Is value investing dead?

The WSJ article, "Investors Finding Little Value in Value Stocks, So Watch for the Rebound," states the following:

The U.S. stock market is showing the biggest divergence between cheap and pricey stocks since the aftermath of the dot-com bubble, as investors chase the performance of companies with rising earnings.

Valuation of growth companies-those able to show rising earnings, typically priced at a premium-have soared this year even as price/earnings ratios of cheap, so-called "value" stocks slid, an unusual separation.

Growth and value stocks in the U.S. returned the same from the start of the post-Lehman recovery in 2009 until January this year, thanks to a surge in cheap stocks after the U.S. election a year ago. Since then, the 19 percentage-point outperformance of growth stocks is the most in such a short period aside from the last year of the dot-com bubble....


A New Era?

This year's divergence suggests investors are starting to bet on a new era, that new technologies will disrupt business plans. A firm belief in a modern age of technology has been behind many historical bubbles, from the canal mania of 18th-century Britain to the brief over excitement about 3-D printing in 2014. I do believe in the new era where new technologies will transform industries, but I do not think the growth in earnings projected for the growth companies is sustainable, and that over-hyped stocks will get too expensive while cheap stocks will get too cheap due to investor sentiment. It will get to a point where you have a value gap that is so extreme that quite often that can act as a catalyst for the value stocks (cheap stocks) to rebound by itself. The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.

Why Projected Earnings For Certain Companies Are Unsustainable

Here is why I think the projected earnings for certain growth companies are unsustainable:

The faster these companies grew, the more expensive their stocks became. And when stocks grow faster than companies, investors always end up sorry. Growth stocks are worth buying when their prices are reasonable, but when their price/earnings ratios go much above 25 or 30, the odds get ugly.

  • Journalist Carol Loomis found that from 1960 through 1999, only eight of the largest 150 companies on the Fortune 500 list managed to raise their earnings by an annual average of at least 15% for two decades.
  • Looking at 5 decades of data, the research firm of Sanford C. Bernstein & Co. showed that only 10% of large U.S. companies had increased their earnings by 20% for at least 5 consecutive years; only 3% had grown by 20% for at least 10 years straight; and not a single one had done it for 15 years in a row.
  • An academic study of thousands of U.S. stock from 1951 through 1998 found that over all 10-year periods, net earnings grew by an average of 9.7% annually. But for the biggest 20% of companies, earnings grew by an annual average of just 9.3%.

Why I Think Putting All Eggs In One Basket Isn't The Way To Go

The intelligent investor, however, gets interested in big growth stocks not when they are at their most popular-but when something goes wrong.

Also, obvious prospects for physical growth in a business do not translate into obvious profits for investors. While it seems easy to foresee which industry will grow the fastest, that foresight has no real value if most other investors are already expecting the same thing. By the time everyone decides that a given industry is "obviously" the best one to invest in, the prices of its stocks have been bid up so high that its future returns have nowhere to go but down.

The majority of companies have come to follow what may be called a standard dividend policy. This has meant the distribution of two-thirds of their average earnings, except that in the recent period of high profits and inflationary demands for more capital the figure has tended to be lower. However, an increasing number of growth companies are departing from the once-standard policy of paying out 60% or more of earnings in dividends.

On The Other Hand

Having said that, Charlie Munger would rather pay a fair price for a quality company than a cheap price for a stinker.

Questions

Is value investing dead? Do you think the earnings projections for certain growth stocks are on the wild side? What growth stocks are you bullish on, monkeys?

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Comments (104)

Nov 30, 2017

this kinda stuff ebbs and flows over time. people called warren Buffett a has-been in the late 90s. weakness in financials and energy has really hurt the space, but they will have their time to shine eventually.

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Nov 30, 2017

I like your signature quotes. Are you a follower of the Graham investment philosophy?

Nov 30, 2017

indeed i am

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Nov 30, 2017

Hoping to get your thoughts on Bitcoin. Is it in a bubble?

Dec 3, 2017

Are you Katy Perry?

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Dec 3, 2017

Nope, and who are you actually?

Dec 3, 2017
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Dec 3, 2017

How did you get to make friends with famous people and date a model?

Dec 4, 2017

And a post stalker....

