Compound interest enthusiasts often look up to billionaire investor Warren Buffett for various reasons. First of all, Buffett is a firm believer in the art of compounding, a strategy that he has firmly adhered to since he was a teenage investor. Second, Buffett’s conservative principles of value investing have withstood several periods of economic uncertainty, such as Wall Street crashes.
Value Investing and Compound Interest
Value investing and compound interest go together like a splash of lemon juice and sweet iced tea. When you evaluate a company’s financial statements, you should be looking at the assets held without compromise, the corporate record, and cash flow; these corporate aspects should always be more important than the actual trajectory of the stock or the company’s future plans.
more important than the actual trajectory of the stock
In a November 2020 opinion published by The Economist, an analytical evaluation of how value stocks performed over the last decade indicates that they have significantly lagged behind compared to their non-value counterparts in the S&P 500. Looking specifically at Buffett’s Berkshire Hathaway, shares of the company have not done as well when compared to the rest of the stock market. While this may sound surprising, it should not seem that way when we take into account that many economists believe that the market has been performing upside down ever since the coronavirus pandemic was declared in March.
This is not the first time value investing has lagged behind Wall Street; if we look at how things unfolded between 1998 and 2000, just before the bursting of the Dot-Com Bubble, we will see a situation similar to what we are experiencing today. Investors are far more reactive and speculative these days; on the day that Pfizer announced it had successfully completed clinical trials of a COVID-19 vaccine, Wall Street exploded with heavy buying of airlines, oil companies, banks, and hospitality enterprises.
Smart Strategies for Value Investors
Ever since value investing was widely adopted as an investing strategy just before World War II, countless other methodologies have emerged as alternatives. Technical analysis, behavioral research, and high-frequency trading, for example, are followed by hedge funds and investment banking firms on behalf of major clients such as pension funds and insurance companies; these strategies tend to be favored during times of higher market volatility, but they also tend to be risky for the average investor.
In the end, value investors and compound interest do not have a good reason to give up on their favorite strategies at this time. When you think about it, from 1940 until today, Wall Street has not favored value investing for about 13 years; all the same, value investors have enjoyed eight decades of good returns.