“You’re just a rent-a-rapper, your rhymes are minute-maid
I’ll be here when it fade to watch you flip like a renegade”
—Rakim, Follow the Leader [source]
I came across an article proclaiming the death of value investing today and was surprised to find that the author, Ashvin Bachireddy, is a partner at Andreessen Horowitz. The namesakes of the venture firm, Marc Andreessen and Ben Horowitz, have impressed us with their insights into technology, business building, and investing.
Marc Andreessen’s bona fides are well known, starting with Mosaic and Netscape, on to Opsware and Andreessen Horowitz. He is one of the foremost thinkers on the future of technology, and his 2011 article Why Software Is Eating the World is a must read. We wholeheartedly agree with Marc’s thesis that software is making its way across the business landscape, upending many previously sound value propositions and business models.
Ben Horowitz may be less well known in some circles, but he is no less a thought leader in technology, business, and organizational design. Horowitz has talked persuasively about the unique advantages of Andreessen Horowitz, a young firm that has already managed to break into the highest of venture capital circles. By modeling the firm on the Hollywood talent agency model championed by CAA co-founder Michael Ovitz, Andreessen Horowitz brings a whole host of specialized services to the table for the companies in which it invests. This is a more powerful value proposition than the general partner-reliant approaches of traditional VC firms.
Horowitz established his bona fides with us not only through his successes at Opsware and Andreessen Horowitz, but also through his encyclopedic knowledge of rap (yes!) and the following statement:
Based on Horowitz’s statement, we thought we might have found the proximate cause of Bachireddy’s article: Did he go to Harvard? (It turns out he did not.) Whatever the reason, the implication that faster technological change implies the death of value investing is superficial at best.
The Death of Growth Investing
On the contrary, one could easily argue that faster technological change implies the death of growth investing. What is growth investing, if not the willingness to pay a high multiple of today’s cash flow (if there is any!) in anticipation of strong cash flow growth long into the future. If technological change is accelerating, then predicting the cash flows of companies far into the future becomes increasingly futile.
Zynga was valued highly at the IPO based on an expectation of long-term mobile gaming dominance. Less than one-and-a-half years in, how has that turned out? Groupon was valued highly at the IPO based on an expectation of durable competitive advantage versus the numerous copycats. Less than one-and-a-half years in, how has that turned out?
Bachireddy even asserts that “Apple is dangerously close to losing their own software battle to Google with mobile versions of Google Maps, Gmail and Google voice being far better than their iOS counterparts.” It seems only a matter of time until Bachireddy sees Google as threatened, perhaps by Amazon or Facebook, or an entirely new competitor? Should public market investors still put high multiples on technology IPOs if creative destruction is accelerating? Change is accelerating across the board, but it’s hard to argue that technology companies themselves are not being challenged at least as much as are “old economy” companies.
When accelerating technological change makes the future less predictable, it seems plausible that the businesses that should be worth least are the ones whose value derives from growth assumptions that reach farthest into the future. Amazon.com founder Jeff Bezos has worked hard to make Amazon’s advantage more based on things that do not change rather than on fleeting technological advantage (though Amazon has plenty of the latter as well). It might have been Zappos founder Tony Hsieh who commented that Jeff Bezos focuses on things like customer service and fast fulfillment because those are value-adds his customers will still desire in five, ten and twenty years. Similarly, Airbnb’s Brian Chesky focuses on making the “frames” of a traveler’s experience better in a way that should preserve Airbnb’s competitive advantage far into the future.
The Example of Hewlett-Packard
Given the tenor of Bachireddy’s piece, he might have cited Hewlett-Packard as an example of a failed value investment were it not for the sensitive fact that Marc Andreessen sits on HP’s board. Yes, many value investors lost money in HP, but so did growth investors, perhaps even more so. You see, value investors are the ones who set out to buy low and sell high, while growth investors tend to be fine buying high and selling higher. Unfortunately for those buying HP “high” in 2000, there was no “higher”. For those buying HP “low” in late 2012, there has been such a thing as “high”.
Here is my tweet on HP dated November 21, 2012:
The above tweet was not one of dozens touting HP as it was dropping from $50 to $40 to $30 to $20 to $12. It was my only tweet on HP because that was a time at which my value investing philosophy screamed “buy”. At $12 per share, HP was not relying on any future heroics; it simply needed to stay in business. It has done so and will likely continue to do so. Still, I fully agree that the future of HP ain’t what it used to be (nod to Yogi Berra).
The Example of Research in Motion
Bachireddy does cite Research in Motion in his piece, using it as Exhibit A of his case for the death of value investing. Meanwhile, it likely is growth-oriented investors who have lost the most in RIM. Few value investors were professing their love of RIM shares at roughly ten times the recent stock price. Yet in 2007, plenty of growth investors, including some well-known figureheads on popular TV shows, were calling RIM one of the “four horsemen”. Presumably, if you call a stock a horseman, you can ignore the valuation because horsemen just keep on marching forward.
Bachireddy’s use of RIM as an example would be less misguided if there was no prominent disclosure about a value investor getting involved with RIM. Prem Watsa, who serves as CEO of Fairfax Financial and is sometimes called the “Warren Buffett of Canada”, initiated a position in RIM in Q3 2010, based on SEC filings. At that time, RIM traded around $20 per share. The recent price of $14 seems to suggest that Bachireddy may be on to something, but not so fast. Based on the 13F-HR filings of Fairfax, Watsa added heavily to the position when RIM shares dropped as low as $6 in 2012, likely lowering his average purchase price below the recent market price.
While RIM may not serve as Exhibit A for why value investing is alive and well, it certainly cannot serve as Exhibit A for Bachireddy’s thesis. The most prominent value investor in RIM, Prem Watsa, is likely up on his RIM investment, however modestly. Meanwhile, many growth investors have been annihilated by RIM’s collapse.
Not All Wrong
I may not have bothered to respond to Bachireddy’s article if it had been all gibberish. The piece actually makes several good points but, unfortunately, draws the wrong conclusion. New technology is being adopted faster than ever, software is eating the world, etc. That’s all true. Still, Bachireddy may wish to internalize the following Buffett quote: “The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
Andreessen Horowitz will undoubtedly roll on, funding many wonderful companies that will make the lives of consumers around the world more convenient and more enjoyable. While I know little about the venture capital business, I humbly submit to the partners at Andreessen Horowitz that they consider pairing up their unique insights with an appreciation of the true meaning of value investing. The result could be an already-impressive portfolio filled with even more companies like Amazon and Airbnb — and perhaps fewer companies whose names we won’t remember.