Path to Value Investing
So I am wanting to eventually work for a value investing fund, but right now I am uncertain on the best path to take. Currently I have been working in sell-side equity research for about two years, and right now most of the positions that are being brought to me are multi-strategy market neutral funds. Right now I am trying to either go directly to a value fund or get my MBA and then go straight to a value fund post MBA. I have not been considering these market neutral multi-strategy funds because to me they seem much different than what I am interested in, but should I change my approach and start considering these jobs as a stepping stone to a true value fund? What do you guys think the best path for me is to eventually make it to a true value investing fund? Any help is much appreciated.
I think you'd be surprised how many of the market-neutral funds operate. Just because they dont carry the "value" label does not mean they like to buy expensive stuff. Also, some focus very much on near-term earnings, but a ton don't. Also, do the value funds you seek buy a stock they think is going to miss earnings and cut guidance next quarter? Market neutrals are no different.
Finally, I'm always bemused by the intellectual superiority complex many of these value guys have. They claim you need to patient, giving ideas 10yrs to work is the key to success etc. Well, if that is true, do you deserve to get paid 2+20 for just asking your investors every year to "be patient"?
Guys at market neutral shops that lose money one year are pissed at themselves and know they're not performing. They feel the urge to turn the ship around. Value guys underperform for 5 years and their excuse is you need to wait until year 10 to get the full picture. Then they light another cigar, while they keep charging their fees. How this charade keeps going on is beyond me.
Unpopular opinion, but a lot of "long-term oriented, value focused" investors just dont like to be held accountable for horrible performance and seek refuge in the everlasting excuse of "need more time".
Completely agree with the above. One other thing that I think is relevant is people (especially the so called value HFs) tend to sorely overlook the importance of risk management. Alpha from my perspective is relatively commoditized - everyone graduates from the same schools, looks at the same names, attends the same conferences. Do you really think your view on some mid/large cap name XYZ is really differentiated from the rest of the street? Probably not.
MMs tend to focus on the risk management side of things much more heavily than any other styles of HF. PMs at MM learn how to manage a portfolio, quantify their risk, and insulate their book from events that you have no control over. IMO that is the main skill needed to succeed in HF. Most people can learn how to pick stocks, how to structure your book to make money from your views is a much rarer skill.
Eh, think this is an over simplified and negative view. I'm not defending under performance; however, if there is a true turn around story that does in fact take a long time (years) to cycle through with ebbs and flows along the way. Should private equity not be paid a management fee while their companies are in the hold period? Likewise, if PE guys where held to the whims of MtM they'd have huge volatility too. If someone never actually has their thesis play out of course that is horrible and they should lose investors. However, harping over quarterly earnings for a long term play is more trading than investing - not that that is wrong, just different.
As an individual who is very interested in value investing and have been reading books on the topic for the past two/three years, I'd say first and foremost, ignore those who say "value" is dead. WSO is not a great site to discuss value, as most people simply do not get it. Value investing is inherently contrarian and it's not an easy place to be in for 99% of the people.
If you study Buffett, Munger, or even Bill Ackman, they always preach that work for someone you admire and that investing is one thing you cannot learn from school. Honestly, in my opinion, an MBA has no value when it comes to pursuing a career in value investing. Even CBS value investing program nowadays does not cut it... you can search on YouTube for a lecture video back in 2006 where Li Lu went back to CBS; pretty interesting that he showed his disappointment during the lecture.
You are exactly the type of person I had in mind. You tie your identity to value investing, it defines who you are. Along the way, peeps like you forgot that the point of the whole game is to make money, not to be 100% pure a certain method, ideology, or cult.
You just can't help mention Buffett, or come up with a Munger quote, etc. Every. Single. Time. You guys forget that we have all read the same books. We know what Buffett stands for. We respect it, but we are pragmatic and open-minded because -again- we are focused on making money.
You didn't answer the question. I think the distinction is we have investing careers and you don't. Therefore we have a realistic view on the industry and aren't college kids in banking that watch CNBC and get off to Berkshire annual reports
The term value investing is a farce. Everyone who trades is a value investor. Do you think high frequency firms buy a stock expecting it to go down and sell stocks expecting them to go up? No they don't. If you buy/sell a stock by definition you think it is undervalued/overvalued currently, no matter how long you hold it for.
