This year marks the 50th anniversary of Brandes Investment Partners. The milestone invites us to reminisce,reflect, and delve into the rich history of our firm and the marketplace. Among the memorabilia we came acrosswas a 1974 Financial Analysts Journal article by Benjamin Graham titled The Future of Common Stocks. Forthose familiar with the history of Brandes, it is probably no surprise that this article stood out to us. That was theyear of our founding as an investment firm based on the value principles and philosophies of Benjamin Graham,with whom Charles Brandes had the honor to develop a relationship.
In going through the article, we noticed how its content revealed striking parallels to today’s market environment. Graham wrote, The distinction I have just made is clearly relevant to the present situation because of the recent advent of the two-tiered market,’ resulting from the massive preference of institutions for large, high-growth companies. This in turn has brought about disparities in the P/E ratios for issues of investment characterdifferences as high as ten to onethat have been unexampled in all my experience, except perhaps at the heightof the 1929 madness with its celebrated blue-chip’ issues.1 Are we sure Graham isn’t describing the current market environment? As this chart highlights, concentration in the S&P 500 Index has returned to levels last seen when Graham penned this article in 1974.
The concentration extends beyond holdings composition to market performance as well. For the six monthsended June 30, 2024, approximately 60% of MSCI ACWI’s return was driven by just 10 companies, eight of which are based in the United States. Similarly, over 70% of the S&P 500’s performance was attributed to 10 companies, nearly all of which could be categorized as high growth, technology-related, or AI (artificial intelligence) trend beneficiaries.
This raises the question: How does Brandes approach these high-growth companies? Graham noted, But the firsttier, high-growth issues present a real challenge to past experience. Obviously, they would be wonderful private or market-type investments if obtainable at book value or even twice that figure. The trouble is, of course, that most of them sell at more than five times book valueand some more than ten times. Last year the ratios were a good deal higher than that. At these levels, they take on a speculative character which is due entirely to their price level, and in no sense to any weakness of the companies themselves.2
A couple of points stood out to us:1. Growth and quality: Graham emphasized investing in first-tier, high-growth issues, not just the deeper-value bargain issues for which he is better known.2. Price matters!
Following Graham’s approach to investing, Brandes is a fundamental, price-sensitive value investment firm. While we do considerand appreciatecompanies with high-growth and high-quality attributes in our search for value potential, we will only invest at what we consider the right price (and we do think there is a right price for almost everything!) We believe this approach is advantageous in today’s investing landscape as it helps us avoid businesses that are likely overvalued and identify those that are potentially undervalued.
So, what are the prospects for value in a market environment that bears a lot of similarities to the one from 1974? Graham said it well when he concluded the article with this quote from Virgil, his favorite poet: ‘O fortunati nimium… (etc.) Agricolae!’
Graham noted, Virgil addressed this apostrophe to the Roman farmers of his day, but I shall direct it at thecommon-stock buyers of this and future years: O enviably fortunate Investors, if only you realized your currentadvantages!”3
1, 2, 3 Graham, B. (1974). The Future of Common Stocks. Financial Analysts Journal, 30(5), 2030. https://doi.org/10.2469/faj.v30.n5.20 Book value: Assets minus liabilities. Also known as shareholders’ equity
This article first appeared on GuruFocus.
Read More: 50 Years of Value Investing, Benjamin Graham and the Future of Common Stocks