Tony, good discussion. There is some nuance here that is important for people to understand. Historically, over long periods of time, "undervalued" stocks have outperformed "overvalued" stocks. The main exception to this is in late stage bull markets like we have had for the past few years, when money is pouring in regardless of buesiness fundamentals.
That being said, there is an understand in the value community now that traditional value invesstment "missed the boat", so to speak, on the value of growth of comapnies that can dominate markets (like Google and Amazon). Traditional Benjamin Graham-style investing assigns no value to growth, as it is uncertain.
One of the biggest mistake investors have made in the markets since the day they first opened is paying too much for growth. When you pay a high price for a stock that you anticipate will grow a lot in the future, you are speculating, not investing.
Growth only pays if it is in a business with an economic moat that keeps out the competition and allows that company to dominate its market. It must be able to reinvest capital at rates of return above its cost of capital to deliver value from growth. Otherwise, growth can actually destroy value.
So the first question an investor should ask is if the growth company has a strong economic moat that will keep out the competition. Tesla, for example, I do not believe has an economic moat and is already dropping prices and losing market share due to competition. Investors that have poured money into Tesla will likely regret that decision long term.
The next quesion is if the business with an economic moat is fairly priced. This question is much more difficult to answer. I'm reading a book on it now by Columbia Profession Bruce Greenwald, so I hope to better understand ways to value "growth" companies to ensure that I'm not paying too much.
Until then, I'm happy to stick to tranditional value investing. Last year was a great year for my portfolio since the pandemic helped to drop many companies to attractive prices.
