Written by Brian Cubellis

Compilation: Block unicorn

The Origin of Value Investing

The emergence of the 'value investing' concept in the late 1920s was not accidental. This school of thought, pioneered by Benjamin Graham and David Dodd at Columbia Business School (CBS), was largely a response to the unrestrained financial frenzy that triggered the 1929 Wall Street stock market crash and ultimately led to the Great Depression. The prosperous 1920s were a period of post-war optimism, rapid industrial growth, urban expansion, and technological progress. These transformative social changes were to some extent catalyzed by the increasingly financialized economy and stock market participation. As companies flourished and ordinary people experienced unprecedented prosperity, the belief that 'stocks will only rise' firmly took root in the public consciousness.

Of course, this trajectory driven by loose monetary conditions and excessive leverage is unsustainable. In addition, the lack of regulation and standardized corporate financial statements makes it difficult for most investors to implement disciplined investment strategies. Insider trading is legal, and deceptive accounting practices are not restrained, making it extremely difficult to judge whether a stock is a wise investment. Therefore, the dominant investment approach at the time was essentially speculative and driven by herd mentality, ultimately leading to a severely overvalued market and a stunning collapse.

Graham – considered the father of value investing, witnessed first-hand this turbulent period, suffering heavy losses during the Great Depression, which prompted him to rethink his approach to investing from the ground up. Along the way, he creates a detailed framework for determining the true or Intrinsic value of a stock through fundamental research and analysis. Value investing is very different from the speculative bubble that prevailed in the 20s, and it is based on the idea that the market liquidation price of a particular asset does not always indicate its true underlying value. Instead, Graham sees the market as a volatile pricing mechanism driven by investor sentiment, a concept that is embodied in his famous analogy, which he likens to an investor's business partner, known as "Mr. Market," who is willing to buy and sell company shares at different prices every day, depending on his mood. In other words, the market is a short-term voting machine, but it is also a long-term weighing machine.

"The job of the market is to provide you with prices; your job is to decide whether it is advantageous for you to take action." - Benjamin Graham, "The Intelligent Investor" (1949)

Developing Framework

In short, value investing is buying something at a price that is lower than its actual value. Since Graham's initial thoughts, this fundamental concept has become a core belief in the professional investment community for nearly a century. His teachings have inspired people like Warren Buffett, who was Graham's student at Columbia Business School in the early 1950s and later created one of the most brilliant records in investment management history. However, over time, the elements of the value investing framework have evolved and adapted to the ever-changing financial landscape. For example, Buffett's value investing approach gives priority to more qualitative factors, rather than just the quantitative indicators that Graham relied on, such as competitive barriers, entry barriers, and excellent management.

All of these principles are rooted in long-term fundamentals and are most commonly applied in the traditional stock space. However, it is worth considering how these principles apply to newer asset classes. While Bitcoin is not a traditional security, it is a compelling case study that can be analyzed within this framework. By understanding the underlying support of the asset and the potential development trajectory of the network, there is ample reason to suggest that Bitcoin represents a significantly undervalued investment opportunity, and its investment thesis may be understood through the lens of value investing.

Application of Value Investment Framework in Bitcoin Investment Arguments

We believe that long-term holding of Bitcoin represents a modern and rational interpretation of value investing. Although this may go against intuition for some, many fundamental elements of value investing can be directly applied to investment cases for Bitcoin. Let's explore how the concept of value investing aligns deeply with the arguments for Bitcoin:

(1) Long-term investment perspective: Value investment requires investors to be able to ignore volatility and be willing to wait for the market to recognize the true value of the asset. The best investments are those that can be held indefinitely. Within the value investment framework, the significant volatility in the history of Bitcoin should not be seen as a risk, but as an opportunity that can be seized by maintaining a long-term investment perspective and shielding short-term noise.

"The stock market is designed to transfer money from the active to the patient."..."Uncertainty is actually the friend of long-term value buyers." - Warren Buffett

(2) Reverse thinking: Going with the flow and chasing performance goes against the concept of value investing. Instead, investment decisions should be made based on first principles and by identifying information asymmetry. The general misunderstanding and lack of knowledge about Bitcoin (and our existing monetary system) have kept it in a position of contrarian investment.