Long story. Short version, entrepreneurship --> unique friend's circle --> expanded to include famous people (or rather, they included me) --> M&B.

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Dec 1, 2017

Warren Buffett's desired holding period is "forever." He definitely comes across as a curmudgeon at times, but returns don't lie and the man is in the HOF for his lifetime of returns.

I hate the dichotomy of value vs. growth companies.

Hard to fairly evaluate anyone's returns over the 10-year period starting with the beginnings of a financial crisis and ending with a rip into new ATHs for Dow S&P NASDAQ.

2c.

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Dec 1, 2017

"Listen, there's the thing. If you can't spot the sucker in the first half hour at the table, then you are the sucker."

Another great Warren Buffett quote!

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Dec 2, 2017
Passionate Investor:

"Listen, there's the thing. If you can't spot the sucker in the first half hour at the table, then you are the sucker."

Another great Warren Buffett quote!

Pretty sure it was "patsy," not sucker. And this is Ben Graham, not WB.

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Dec 4, 2017

Ah yes, the art of getting to a desolate town, buying all that is of value, and waiting for the sheep to arrive and out bid each other over the scarce resource before they sell off and move on to the next fad.

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Dec 4, 2017

I'm of the absolute opposite opinion; the time for value investing has never been better. Let me explain.

With the prevalence of high frequency trading, algorithmic trading, technical analysis, sensational media and unedited unreliable information, the opportunity for a company to not correlate with its intrinsic value is very high - especially in emerging economies and the private equity marketplace. Not to mention the lack of original research, it all comes from the same places... I interned for a $13B fund abroad that outsources all their research to JP Morgan ... if everyone is using similar research that can't be good.

I know this example I'm about to provide is not statistically relevant but I'm sure it's applicable to others. I'm interning right now for a BB pwm group that has close to 100 million in AUM. All these guys do is stare at technicals all day, no independent research, no reading, just some book called the technical analysis encyclopedia and Investor's Business Daily.

If you think "value investing" will ever die you don't really understand what it is. I put value investing in quotes because it's not really value investing, it's more of a value/growth hybrid. There will always be times when market sentiment is too optimistic or too pessimistic.

Or a simpler argument, value investing will always be de facto "alive" as long as bubbles exist.

Dec 4, 2017
New Yorker:

I'm of the absolute opposite opinion; the time for value investing has never been better. Let me explain.

With the prevalence of high frequency trading, algorithmic trading, technical analysis, sensational media and unedited unreliable information, the opportunity for a company to not correlate with its intrinsic value is very high - especially in emerging economies and the private equity marketplace. Not to mention the lack of original research, it all comes from the same places... I interned for a $13B fund abroad that outsources all their research to JP Morgan ... if everyone is using similar research that can't be good.

I know this example I'm about to provide is not statistically relevant but I'm sure it's applicable to others. I'm interning right now for a BB pwm group that has close to 100 million in AUM. All these guys do is stare at technicals all day, no independent research, no reading, just some book called the technical analysis encyclopedia and Investor's Business Daily.

If you think "value investing" will ever die you don't really understand what it is. I put value investing in quotes because it's not really value investing, it's more of a value/growth hybrid. There will always be times when market sentiment is too optimistic or too pessimistic.

Or a simpler argument, value investing will always be de facto "alive" as long as bubbles exist.

And that is how Big Meech Capital is the next LTCM.

Value investing is not dead it is just not a good time to concentrate on value when everyone else is in GROWTH right now.

@ SQUIRTZ: I completely agree with your post my computer science lil geek.

@ NEW YORKER: Pretty sad that you went from $13 billion dollar fund to a $100 million PWM group, I wouldnt even be proud of posting such a disgrace, that's like saying you went from RENTECH to UBS wealth management.

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Dec 4, 2017
barboon:
New Yorker:

I'm of the absolute opposite opinion; the time for value investing has never been better. Let me explain.

With the prevalence of high frequency trading, algorithmic trading, technical analysis, sensational media and unedited unreliable information, the opportunity for a company to not correlate with its intrinsic value is very high - especially in emerging economies and the private equity marketplace. Not to mention the lack of original research, it all comes from the same places... I interned for a $13B fund abroad that outsources all their research to JP Morgan ... if everyone is using similar research that can't be good.

