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This dynamic often results in a winner-take-most competitive structure, which is different than the environment historically encountered in industries focused on physical assets. Once a company gains a lead online, it can grow very rapidly and expand its competitive advantage over peers, leading to more persistently high returns on capital and larger market shares than the market leaders of the past. Intrinsic Value Investing Despite the shifts in the economy and competitive landscapes, we do not believe value investing in its broadest, philosophical sense has been undermined.

Buying an ownership interest in a business for less than what it is worth and patiently waiting for value to be realized is still a very logical strategy that should continue to work. But it requires an intellectual evolution in understanding how value is created as the economy changes, along with diligent work analyzing competitive dynamics. Simply buying stocks with low price-to-book or price-to-earnings ratios is not sufficient. At Diamond Hill, we prefer to call ourselves intrinsic value investors.

This is more specific about where we believe value comes from: the core competencies of a business and the future cash flows those competencies allow it to produce. This process results in a wider universe of businesses to consider for investment—beyond just stocks trading at low multiples—and positions us very well to adapt to, and capitalize on, changes in the global economy.

We sometimes find value in slow-growing, undervalued businesses with stable competitive positions that happen to trade at low multiples of earnings or book value. In other cases, our search for value leads us toward high-quality, growing businesses whose future prospects are underappreciated.

In other words, our portfolios are composed not only of what most investors consider value stocks, but also some that are typically considered growth stocks. To us, every position represents value. In fact, we believe the distinction between the two is a false one—growth is a component of value. Take Alphabet—it has never traded at an optically low multiple of earnings or book value, which has likely made it off-limits for many value investors.

While the market was focused on the potential near-term negative impact, we viewed it as an opportunity to start a position at an attractive price. We looked at the quality of the business and the predictability of its long-term growth, and we became confident we were getting more value in the form of that growing cash flow stream than what we had to pay to acquire the shares. Alphabet was a growth company that offered a lot of value. Our purchase of Facebook in early was similar, when the shares traded at an unusually low valuation due to concerns around the Cambridge Analytica scandal.

We had been following the business for several years and liked it very much, but never had the opportunity to buy shares at an attractive enough valuation. After spending a significant amount of time evaluating the potential impact of privacy concerns on user engagement, we believed the long-term impact would be limited. That reinforced our belief in the strength of its network economics and gave us the opportunity to start a position at an attractive discount to what we thought the business was worth.

When evaluating businesses like these that are redeploying large amounts of capital, developing the conviction to project sustainably high levels of growth is difficult. Price Matters, A Lot A key difference between competitively advantaged growth companies and many cheaper value companies is that the growth companies have runway to reinvest significant amounts of capital at high returns.

They should trade at higher valuations than low-growth value stocks, but it does not mean that one can expect an attractive return regardless of the price paid. Investors who bought Coca-Cola shares in had to wait nearly twenty years to regain price levels at purchase.

Value companies can be fantastic investments provided that competitive dynamics are relatively stable and incremental returns on capital are sufficient. The recent environment favoring growth above all else has likely created opportunities in more traditional value stocks for investors who are able to properly evaluate the challenging competitive circumstances many businesses currently face. There are many firms in the financials or industrials sectors, for example, that have tangible assets, operate in stable competitive environments, and trade at low valuations.

We believe the attractive prices these shares trade at more than compensate for a lack of growth or innovation, creating attractive investment opportunities. Value Investing Is Alive and Well We are not particularly concerned if a stock is classified as growth or value. But for many businesses, the competitive environment that will help determine those future fundamentals is very different than it has been in the past.

Value investing is not dead—quite the contrary—but as the economy evolves, the way in which value is measured should evolve with it. The views expressed are those of the author s as of July and are subject to change without notice.

These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Investing involves risk, including the possible loss of principal. Herd behavior, imperfect information and plain-old investor irrationality create inefficiencies across markets, among asset classes, and over time. Value Investor Insight helps identify these inefficiencies and tells you how to profit from them.

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