The Warren Buffett Era of Investing is Over. Elon Musk Proved It

Warren Buffett made his billions using the classic ‘value investing’ strategy. But in a world of Tesla and Microsoft, it no longer works.
Elon Musk, Tesla, Warren Buffett
The era of 'value-based investing' that relies on strong fundamentals are missing a trick in the modern financial era. | Source: REUTERS/Hannibal Hanschke - RC2V9D97EVTL/File Photo
  • Warren Buffett underperformed the stock market by 20 percentage points in 2019.
  • His classic ‘value investing’ strategy is no longer effective in this new financial market.
  • The rapid rise of innovation and growth stocks like Tesla usher in a new era of investing methodology.

For decades, Warren Buffett has been the king of investing. But the strategy that made him the third-richest man on the planet is dead.

Buffett underperformed the stock market by 20 percentage points last year. And he missed most of the biggest success stories of the last decade like Amazon and Microsoft. He only bought Apple stock in 2017.

Why? Because Buffett’s strategy – the classic ‘value investor’ model – no longer works.

Warren Buffett’s ‘value investing’ strategy is broken

At its core, value investing makes a lot of sense. You only buy stocks with strong fundamentals and earnings.

But that strategy has a big flaw, according to Coinshares chief strategy officer Meltem Demirors. Speaking on the Off the Chain podcast this week, she said:

Here’s the issue [with value investing]. If you’re investing based on fundamentals, you would have missed Amazon. You would have missed Apple. You would have missed all the companies that delivered 98% of S&P 500 market growth over the last 20 years.

The stock market has shifted towards ‘growth investing’ which is much more difficult to quantify using traditional models.

Elon Musk and Tesla are the perfect example

Tesla’s latest parabolic run is a great explainer. The stock is now worth more than Ford and General Motors combined. Based on fundamentals, there’s no way Tesla should be the second-largest automaker on the stock market. But it is.

Tesla stock parabolic run
Tesla’s market capitalization is now larger than Volkswagen, Ford, and General Motors despite only just turning a profit. Source: TradingView

On the surface if you look at Tesla’s balance sheet, their cost of capital, revenues, how much they’re spending, their indebtedness. If you look at it through a fundamentals lens, it doesn’t look like a good stock – Demirors.

But there’s a missing element that value investing can’t calculate: innovation. You can’t quantify the world-changing impact of a company like Tesla and its share price reflects that.

Buffett is stuck holding underperforming assets

Buffett’s Berkshire Hathaway portfolio is weighed down by laggards like Kraft-Heinz, Wells Fargo, US Bancorp, and Delta. Only Apple has delivered outsized returns for the Oracle of Omaha.

Warren Buffett Portfolio
With the exception of Apple, Warren Buffett’s Berkshire Hathaway owns almost no growth stocks. Source: Retireby31.com

Problem is, when you live by a value investing dogma, everything looks overvalued. The classic “Buffett Indicator” is at the most over-valued level since the dot-com bubble. No wonder he’s on the sidelines with a record $130 billion in cash.

Many have suggested this means there’s a huge stock market crash around the corner. But what if there isn’t? What if this is a new era of investing – one that values growth potential, innovation, and star-power over fundamentals.

Here’s another reason value investing is dead…

The last decade has seen the biggest experiment in central bank liquidity the world has ever seen. The Federal Reserve and central banks across the globe have pumped more money into the financial system than ever before.

Not only that, but corporations have been buying their own shares at an unprecedented pace. And at the same time, passive investing in ETFs has exploded, circulating money right back into the best-performing stocks. Active stock picking based on fundamentals has all-but disappeared.

ETF inflows
A record amount of money has flowed into passive ETFs, eclipsing the role of active stock pickers. Source: ETFGI.com

These factors have created a self-fulfilling driving force in today’s stock market that a value investing template doesn’t account for.

Time will tell if Buffett is right

Buffett is right about one thing. Stock prices are detached from reality and fundamental value right now.

If he’s right, then stock prices will ultimately crash and return to their fundamental levels.

But what if he’s wrong? What if we’ve entered an entirely new era of investing that models price differently?

How long can he stay on the sidelines while Berkshire Hathaway underperforms the stock market? Shareholders may start demanding answers when Buffett issues his annual statement on February the 22nd. Watch this space.

Samburaj Das edited this article for CCN.com. If you see a breach of our Code of Ethics or find a factual, spelling, or grammar error, please contact us.

Ben Brown

Ben Brown

Ben is a journalist with a decade of experience covering financial markets. Based in London, UK, his writing has appeared in The Huffington Post and he was Chief Editor at Block Explorer, the world's longest-running source of Blockchain data. Reach him at , Twitter at _Ben_Brown or MuckRack. Email ben @ benjamin-brown.uk.

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