I know this example I'm about to provide is not statistically relevant but I'm sure it's applicable to others. I'm interning right now for a BB pwm group that has close to 100 million in AUM. All these guys do is stare at technicals all day, no independent research, no reading, just some book called the technical analysis encyclopedia and Investor's Business Daily.

If you think "value investing" will ever die you don't really understand what it is. I put value investing in quotes because it's not really value investing, it's more of a value/growth hybrid. There will always be times when market sentiment is too optimistic or too pessimistic.

Or a simpler argument, value investing will always be de facto "alive" as long as bubbles exist.

And that is how Big Meech Capital is the next LTCM.

Value investing is not dead it is just not a good time to concentrate on value when everyone else is in GROWTH right now.

@ SQUIRTZ: I completely agree with your post my computer science lil geek.

@ NEW YORKER: Pretty sad that you went from $13 billion dollar fund to a $100 million PWM group, I wouldnt even be proud of posting such a disgrace, that's like saying you went from RENTECH to UBS wealth management.

huggles

Dec 4, 2017

Get real ever since the recession + flash crash + mortage mess + bp spill + QE1 + QE2 investing is all about paying attention to head lines/ what will curency X do/ what policies will X pass/ who will win X election / what regulations are coming for X industries/ I should short X bc of populist rage such as cnn msnbc fox news etc

for example take a look at DJI yearly april 26 2010 11205 >>> july 02 2010 9685 >> October 29 2010 11,118.49

13% down then 13% up in a year time period many other indexes the same the days of buy and hold then forget for 2 years and come back are over.

Dec 4, 2017
squirtlez:

Get real ever since the recession + flash crash + mortage mess + bp spill + QE1 + QE2 investing is all about paying attention to head lines/ what will curency X do/ what policies will X pass/ who will win X election / what regulations are coming for X industries/ I should short X bc of populist rage such as cnn msnbc fox news etc

for example take a look at DJI yearly april 26 2010 11205 >>> july 02 2010 9685 >> October 29 2010 11,118.49

13% down then 13% up in a year time period many other indexes the same the days of buy and hold then forget for 2 years and come back are over.

Well said.

List of the deceased:
-Hedge Funds
-Mutual Funds
-Day Trading
-Warren Buffet style "buy and hold" a falling knife investing

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Dec 4, 2017

deleted.

Dec 4, 2017

LOL, go back to trading pokeman cards man

Dec 4, 2017

lol go back to trading pokemon cards instead of stocks mate

Dec 4, 2017

any other argument?

Dec 4, 2017

so whats alive?

Dec 4, 2017

I think value investing is still alive and well as what New Yorker said previously, the markets still provided many mismatched prices of equities versus their intrinsic values. However, it needs to be integrated with technical analysis and global macro awareness to maximize returns. The one thing I have noticed (especially on the short side) is that prices can act irrationally much longer than expected. You can be wiped out of your position before it has time to correct itself, so you need to be aware of the technicals to assist with timing.

Dec 4, 2017

technicals analysis works about as well as astrology you idiots. past movements don't indicate future movements.

Dec 4, 2017
New Yorker:

technicals analysis works about as well as astrology you idiots. past movements don't indicate future movements.

I apologize if technical analysis wound up to be excessively technical for Mr. Rick Ross to comprehend.

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Dec 4, 2017

I would argue that value investing is as alive as ever which is because "value investing" is not a trading strategy, it is a methodology based on the fundamental truth that buying something for less than its worth is a good trade.

The mindset behind value investing has nothing to do with trading, not even with securities as such. That's why i.e. Buffett went from being a fund manager to owning entire companies and building a holding company. If you can buy a dollar for fifty cents, you want to buy the entire dollar. Buy the entire company and harvest its cashflows over its life - and thus all value you bought at a discount.

That's not to say that there is a whole number of issues which turn value investing for mutual/hedge funds into a simple yet difficult strategy. Volatile short term funding (i.e. mutual funds, most hedge funds?) combined with volatile pricing is obviously a bad combination with an investment style that is focused on long-term returns and kind of agnostic towards short term volatility. That's why value investors often either look for strong catalysts (i.e. activist investing) or switch to a more stable funding base (holding company as opposed to fund, partnerships/hedge funds with long lock-in periods).

