It has been a year since I wrote a three-part series on what I considered were the biggest lessons from Warren Buffett. He eventually retired at the end of 2025 and was replaced by Greg Abel as head of Berkshire Hathaway.
The annual stockholders meeting at the start of this month was the first one Mr. Buffet did not preside over and field questions. It was reported that attendance at this year’s meeting was significantly lower than in previous meetings. That is understandable as the star of the show had taken his bow and stepped off the stage.
I always thought superstars in finance, like Warren Buffett, were hard to replicate because they were backed by decades of experience and time-tested approaches. But with the onset of social media, artificial intelligence (AI) and blockchain technology, finance superstars are now easy to manufacture.
Value-investing, which is buying great businesses at prices significantly below their intrinsic value as a strategy, works best in a declining market. In this environment and using Buffett’s analogy, you try to buy quality merchandise when everything is marked down.
In the US, we have not seen a weak market for quite some time, and if you are a strict value investor buying on cheapness alone, you might suffer or are suffering from underperformance for an extended period of time.
While value-investing does involve looking for cheap companies, the key element of the strategy is to understand what drives value in these companies. Searching for these hidden gems and avoiding the value traps are part of a value investor’s objectives.
Given the weakness of the Philippine stock market, you would think that value-investing would be the dominant approach, but looking at reports and recommendations over time, I have observed a few prevalent themes dominate, namely: 1) focus on earnings; 2) search for changes in an index membership; and 3) mean reversion. While each of these themes have their merits, they also have their drawbacks.
Earnings are important because they are related to value creation, but focusing on them limits investors’ perspectives to the next 12 months. Extracting an estimate of value from the expected net profit for next year is quick but unreliable, particularly if the environment is uncertain. A case in point are the recent massive downgrades in the target prices of a couple of PSE-listed companies, primarily because of disappointing first quarter earnings.
Investors can chase the changes in an index’s membership and time the demand adjustments from passive investors — it can be a little tricky, but it works. If the selection criteria and process are transparent, anybody doing a little homework can make a good guess and a potentially decent profit, at least until everybody (or AI) starts doing their homework.
Mean reversion is a well-documented market phenomenon. What it basically says is that every dog has its day and every star loses some of its shine. Many things in the market gravitate to the average and this is normally applied to price multiples. But this is dependent on the shape of the distribution curve. In other words, while every dog has its day, some dogs will have to wait longer than others. If mean reversion is the plan, be prepared to wait a whole business cycle or around five to 10 years.
The main drawback for me is that it distracts investors from questioning the stability of value creation, which is maybe what global investors are looking for when they eye the Philippines.
For me, the first and last question for investors, even before the thematics on earnings, index membership, or mean reversion, is whether the company has or continues to have a durable competitive advantage. Because even if the theme does not pan out or materialize over the investment window of the investor, if the company has a durable competitive advantage, investors will have the necessary confidence of owning it amidst uncertainty in the markets.
The superstars of value investing — Benjamin Graham, Charlie Munger and Warren Buffett — may no longer be reminding us to seek durable competitive advantages and economic moats, still, we should not forget these key principles because they help keep our investment portfolios resilient.
