Value investing, the practice of identifying stocks that are undervalued by the market so as to take advantage of low stock prices before a stock’s value is realized, faced a reckoning on Wall Street recently.
Pioneered by the American investor Benjamin Graham and famously embraced by investors like Warren Buffet, the strategy remains the preferred method for assessing long-term performance, even as some skeptics have noted that it has become increasingly difficult to identify and capture under-valued opportunity as a consequence of the longest-running bull market in history.
But the stock market is not the only place where the principles of value investing apply. There’s another multi-billion-dollar arena where the payoff of a value investing approach is now more clear-cut and urgent than ever: the 2020 US election.
It’s true: Value investing and supporting political campaigns are more similar than many recognize.
The theory behind value investing is to make the most targeted investments that will earn back the best return by identifying undervalued and/or underpriced assets.
And while there are many motivations behind political contributions, the same logic applies: Savvy investors contribute to campaigns and affiliated organizations to try to drive political change while making the best use of limited dollars.
Applying value investment to political contributions
In the context of the 2020 election, the key underpriced “assets” are state legislative races.
While presidential and congressional campaigns dominate the headlines and the fundraising hauls, many political investors systematically miss the critical way state legislatures affect national power in Congress, specifically by blocking the gerrymandering that makes key congressional races impossible to win in the first place.
For Democrats, the failure to address this major “mis-pricing” in the election market has come at significant cost. For most of the past decade, Democrats struggled to win a congressional majority because Republicans controlled the state legislatures that drew congressional district lines—and have been responsible for the most egregious gerrymandering in American history.
Importantly, this distortion of democracy is not driven by state legislatures in all 50 states; there are a handful of states that have been the worst actors. With the US Supreme Court failing to put a limit on partisan gerrymandering earlier this year, the states that have the most at stake in terms of Republican gerrymandering going forward are Texas, Florida, and North Carolina—states with sizable congressional delegations where the GOP today controls every lever of power in the redistricting process.
In each of these states, there is one path to power for Democrats that could transform the power dynamics before redistricting and put a check on the gerrymandering of maps through 2032: winning the state house.
The “intrinsic value” of competitive state house seats in Texas, Florida, and North Carolina is extremely high. Beyond the impact they have on policy ranging from healthcare to environmental regulations and gun control, they also draw district lines for congressional delegations that are expected to grow to more than 80 seats.
While funding the congressional battlefield to compete for the majority can cost more than $1billion, winning the state houses in this handful of states requires much less funding
A high-impact portfolio
When we estimate the cost of funding a competitive campaign in these districts, the average “price” of these state house elections is just around $500,000 in both hard-side direct to candidate contributions and soft-side independent expenditure programs. This estimate is a bottom-up campaign budget built to ensure all voters in a district have the chance to hear messages and learn about the Democratic challenger in districts that, in some cases, hadn’t seen a competitive campaign in decades prior to 2018.
More broadly, this cost across a portfolio of 60 or so competitive races, to compete aggressively and win a Democratic majority in state legislatures across Texas, Florida, and North Carolina, would be roughly $30 million—a tiny fraction of the $488 million spent in 2012, when Democrats won more than 1.4 million votes cast for congressional candidates nationwide. But Republicans’ gerrymander held and they maintained a 33-seat majority.
In fact, it took Democrats ploughing $1.1billion to congressional races, a historic wave year—and a decade of legal challenges—to overcome Republican gerrymandering and win the US House in 2018.
Of course, money alone is never enough to win elections. Paramount among other factors are the electoral fundamentals: Is the Democratic vote already fairly close and is there opportunity for growth? Based on our analysis the answer is a resounding yes in all three states.
In Texas, Democratic performance has been improving consistently for over a decade and shows strong signs of additional long-term growth potential. Democrats flipped 12 seats in the state house in 2018 and came close but lost in an additional 17. In fact, Beto O’Rourke, although he lost his statewide race for US Senate, actually won in a majority of Texas state house districts.
But these highly competitive Texas state house races were also severely underfunded. On average the Democratic candidates raised less than $100,000 (far short of the $500,000 we estimate is needed). In every single close-loss district noted above, the Democrat was out-raised by the Republican on average by 9:1. In several cases, this Republican fundraising advantage exceeded 20:1.
Imagine how competitive these races would be if the Democrat were only funded at parity with their opponents. These state legislative contests offer outsized impact and are currently trading at a deep discount.
In summary: While the future of value investing is being hashed out in the financial markets, we could benefit immensely from applying this market strategy to our own political market.
With the same dollars spent, investors can make marginal investments in funding the billion dollar congressional battlefield to successfully compete for a majority in the US House, or invest in a portfolio of under-valued state house races and affect Democrats’ ability to have a fair shot at winning a congressional majority for the next decade.
We call that good value investing.