By the way: I don't see Einhorn trading S&P futures. The last deal he pulled is massively shorting JOE. Based on bottom-up research. For what it's worth, that's pretty close to value investing..

Dec 4, 2017

How could value investing be dead ?

It is well and alive and operating very profitably.

And No where did I read that in order to be a value investor you have to ignore the BIGGER PICTURE.

It has served me well over the years and I am sticking to it, because it incorporates not only micro matters but MACRO issues as well when determining the final price of a stock. Maybe you should re-read the meaning of value investing !

Dec 4, 2017

Living Dead. Soon to be Deceased Dead. Why? Because unraveling 20 years of wins/loses will bounce across all sectors. De-leveraging, Dollar Debasement followed by Inflation or Deflation induced Trade Protectionism will hit the importers/exporters/offshorers equally badly in multiple time frames. Keep on playing the music while the chairs are taken away one by one. Everyone I know has only 1 trade on with some variations of the same theme.

Dec 4, 2017

Value investing isn't really trading, like gold said aswell, it's a method of buying something significantly under the market value. A good company that's undervalued has the potential to make more profit than another company that's overvalued or correctly valued. I don't think fundamentals are the only research you should use when buying a stock. I think you should use technical analysis to see when the best time is to buy a share of the company.

Dec 4, 2017

Last time I checked, buying a business for less than it's intrinsic value isn't dead. I don't think buying a dollar for fifty cents will ever die.

How else would you invest? Buy a business for more than its worth? No intelligent businessman would do that. That's why I believe value investing is the only logical way to approach the markets in the long term.

Dec 4, 2017

the only thing alive now are ETFs, and finding new ways to make markets for more and more illiquid underlyings, and make as much spread as you can before the others join the game.

Dec 4, 2017

correlation is still too high right now and an uncomfortably large amount of stocks are moving in tandem (just like after '87 crash) hence the additional effectiveness of ETFs. Once correlation comes back down to its historical average value investing will regain its strength. Several of the value guys on the buy side I interact with are still hoarding lots of cash

Dec 4, 2017

If you were to pick stocks in early 2009 based on value metrics like price/book you would have absolutely pounded the market over that year. I'm talking 100%-200% returns on a portfolio of micro or small-cap stocks with low-debt to equity and P/B. Paying attention to technicals and market momentum would have been the only way to getting a decent timing, but value investing is a set of principles that define what constitutes value, not a trading strategy.
So no, value investing didn't die in the crash. But I wouldn't bet on it outperforming right this second.

Dec 4, 2017

except im a sophomore and when you were my age you were probably working as a tour guide for prospective students.

and furthermore, I forgot to mention fund manager's focus on short-term results (cf. introduction to margin of safety by seth klarman - baupost group).

Dec 4, 2017

I think value investing is alive and well but it exists in the sub 10bn market cap space. When I hear people talking about value investing it tends to be about these old blue chip behemoths that have not moved in price for 10 years. The reality is for most companies they were trading at insanely high premiums 10 years ago and over the past decade many have not seen substantial earnings growth. Couple contracting multiples with weak earnings growth and you have a value trap not a value stock!

As far as value investing goes I think the real opportunities where you can get in with some decent timing and hold for long periods.

Housing in 2003...

Energy in 2005 when oil first crossed $40/barrel....

Commodities related to China/ global infrastructure in 2006/2007

Gold in 2007....

Large Cap financials in 2009/ a lot of companies that got ridiculously crushed.... obviously this took some skill to get the best prices as it was buying the falling knife, stocks clearly bounced before the economy did.

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Dec 4, 2017

Buffett has been value investing for decades. I doubt it's going to end anytime soon.

Dec 4, 2017

Macroeconomics 101: A recession is part of the business cycle.

Men are so simple and so much inclined to obey immediate needs that a deceiver will never lack victims for his deceptions.

-Niccolo Machiavelli

Dec 4, 2017

The day long-term value investing is dead is the day I'll start hoarding guns and canned food, because it means the market will either be flat or downward sloping, and that shit can't last.

