it was in March of 2000, but there's also fundamental catalyst that could, not that will, but that could surface.

I do not know that the US will hold a monopoly on artificial intelligence. I think it's entirely possible they will. I think the threat of deep seek could mean that they're not going to, and I think that could prove deep seek could mean that they're not going to, and I think that could prove to be a deep fake, and forgive me for absurd joke, but I think it's entirely possible that we got away with a really US-centric ownership of the smartphone ecosystem of,

in a lot of ways, the internet and the building out of what the web would become. And we may not hold that on AI, but maybe we will. I think it's entirely possible that some of the big successful tech companies face a regulatory apparatus that has not been fully appreciated. DOJ concerns. I thought that the DOJ's case against Microsoft in the late 90s going in the early 2000s was perversely stupid and eventually Microsoft prevailed and it didn't

break the internet or break technology. It didn't help Microsoft a lot at the time. But right now you can look at various antitrust accusations and bundling accusations and business model issues, and there can be favorable or unfavorable political regimes around it. There's various possibilities but not assurances of risks entering the fray in some of these things. So again, a more event-driven catalyst that exists. I've talked a lot about the AI CapEx, perhaps all of a sudden slowing.

Again, it may not, but no one can say that the risk is zero. And of course, I've also talked not only about CapEx declining, but the people who are the customers of AI CapEx wishing it had declined in the future because we find out on the other end of this that the ROI they expected just simply doesn't materialize. It doesn't materialize in the timeline they wanted or in the way they wanted or even maybe at all.

Now in every case I just brought up and I could list out a lot more possible scenarios, I don't know that I'd put anywhere near a 50% probability on any of them. What I do know is every one of them is a probability higher than zero. So there is the possibility of an event catalyst leading to pain and suffering for this growth space. And then if there isn't, there's the rather I would say high probability of evaluation incident becoming real. But my conclusion of the matter is that these things are being dismissed because right now

today, what we know is these investments just got done doing very well for the last three or five or ten years and I'm not buying for future opportunity. I'm buying because today, which is another way of saying in the immediate rear view mirror, it feels comfortable. And this is the distinction between value and what they refer to as growth. I do not know when high valuation companies are going to hit a peak. I don't know what the correction will be like when they do. What I do know is that the mentality ought to change.

Now if the mentality were to change to anything cheap, the cheaper the better is going to do well, there is another risk, the other side of that, which is what we refer to as a value trap, where sometimes things have gotten really, really cheap because they're headed to extinction. It's pretty rare. It's not something I've really run into a bunch, but it can definitely happen. And I think avoiding view of growth

that is overly romanticized, that makes one valuation agnostic to their own peril, and then on the other side of the coin, avoiding a value trap that says this thing is so cheap that it doesn't matter what happens is also very dangerous. But where I think investors want to be is in the space that no longer believes the lie that value is opposed to growth. What we want to see are companies that we think we're paying a reasonable, if not attractive,

entry point for while getting growth in the business that is measurable and empirical and objective to us because the growth is reflected in a growing dividend. That is not exactly the same way people talk about growth when you talk about growing valuation, growing P-E ratios, et cetera. But the application of received profits, dividends, is a subset of a value and growth mentality. And I think that there is no value where there is no growth, but that the value comes in the price you are paying for future growth.

And yes, some growth is bigger than others, but the whole entire conversation hinges on the fact that some valuations are bigger than others too. Thank you for listening. Thank you for reading. Thank you for watching The Dividing Cafe. Brian Sightel will be Thank you for watching The Dividing Cafe. Brian Sietel will be with you in the Monday Dividing Cafe. I'll be out of the country for a few days with my family and I'll be back with you next Friday.

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