Investing teaching is obsolete?
Anyone feel the investing habits taught in undergrad/MBA and online are now less relevant and often counterproductive? Things like focus on quality, valuation, earnings, and cash flow quality, hold contrarian views, don't chase the hottest fads, and don't extrapolate near term results?
Quality/valuation doesn't really drive returns, sure 10x P/E is cheap but that can go to 5x P/E while another company goes from 20x P/E to 30x.
What moves stocks is earnings/catalyst revisions/ETF and retail flows.
Contrarian is actually bad because momentum goes against you and you get stopped out. e.g if you short AI thinking overhyped, you would have gotten killed
Don't chase hottest themes is horrible advice. Look at AI, ozempic, EVs the list goes on. Best stocks have been NVDA, LLY, TSLA last few years.
These are very valid thoughts. I've talked to many quants and one recurring theme that many pass around, is smtg along the lines of 'a backtest can make 10 years feel like a minute'.
What does that mean?
It means that what works on average, and in theory, can be horribly difficult to actually implement. Yea, you know that this strat will work out in 10 years, but guess what - you have to stick with it day by day, with LPs shouting at you every day when the market gyrates. Our hindsight bias also tricks us to think that holding a thoughtful strat is easy, just stick with it diligently, right? But we forget that risk is truly the price of return - it's the fact that investing habits in undergrad are so hard to stick with, that they're not arbed away. Even God would get fired as an active manager.
So, thoughtful disciplined investors will always have to fight the massive temptation to not chase fads etc. Because they will always seem like terrible advice in the short run. But we've seen that finance progresses cyclically - investors have been ruined by the same things for centuries
IMO, in broadly general terms, the abstract purpose is learning various methods of reasoning that can influence your perception or judgment of opportunities. The manifestation of these opportunities and the nature of their technical mechanics is subject to time just as financial market structures have changed over time. This isn't something exclusive to finance and you can/should apply the concept to most subjects.
It’s like the difference between learning to read/write English vs composing a novel. For fundamental mandates (even growth etc) you need to know how to work with the information, but what to do with the info changes over time and from person to person
I don’t think it is irrelevant or anything like that (it never accurately explained prices anyways) but I think this is a fairly standard “what is taught in school is not the same as what you actually do” thing. Like all those different methods and considerations that are part of that fundamental analysis is valid but it is mostly a question of utility. Just because something is internally valid doesn’t mean it is applicable to reality.
Look at neoclassical economics (and its derivatives). Neoclassical economics is internally consistent. It is a valid theory. But it is not descriptively valid. It does not accurately explain the world as it assumes things, it required things to be true, that just are not always true. Reality doesn’t work the way neoclassical economics says it does.
This is similar to fundamental analysis in investing. Fundamental analysis is internally consistent. It is internally valid. But fundamental analysis assumes things that are not necessarily true with the main problem being that price isn’t determined by any of type of fundamental analysis. It is just determined by what dollar value causes a transaction to occur. That’s it. That’s the one thing that determines price.
But it is useful to know why someone is willing to buy/sell at a given price. Just because that is what determines price doesn’t mean that you shouldn’t ask why at that price are the two parties willing to transact. Trading determines the what but there is always a benefit to understanding the why and for a large number of trades, the why is fundamental analysis
Relevant to your point on the short comings of fundamental analysis is George Soros’ theory of reflexivity.
Bump. Great insights here
Seems the best way to make money is not to be too smart. If market thinks a certain way better to follow it (see AI) than try to be “contrarian” and lose money.
For example, investing in Microsoft is safe because the market prefers it to some “value” investment that looks good on paper based on capital return but cannot attract hedge fund flows, so is actually more risky and volatile. Agree?
This heavily depends on your time horizon / how well you think you can time your trades. CVNA, PTON, and ZM were COVID darlings but if you held too long into 2021 you got your face ripped off. You raise some valid criticisms of the fundamental analysis we learn in school, but I don't think the takeaway should be, "Screw thoughtful analysis just go with whatever's hot." Different asses class but that's what VCs have done over the past few years and their performance in the '20 and '21 vintages is going to be abysmal.
FWIW I think the right takeaway is, "The world is orders of magnitude more complicated than any model we learn in school. Use the underlying principles of what we learn, sure, but don't be dogmatically married to them. Figure out what your edge in investing is (e.g., quant edge, sourcing edge, analysis edge, etc.) and develop a strategy around that. Constantly use feedback from the market to adjust your strategy over time."
Bump - NVDA earnings shows how true this post was in hindsight?
Jensen is the GOAT CEO
Those are the fundamentals are its important to master those and note lose sight of those for the immediate secular rally's. Yes, you can still play those themes, but in the back of your mind you should be things you mentioned because in the longer-term they will matter. To use a current example, cyber security is a huge theme that has done very well. PANW just shit the bed with their latest print. Someone who fully understands the characteristics you cited "quality, valuation, earnings, and cash flow quality", would have been able to see that things were deteriorating and at the least reduced their position before the stock was down ~30%.
Was not involved in PANW, but cyber industry commentary and checks beforehand were not indicating a big deterioration from the limited amount I saw. Maybe something in the model was more clear, and while I get that a digestion period was probably due, nailing that for this Q seems like it would've been a very very out of consensus call. Also difficult to tell what is going on here, as "bundling" makes sense, but the billings slow down and timing effects really shouldn't be that impactful - is this truly just timing? Companies who can't maintain pricing power and have the need for constant innovation get hit hard when cycles break. Not saying PANW fits that bill, and cyber is its own can of worms here given how quickly threats/priorities change in the end market... anyways, just some thoughts...
IMO it was more about the commentary from mgmt. last Q, which you were getting at with the billings slow down. last Q mgmt. said they "extended payment terms with clients and moved them from multi-year contracts to annual". That's a screaming of weakening customer demand (and the implications that go along with that; you mentioned pricing power) and no to mention cash flow negative for PANW and positive for customers. This was while mgmt. said demand is still as strong as ever. Then you couple that possibility of a below consensus guide for the next couple of Q's with a stock that was reaching its upper historical valuation range and the fact that it's a consensus long like you mentioned, you get a good recipe for a semi-thesis changing face ripping sell off, which is what we saw.
The issue is that even with the drop PANW has crushed "cheap"/value stocks last five years. Buying PANW on the momentum would have worked on any time horizon outside of the last month.
The amount of people that don’t understand how securities are valued is mind boggling
There’s a saying: “those that can’t do: teach”
Academics know how to teach you high level concepts but are terrible forecasters, that’s why many MBAs are in middle office/risk roles, they’re great at assessing and attributing risk factors and explaining why you made or lost money, but have little clue how to bet/size bets, and where to allocate capital for future expectancy (news break: the Fama/French model hasn’t worked for decades now). If academics were amazing forecasters then they would be doing it for themselves to make8/9/10 figures and not sharing their secrets with every student who walks through their door.
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