All of the evidence has pointed to the so called "value" investors being terrible at assessing the value of securities. Why you would want learn how to assess value from people who clearly don't know how is beyond me.
This post is evidence that most of you guys don’t know what you’re taking about when you refer to value investing. Value investors buy stocks they think are trading below what they are ultimately worth. Whereas many in hedge funds will buy stocks because they think they will go up for different reasons, say this quarter they will beat earnings. The latter can also be done successfully but to say that is value investing is a farce, an investor in that scenario doesn’t give a shit if the company is trading at 5x the intrinsic value, they just care if the company beats earnings and the stock will go up so they can sell out at a profit. Not saying that’s bad, a lot of people make money that way consistently, but not value investing.
This is so wrong it's laughable. You said it yourself "Value investors buy stocks they think are trading below what they are ultimately worth.". Replace "Value" with "All investors" and you will start making sense. Why would anyone buy a stock they think is trading above what it is ultimately worth? Maybe you would because you clearly aren't in the industry.
So if you are a value investor and you buy a "cheap" stock and the next second it goes up to your price target are you just going to keep holding on to it because you are "long-term"? Honestly you probably don't have a price target because you are a value investor. Value investors don't have a monopoly on time horizon. You use the term "Ultimately worth", why do you get to determine what "ultimately" means. Ultimately can easily be 1 week later just as much as it can be 1 year later.
You and "Value investors" think that you are smarter than the market. Sorry to burst your bubble dude but the market determines the price and therefore the value. So no matter how much work you've done determining what the "intrinsic value" (whatever that means) is of a stock, if Mr. market prices it at 5x that value you are still wrong. No amount of crying and blaming the algos/fed/crowding will change that fact. If someone at a MM buys a stock before earnings and it jumped after and they sold, they certainly are better assessors of value than a "value" investor holding onto a losing position for 10 years.
Another rephrase/way of looking at it: I'd argue that value and growth are just screening techniques. Goal is the same for both camps - beat the benchmark. Back in the day, you could find more opportunities in the "value" bucket using the Buffet methodology, but as the market gets more efficient and more markets become winner-take-all, it's hard to make the case for not adapting the approach. Seems like we still have a generation of investors that haven't figured out how to implement that.
I think the most important distinction that Buffet makes is investing vs trading. Not sure what MMPM thinks of this, but from my experience most of the MM PM's in my sector are really research-backed traders (which is incredible if you compare to prop traders - hard to do across a whole book and that's why they're paid so well for good performance). Investors emphasize business models long-term, MM guys spend less (but still a substantial amount of) time on that and more on contrasting those business models + current & expected outlook with their own expectations and finding the gaps that make money over a period of time that justifies upside (I've seen guys take long(er) term bets for bigger upsides mixed in with the fast stuff).
I challenge anyone who drinks value kool-aid to be open minded and read some growth books. Vice-versa with the growth ppl too. Try seeing the overlap. It's grown quite large.
It's like Fox vs MSNBC. Often both sides miss the point.
Don't forget buyside is really just a service that fits a certain need that a pension/endowment will pay you for. That's why MM platforms are arguably most worth their fees - they are pretty consistent in generating a 6-10% return uncorrelated every year like they are supposed to. Can most LO funds say the same? Like MM HFs, they have one job - and it's different (beat a benchmark that does effectively the same thing with as they do without a human) - but they often fail to do it.
Alright.. I felt compelled to comment because I work at once of these long term value shops..
