What we mean by value
The term “value” often describes approaches that have little in common with how we invest at Harris | Oakmark. One version of value investing amounts to sorting companies by price-to-book ratios, buying the cheap half and waiting for mean reversion. It’s systematic, backward-looking and increasingly difficult to execute well. That’s not what we do.
Our definition is simpler and, we’d argue, more durable. We believe value investing is trying to get a lot more than you pay for. It starts with understanding a business as an owner would: its competitive position, cash flow dynamics, and how the industry is likely to evolve. From there, we estimate what the business is worth and buy only when the stock trades at a meaningful discount. At Harris | Oakmark, that typically means roughly two-thirds of our intrinsic value estimate.
Our time horizon is usually five to seven years. We ask what the business should be worth then and whether today’s price gives us enough upside to compensate for the uncertainty.
That forward view matters. Value and growth are not opposites; growth is one input into value. The biggest practical difference between us and a long-horizon growth manager is that we are less willing to pay for forecasts far into the future. We are skeptical of our ability to forecast 15 years out with confidence. Knowing the limits of our foresight keeps us grounded in what we can reasonably underwrite.
Why growth stocks outperformed value
Something important gets lost in the narrative: Value investing has not failed. Over the past decade, value strategies returned roughly 10% to 11% annually. That’s well ahead of inflation and, for most investors, sufficient to help meet their financial goals. The bigger story is that growth did something remarkable, which warrants a fundamental explanation.
We went back to 2019 and compared consensus expectations for 2026 earnings of the Mag 7 with what each company is now on track to report. On average, 2026 earnings are expected to be twice what analysts estimated seven years ago.
That was not just multiple expansion. Fundamentals improved far more than expected, and forward growth expectations moved higher. These businesses executed at a level that exceeded what most thought possible for companies of their size.
Extraordinary business performance should produce extraordinary stock performance. In hindsight, the market was directionally right. The question now is whether today’s expectations are again too low or investors are paying too much for extrapolation.
S&P 500® concentration risk
Value investing has long been built around a simple phrase that requires intellectual discipline: Trees don’t grow to the sky. For most of business history, high growth attracted competition, margins compressed and the exceptional became ordinary. Regression to the mean was one of the market’s most reliable forces.
Much of the market assumes several of the largest companies in history can keep growing rapidly from enormous bases. That may be right, as their competitive positions are exceptional. But the assumption is demanding. Investors should also look carefully at what they own through the S&P 500®. What was once a broad representation of the U.S. economy has effectively become a concentrated technology growth fund. An investor who views the index as a balanced, moderate-risk equity portfolio may be taking on more concentrated growth exposure than intended.
Consider the Australian market, historically dominated by metals and mining. There, indexing meant accepting significant sector concentration, and few advisors would have called that a complete equity portfolio. Indexing has never been one-size-fits-all; rather, it depends on what the index owns. Today’s U.S. market raises the same question.
Intrinsic value beyond GAAP
We don’t believe anyone can say a business is worth exactly $80.42. That precision provides false comfort. We form a reasonable range and require a substantial discount before acting. The imprecision is a reason to demand a larger margin of safety, not abandon the framework.
Our estimate of value has had to evolve because accounting has not kept up with the economy. GAAP prizes conservatism: If you can’t touch or feel an asset, you value it at zero. That made sense in an industrial economy where much of a company’s value resided in physical plant and equipment. It makes less sense when valuable assets such as brand equity, global networks, customer relationships and proprietary software appear nowhere on the balance sheet.
The Netflix* example is instructive. When we invested, Netflix looked absurdly expensive by GAAP metrics, trading near 200 times earnings with almost no book value. But the economics looked different on a subscriber basis. HBO subscribers were valued at roughly $800 each, while Netflix’s implied subscriber value was closer to $200. Netflix was adding subscribers rapidly, and those subscribers had long, predictable lifetime values. GAAP immediately expensed customer acquisition costs that we believed created value over many years. On an economic basis, we believed Netflix traded closer to four times earnings, a substantial discount to intrinsic value.
That’s not creative accounting. It’s an effort to understand what a business is worth to an owner rather than defer to accounting rules designed for a different economy.
Why value investing matters now
Several factors support the case for value investing today:
- A wide valuation gap: The gap between growth and value stocks remains historically wide, leaving value businesses purchased below intrinsic value well positioned if expectations normalize.
- Unintended growth concentration: As the S&P 500® has moved further into growth territory, investors who pair the index with dedicated growth managers may hold more growth exposure than they realize.
- New business models: Successful value managers must understand innovation and disruption, including artificial intelligence's impact on software economics and the evolution of platform businesses, rather than retreat into familiar industries.
Value investing, properly understood, has never been about an industry, a price-to-book ratio or inclusion in a particular index. It has always been about understanding what a business is worth and having the discipline to pay meaningfully less.
Over the past 15 years, that discipline evolved to look forward, value intangible assets and consider a broader range of businesses. We believe the next 15 years will show that this discipline, practiced with rigor and intellectual honesty, remains as relevant as ever.