“It is always easiest to go with the flow; but sometimes, it takes great courage and conviction to stand out. However, distancing oneself from the crowd is an essential component of long-term investment success.” - Seth Klarman

(3) The power of compound interest: The concept of compound interest in value investing is similar to a snowball rolling down a hill; with time and patience, small returns can accumulate and multiply the value of the investment. It is important to recognize that this mathematical concept can also be applied to the hidden devaluation of currency - understanding that inflation erodes purchasing power slowly and discreetly is key to understanding the value proposition of Bitcoin.

"It is obvious that a small change of a few percentage points will have a huge impact on the success of compound interest (investment) plans. Equally obvious is that this impact will become increasingly significant over time." - Warren Buffett

(4) Comfort in concentrated investment: In value investing, a non-traditional concept is that investors should embrace concentrated investment rather than accepting the common notion that portfolio diversification is critical. When investors truly understand the intrinsic value of an asset, they should adjust their investment size based on this conviction, even if it leads to a more concentrated portfolio. In the context of Bitcoin, a deep understanding of the technology, its unique properties as a digital store of value, and its overall adoption trajectory may lead to extraordinary investment opportunities.

"Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing." - Warren Buffett

(5) Excellent Management: The core principle of value investing is the excellence and integrity of the company's management team. Investors should pay close attention to the leadership to ensure that the stewards of their capital are both capable and trustworthy. When compared to Bitcoin, an interesting similarity emerges. The foundation of Bitcoin is not a tangible management team, but carefully crafted code and an unchangeable monetary policy. Trust is not built on fallible individuals, but on the absolute mathematical principles of the management protocol. Therefore, the attractiveness of Bitcoin in the field of 'excellent management' lies in its lack of human intervention, providing investors with a transparent and predictable financial instrument.

"Modern life creates successful bureaucracy, and successful bureaucracy breeds failure and stupidity." - Charlie Munger

(6) Competitive barriers and entry barriers: Value investment attaches great importance to competitive advantages, ensuring that companies maintain their advantages and maintain their position in the market. The origin of Bitcoin is often referred to as the 'flawless concept', representing a profound first-mover advantage in creating digital scarcity. The continuously growing network effect of Bitcoin, coupled with its unparalleled degree of decentralization, supports its dominant position in the market. Therefore, any attempt to replicate or introduce new entrants with similar digital scarcity will face insurmountable barriers, reinforcing Bitcoin's claim to intrinsic value.

"The key to investing is not assessing how much an industry will affect society, or how much it will rise, but rather determining the competitive advantage of any given company, and, above all, the durability of that advantage." - Warren Buffett

Value investment is not yet extinct

Just as the mainstream media has often declared "Bitcoin is dead" in its history, "value investing is dead" has been declared countless times over the past few decades. Indeed, the slogan "rise at all costs" has dominated markets in the 21st century, and the ongoing shift from "active" to "passive" index investing has also played a major role in the perception that value investing is ineffective, as the stock market's performance is increasingly concentrated in a handful of large cap growth stocks. That being said, value investing will always fall out of favor to some extent due to the behavioral tendencies of humans to chase performance.

“Value investing is not appealing to the masses. If it were appealing to the masses, you’d never get a bargain.” - Howard Marks

In addition, over the past few decades, the continuous devaluation caused by currency printing and the artificial reduction of capital costs have been one of the reasons why growth stocks are favored over value stocks. However, despite the fact that the performance of the "value-oriented" strategy in the stock market is lower than that of the "growth-oriented" strategy, the fundamental principles of value investing have eternal value. Value investing represents the ability to foresee future growth before the asset's financial situation is evident or the market realizes its true potential value.

"When the gap between reality and perception becomes large, opportunities arise." - François Rochon

Just like Bitcoin, value investments will never disappear. They may be unpopular for a long time, but there is asymmetric opportunity for investors who are willing to make an effort to understand the full potential value of digital natives, energy support, encryption security, open source, fair distribution, and scarce commodities. Benjamin Graham, Warren Buffett, and many of their disciples may not realize this yet, but they have provided a useful toolkit for understanding the investment case for Bitcoin.