For value investing, I think a lot of the macroeconomic situation is factored in based on the discount and growth rates applied. It may not be quite as exciting or obvious as calling a change in interest rates or the breakdown in a currency band (ala global macro), but that's why Buffet is called an investor while Soros is called a trader. I have a lot of respect for Soros and PTJ, and I actually favor their style more than investing, but in a time like this you're going to get whipsawed out of a lot of your positions and thinking slightly longer term is the way to go.

With so much uncertainty around, real assets/companies which provides a real cash flow / yield and profits is bound provide long term value versus trying to buy assets anticipating a flood of capital (I'm looking at you gold). Things like gold and art (and fiat money) have value because we ascribe value to it, but it really seems like a greater fool game to me.

I'd be more inclined now to look at commodities that actually have uses (I believe someone mentioned palladium and silver instead of gold, but I forget who), and also other tangible assets like real estate.

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Dec 4, 2017

Value investing def exists in the private sector. Long term private holds allow you to make the cash flow decisions and ignore the noise created in the market and from board member politics.

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Dec 4, 2017

If you believe value investing is dead, or are even entertaining the idea, then you do not understand what value investing is. Everyday Mr. Market (influenced by all those macroeconomic and political considerations mentioned above) is doing one of two things: (i) offering to buy your shares in a business at a price below what you believe to be fair value, or (ii) offering to buy your shares in a business at a price above what you believe to be fair value. Therefore, a value investor must have his view of fair value. Otherwise he is simply a speculator, guessing at the market's next move, attempting to outwit and outsmart the millions of people doing that very same thing.

Dec 4, 2017

Sorry for the delay guys, been swamped over the weekend.

Anyway, amidst the Kool-aid laden responses there are some great points made here and yeah, I admit I may have gone into this from a different perspective.

From a stockpicking standpoint, as Goodbread, barboon, 1.21 gig and the rest said, it's really not a great time for it now and would probably not perform well at all but as trade4size related, those that have gone for other opportunities would've fucking killed it.

Value isn't dead after all.

@squirtz- looking forward to how your short treasuries call plays out bro, looks good from here.

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Dec 2, 2017

Pick any two growth and value indexes. Roughly half the companies appear on both indexes. Thats not "value investing" thats factor investing for low p/b or p/e or p/s ratios. Value investing, for the most part, also assumes some concentration, intimate knowledge of a company's operations and financial position. Value investing means you know the intrinsic value of a security, and the market has temporarily mispriced it. A factor screen might mimic or approximate value investing, but it is not. A p/e ratio of 12 might highly appropriate for a company with poorer prospects that a company growing profitably a good pace.

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Dec 4, 2017

Buy JPM

"Everybody is a genius. But if you judge a fish by its ability to climb a tree, it will live its whole life believing that it is stupid"

Dec 4, 2017

Wow, that's what I call an excellent post!

Was just thinking about Nokia today.

Thanks a lot!

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Dec 4, 2017

great post, thanks

Dec 4, 2017

only 2 SBs?....give the man some love.

Dec 4, 2017

Even the biggest contrarians in macro maintain a variant view for about 25% of the time. Doing so otherwise will get your balls clipped.

Dec 4, 2017

i'm interested to know what other things you might incorporate into a basic screen

two things stand out initially- the $5/sh minimum and letter "a" regarding changes in expectations... would it be useful to track analyst expectations back to something like Oct'08 looking at mo/mo and q/q changes compared against actuals for EPS/revenue/etc?

Dec 4, 2017

Great post! Keep 'em coming!

Dec 4, 2017

Great piece, thank you. Please also read the Value Traps Presentation by James Chanos.

Dec 2, 2017

No, I don't know why people say "value is dead" all the time. There are plenty of value-oriented investors who are doing great right now still, example: Mohnish Pabrai is absolutely killing it this year and he is a really fundamental long-only value investor.

I agree with @thebrofessor on this, it really does ebb and flow, plus it's a pretty long bull market with weird economic policy and other stuff going on.

Dec 4, 2017

Really looking forward to this!

Dec 4, 2017

Aswath Damodaran,

Does your framework for "value investing" take into account investing across the capital structure, e.g. distressed debt, convertibles or preferred stock, or is is solely focused on stock investing, i.e. listed companies, which is a rather limited part of finance in my opinion.