1) we describe the strategy as having a bias towards lower valuations (fcf, EV/ebitda, etc), but if something especially compelling / we can justify it with fundamental analysis, we will look at other opportunities / special situations. Lots of tech stocks were actually very cheap if you view marketing spend as Capex that is flexible in a weak environment... suddenly a lot of these stocks screened cheap at 2-3x sales with normalized/LT fcf earnings power higher than people were willing to give credit for
2) I think long term investing is easier than short term investing, and therefore warrants a lower fee structure inherently. You get paid for alpha, if the certainty of that alpha is lower, then your fees should reflect that uncertainty. Most new/small/good long term guys I think have lower fee structures, high water marks, etc, which make consistent underperformance really hard incentive-wise to catch up from
3) work for someone you admire, if the PM is open minded, he will be flexible to listen to ideas that aren’t “traditional value”. But frankly, the LPs that give money to value-biased investors want them to invest with that mindset for allocation to that when cycles shift (TBD on how this cycle turns out for value). Also If you are a good value investor you tend to try avoiding buying cyclical turds unless they are stupid cheap... some guys haven’t figured this out yet (einhorn)
4) some pod shops do very rigorous fundamental analysis and they take more bets on names with risk parameters and if you are good at that, it’s a perfectly fine way to make a ton of money With theoretically lower risk. However, I have found that some multi PMs are chart readers / macro sentiment traders vs fundamental analysts, which is how you should trade in some sectors. That strategy is really not how I want to invest for my own sanity / I think computers eat away at this over time (maybe I’m wrong on that but that’s my perception)
5) there are lots of value guys in mutual fund land who just aren’t good. Those funds will die, do not work for them just because they are “value focused”. You can get fundamental analysis exposure at larger, more shorter term shops if you can deal with the pressure. You can then move to a long only shop, or an in between (probably best for w/l balance and returns IMO, sure ppl will disagree).
Hope that helps
Why do you want to work for a value fund? The world has changed in the last few decades since your heroes wrote these books that probably influenced you to want to work at a classical value shop.
I know this sounds like a hot take, but the very plain reality is that the work you do at a classical value fund isn’t that valuable for the market anymore.
When Graham and Dodd originally wrote about value investing, it used to be hard to figure out what book value and price was. People didn’t even know this was a real ratio you could calculate. In their books, they act like a P/E ratio is some intense concept, because at the time it basically was. Why was that the case? It’s worth remembering that 10Ks were created along with the SEC in the 1930s, incidentally in the years immediately prior to the publication of Security Analysis (the original bible of “value investing”). Early in the 20th century, you had to go to a library and find the SEC filing. There wasn’t control F or BamSec. For gods sake, you didn’t even have the EDGAR website. You probably got paper cuts and a workout from lugging papers around. The library didn’t have prices of stocks near the study area where you read the filings. To make matters worse, they didn’t have a price feed in the library at all. You didn’t even have a live price feed on your phone or Bloomberg formulas! Can you imagine? You had to call someone to get the price. But wait? You didn’t have a cellphone! So how did you call someone? Shit what a fucking pain. It turns out that the work of calculating a very simple set of ratios was difficult, almost scholarly work given the effort required to find the data. It’s no wonder these value guys did so well long ago - they were doing very valuable, differentiated work!
Eventually, this too stopped working. More people caught on that this strategy was valuable. A service now called “ValueLine” (which some of the value investor heroes now still fondly remember today) started to become popular in the late 1940s, which began to commoditize this type of work. Buffett started with this “cigar butt” value investing but shifted towards finding companies far along the value/quality axis over time. Why did he do this? Well, he tries to make it sound like there was a holy, almost spiritual reason for this. He denigrates these so-called “cigar butts” that were found following the Ben Graham approach, but if you read his work carefully you won’t see him give a clear reason. I suspect he made the shift because buying statistically cheap companies became a commoditized game by the early equity research firms in the latter half of the century. Assessing quality however required you to actually read the 10K, understand the industry, and develop a mosaic of understand how “good” a business was; so he began to focus there instead. Again, it was hard work. Today, I’d argue this too is fairly commoditized. The SEC began to require 13F filings in the mid 1970s; why read a 10K of every big company if you can just guess at the quality companies in the world by copying other quality based investors? It took people awhile to catch onto this, but it commoditized this style of investing over time.
The final blow imo was the popularization of factor investing and style ETFs. Now you can literally buy a basket of statistically cheap companies or statistically high-quality companies. If you thought simple stuff like this worked, it’s really hard to maintain they work today.
Ask yourself - what will work *today*? What’s information that’s hard to get but valuable to know? What information are others looking at and what are they missing? Who is winning and who is losing *today*? This is by no means an easy question, but it’s the important question. It’s the question I spent a lot of time asking myself when I looked for a new job recently.
There is no doubt there will continue to be hold-outs to a style of investing that worked only decades ago. Excess returns in long/short will always have a low t-stat and so skill and (more commonly) reverse skill is difficult to detect. People reliant on non-sense strategies that have no reason to work will continue to clip fees, because the existence of statistical noise allows their LPs to maintain faith. You can work for these charlatans or you can figure out what genuinely is important work to do. The choice is yours.