The Value Investor’s Lament: There are No Undiscovered Gems in the Stock Market Anymore

Megan McArdle makes a very good point about the problems that Warren Buffett’s successor is going to have in trying to emulate the legendary investor’s success:

I doubt, however, that that will be enough to reproduce–or extend–Buffett’s success. The lure of value investing is that all you need is common sense, hard work, and the courage to resist your own greed, but in fact, Buffett’s intelligence is really singular. Reading his thoughts on the bubble in 1999, your’e struck not merely by his courage in naming the bubble, but his ability to crystallize such an incisive critique of the prevailing zeitgeist. Moreover, the kinds of stock values that made Buffett rich are thin on the ground these days–the proliferation of screening tools, and other sorts of company information, means that few people are able to make money simply by identifying “hidden gems”. Buffett has survived through a combination of unique vision, good management, and the magical effect of the Buffett name on the investments he does choose to make. It’s going to be hard to impart that to a successor.

Buffett’s success in finding undiscovered gems is a sort of repudiation of efficient market theory: Buffett made his billions finding stocks that the market hated, which is one way of saying that the market did not price assets efficiently. But, as with many other things, technology has wrought change: the amount of information available to investors dwarfs that available to the value investor of the 1960s and 1970s. Therefore, securities that were once looked down upon, and which had low valuations, have all but disappeared over the past twenty years. As computing power continues to increase, there is no reason to think that undiscovered gems will crop up much in developed markets. (They may appear in developing markets, though I would doubt that.)