I'm referring to the kind of investing illustrated in books like Margin of Saftey by Seth Klarman. This could be passive or active in terms of management / board involvement.

To answer your questions...

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Dec 4, 2017
Relinquis:

Aswath Damodaran,

Does your framework for "value investing" take into account investing across the capital structure, e.g. distressed debt, convertibles or preferred stock, or is is solely focused on stock investing, i.e. listed companies, which is a rather limited part of finance in my opinion.

I'm referring to the kind of investing illustrated in books like Margin of Saftey by Seth Klarman. This could be passive or active in terms of management / board involvement.

To answer your questions...

Hey Relinquis, this is a syndication from his blog. For specific questions you should comment on his original post at http://www.aswathdamodaran.blogspot.com.ar/2012/06...

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Dec 4, 2017

Noted. Thanks.

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Dec 4, 2017

Just my 2 cents, but Warren Buffett is NOT a value investor. He is a GARP investor, a growth at a reasonable price guy. Everyone thinks Buffett is a value investor becuase he studied under Graham and Dodd but if you read his letters to the shareholders he clearly states that he gave up on what modern day value investors would consider "value investing." Buffet recalls how be bought flee-ridden dogs like second hand department stores and textile factories (Berkshire) becuase they were cheap and trading below book value. He soon discovered Charlie Munger and decided to drop that act.

Warren took from Ben the key ideas of margin of safety and Mr. Market but abandoned the cigar-but style of investing, which I think all value guys claim to believe in. What warren realised was that you could outperform the market by paying fair value for growth, hence his purchase of Coca-Cola.

The rest is legendary......

Dec 4, 2017
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Dec 4, 2017

Long term buy and hold value investing is for suckers

This aint the 1980s/90s no mo'

Dec 4, 2017

I think you have fallen into a few traps in terms of misunderstanding, or falsely caricaturing, value investing.

Value investing is not exclusively scouring for firms trading at less than book, nor is it finding stocks trading at 7x earnings or any other ratio. Value investing is, at its heart, investing at a price that you believe, based on fundamental research, is significantly less than a company's true value. In particular you have drawn a false dichotomy between investing in value companies and growth companies, in many of Buffet's investments for instance the value comes from the cheap price you are paying for growth.

To address the issue of Buffet specifically, we need to recognise that there is not 'one' Buffet investing approach; in the beginning he attempted to pick 'cigar butts' whereas now he is, as has been mentioned, focused on buying good companies at reasonable prices. In the intermediate period he was picking up good companies at amazing prices; here I think is where he made is money.

For me, the key to value investing is having a fundamental bottom up 'worst reasonable case' valuation that you are confident in. Once this is in place, and you invest at a sufficient discount to this worst case scenario. The advantage over other types of investors comes from having sufficient confidence in your analysis that regardless of market gyrations, you buy and hold the company because you know its true 'minimum value' (or at least a rough estimate) and whatever Mr. Market tries to convince you can be ignored. Investments are only cut when the story has changed.

That being said, while value investing can doubtless be a solid investment strategy and I think has proved its self (to date at least) superior to momentum approaches, it is not necessarily a profitable strategy. Its success depends on the ability to find and correctly establish the minimum price of a company and the ability to stand behind one's convictions. Furthermore the value investments that were possible during the mid to late 20th century simply aren't available now. I just think that the spread of information is too easy and too rapid for value investing to generate the returns we have seen in the past, at least in most developed equity markets.

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Dec 4, 2017
anon56:

. the ability to stand behind one's convictions.

/ your ability to lock up capital and withstand the moans of your short sighted investors

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Dec 4, 2017

Agee with Anon on everything except that there are scarce opportunities... for the little investor, i don't think this holds true, even in the most developed markets

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Dec 4, 2017

Also, for people looking to get an accurate introduction to value investing, this video, although a little old now, is very good:

http://www.youtube.com/watch?v=VAW3gC6AsAo

Dec 4, 2017

Anon - can you tell us a little about your background and what you do?

I'm looking to get into a mid to small HF and focus on value, but planning on getting my MBA first. I noticed your video above is a Darden MBA clip - Darden has recently been added to my radar for MBA schools but I've not heard anything about it's placement in value investing... i'm currently targeting CBS, NYU, Booth, Wharton more heavily for this

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Dec 2, 2017

It's a 8 year bull market with low interest rates...

