BNC#6 Piet Viljoen – Value investing in an index-dominated era

Money manager Piet Viljoen’s keynote address at BNC#6 in Hermanus unveiled the challenges and opportunities of value investing amidst the dominance of index funds. Drawing parallels to historical frauds and market shifts, Viljoen emphasized the importance of active management, focusing on small, undervalued businesses with competent leadership and active share buybacks. His speech warns against blindly following indices, especially when large-cap stocks dominate, echoing Warren Buffett’s cautionary analogy about bull markets. He urged investors to adopt a nuanced approach, seeking out solid fundamentals and strategic capital allocation for long-term outperformance in today’s dynamic investment landscape.

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Edited transcript of Piet Viljoen’s keynote address at BNC#6 in Hermanus ___STEADY_PAYWALL___

00:03 Today, I want to discuss value investing in an index-driven world. We all crave freebies, like perpetual motion machines promising free energy, but they’re often scams. John Keighley’s 1872 motor machine was a fraud using scientific jargon to sell stock. Value investing, rooted in Ben Graham’s methods, used to thrive by spotting undervalued or overvalued stocks and waiting for market correction, a process called mean reversion.

02:05 However, the landscape has changed drastically. Indexing is on the rise, providing market returns at low costs, with 74% of US large-cap fund managers underperforming the S&P 500 in recent years. Money is flowing into passive funds, surpassing active management for the first time in history last year.

04:47 This shift towards indexing is due to its consistent returns, leading to more concentration in indices like the S&P 500, dominated by the “Magnificent 7” big stocks. However, blindly following indices can be risky, as history shows that large-cap stocks don’t always outperform.

08:46 Past examples like Microsoft and Apple illustrate the unpredictability of future earnings and stock performance. Analysts can be wrong, and paying high prices for stocks assumes a rosy future that may not materialize.

10:11 The key factors driving returns include size, starting valuations, and fundamentals. Big stocks historically underperform equally weighted indices, and current high valuations may overlook economic realities.

12:46 Markets often ignore economic laws when asset prices surge, leading to overvaluation. Value investing today requires seeking small, solid businesses with competent management, focusing on companies that are overlooked or facing forced selling.

16:01 Examples like Argent and Calgro M3 highlight the potential of undervalued stocks with strong fundamentals and active share buybacks. It’s no longer enough to rely solely on market corrections; investors must seek out companies that actively manage their capital and shares.

17:49 Lastly, caution against blindly following indices dominated by overvalued assets like the “Magnificent 7.” Warren Buffett’s analogy about bull markets and sex reminds us of the euphoria at market peaks, urging investors to tread carefully.

In conclusion, value investing in today’s market requires a nuanced approach, focusing on small, solid businesses with competent management and active share buybacks, rather than blindly following indices dominated by overvalued assets.

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*The above transcript has been condensed and paraphrased for brevity and clarity, and may not capture the full context or nuances of the original speech delivered by Piet Viljoen at the Biznews conference, BNC#6.

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