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Dec 4, 2017

Great post. "Does spending more time researching a company's fundamentals generate higher returns for investors?". I remember a study that someone did that concluded something like this: the more research someone did, the higher their conviction level became that they were making the correct decision. However, this higher conviction level did nothing to increase their odds of actually making a better decision.

Kind of a depressing conclusion for for those in equity research.

Dec 4, 2017

http://papers.ssrn.com/sol3/papers.cfm?abstract_id...
Have you checked in with Gene and Kenny? Maybe you should stick teaching valuation to greedy NYU businessstudents - haha

You are the king of valuation though - hats off to you

Dec 4, 2017

The real issue with your logic is that manipulating time periods and end points makes a big difference here. The last 5 years was a bad time to be value with growth ruling the day. If you look at the data, value rules for most of the time but there are multiyear periods when growth has its day

Dec 4, 2017
ILOVENYGUY:

The real issue with your logic is that manipulating time periods and end points makes a big difference here. The last 5 years was a bad time to be value with growth ruling the day. If you look at the data, value rules for most of the time but there are multiyear periods when growth has its day

I think his point was to compare a value index to an actively managed value strategy, not to compare value to growth.

Dec 4, 2017

Good point ( am in the office on July4th and am angry at the world), but then this is the old argument of active v passive. Also many so called value investors run different strategies and still call themselves value so you can raise a question there as well of whether or not you have the right sample

do feel like a jackass here...

Dec 4, 2017

Retreading the post I am now really not sure what point is being made about value investing

Does it work over time relative to the market? All that the guy is saying that active managers underperform their respective index - what does it prove exactly?

Dec 4, 2017

hence the research into factor rotation strategies--it's REALLY hard to generate outperformance, esp. after transaction costs

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Dec 4, 2017

A lot of the 'myths' you refer to seem to be false characterisations and a lot of the arguments you present have already been addressed, I believe effectively, in the significant value investing literature. To consider a few of the more obvious:

'Intrinsic value is stable and unchangeable.' - this clearly isn't something believed by legitimate value investors. If it was the case, the only purpose of monitoring existing investment portfolios would be to find exit opportunities. Also if you read Margin of Safety, then Soros' theory of reflexivity which considers the impact of share price on fundamental value is promoted as being an accepted part of Seth's investment doctrine.

To address the stuff regarding management and moats, you seem to be missing the key point. Value investing is about the price you pay. Virtually all of the value investing literature, MOS, Warren Buffet Essays, Thoughtful Investor etc. make this clear, a good company is a only worth investing in at the right price. Any graph which shows good management vs stock growth, without (I could have missed it) reference to valuation multiples will not recognise this important distinction and cannot be used to disprove it. Good management is clearly a necessary component of an investment but no serious (and successful) value investor believes in the exclusive importance of management. To borrow from buffet (paraphrased) when a management with a reputation for excellence joins a company with a reputation for poor performance, it is the reputation of the company that prevails.

Regarding the efficient markets point you mentioned; successful value investors by no means scoff at EMH. I would suggest you read Howard Marks, The Most Important Thing. He makes clear that markets are usually efficient until proved otherwise in individual instances and lays out the conditions that may give rise to inefficient markets. This was another point that just made me question whether you are fully acquainted with value investing literature, although from your background it would seem that you should be. Alternatively perhaps I have misinterpreted the point of your presentation.

These are just a few issues, although much of the presentation seems to include similar ones. I will post further in more detail if required. This is a genuine question, and I am not asking it to be facetious or make a point, but have you read all of the available literature written by top value investors? Much of the stuff here seems to be much the false characterisations of someone from the outside looking in. Some of the points you make are valid e.g. looking down on momentum investors and technical analysis but some also seems suspect. Either way, it is great to have some more focus on value investing so thanks for that. I hope you have time to respond, and thanks in advance if you do. As I say I may have misunderstood the argument of your presentation.

    • 1
Dec 4, 2017

Another important point is that a lot of so called value investors run their portfolios way to skewed too growth an momentum so the data will have a hard time picking it up, unless you run a filter before hand trying to weed out the people who are closet indexers or momentum guys

Dec 4, 2017

Care to comment on the monkey shit? (whoever threw it)

Dec 2, 2017

I think one thing that's tough these days is everyone defines "value" differently. I hear "value investor" and think of a guy who buys companies that are road kill with a pulse.

Dec 4, 2017

Investors are shortsighted and impatient, and with more and more high frequency trading and average holding periods falling all the time I think the future is looking good for us turtles. As Ben Graham said, "the flat earth society will continue to grow as ships sail around the world!"

Dec 2, 2017

Let's start thinking value is dead... it definitely won't work ever again... that type of group think is why things go in/out of favor.

Value investors shine in down markets, hopefully... assuming they actually follow Margin of safety

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Dec 4, 2017

Don't have to worry about ppl being to bullish on unemployment, the Feds expected around ~8% until 2014 then creep down to ~7%. Inflation is expected to be around ~2%, and cheap money will persist til mid 2015. (Source: FOMC Minutes)

Back on topic, if your a value investor you don't invest based on top down aka macro. You worry about macro, but you invest from bottom-up approach (this was from Seth Klarman interview).

Dec 4, 2017
ladubs111:

Don't have to worry about ppl being to bullish on unemployment, the Feds expected around ~8% until 2014 then creep down to ~7%. Inflation is expected to be around ~2%, and cheap money will persist til mid 2015. (Source: FOMC Minutes)

Back on topic, if your a value investor you don't invest based on top down aka macro. You worry about macro, but you invest from bottom-up approach (this was from Seth Klarman interview).

its also in the holy grail, security analysis - value guys dont invest top-down.

Dec 4, 2017

@ladubs111 thanks for the data/sources, lots of good info

Dec 4, 2017
keanemp:

I basically just wanted to get a discussion going around the idea of the Federal Reserve's impact on the fundamentals of our economy, if Mr. Bernanke is helping/hurting the individual investor and if you believe now is the right time to buy.

Discuss amongst yourselves...

I think a lot of people are confused right now. Part of me thinks that QE infinity, etc will help unemployment eventually, but the cost will be runaway inflation in 5-10 years...basically, the Fed keeps blowing harder and harder into a balloon that is trying to deflate.

If you believe that you should balance your portfolio with some hard assets (gold? real estate?)...

Honestly, I prefer to just pick winners and ride them and pick and choose an occasional short position when warranted.

Dec 4, 2017

Do pair trades?

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  • Tom
  •  Dec 4, 2017

Hi,

I'm sorry to be rude, but you're claiming to be a value investor even if you're not acting / behaving like one. You're paying attention to factors (bernanke) that should have little if no marginal impact on your investment decisions. When analysing a company, you should pay attention to the fundamentals of the business etc.

Think of this this way, and I'm borrowing a well known example from some top value investing guys. If you are planning on buying the flowershop around the corner, what questions would you ask to see if the price you have to pay is cheap? You'd be looking at how good the flowers are, whether the shop is well-located, what the pricing power is, whether people are still into buying flowers etc.. You wouldn't ask obscure questions on fed policy rates, Merkel's views on Greece etc. etc.

This same approach should apply when looking at a company..

Dec 4, 2017

@Tom thanks for the input. I agree with you (and @wallstreetoasis.com + @couchy) that value investing is based on a bottom-up approach that sticks to analyzing the fundamentals of the industry and particular company.

However, I do believe that the main principles of value investing rely on common sense and catering the philosophy to your own personal style. Benjamin Graham simply looked at the fundamentals; others, such as Buffett, Einhorn, Klarman, Greenblatt, have taken this philosophy and added their own rules to it (strong managerial leadership, a competitive "moat", etc.). This is my main reason for keeping in mind Fed policies while still analyzing the fundamentals of the business.

With this in mind, how does the average value investor take advantage of current Fed policies? I guess the answer would be to continue looking at the fundamentals, while understanding that Fed policies have, in the short-term, inflated equity prices and instilled a sense of fear in the institutional investor.

Happy hunting everyone.

Dec 4, 2017
keanemp:

@Tom thanks for the input. I agree with you (and @wallstreetoasis.com + @couchy) that value investing is based on a bottom-up approach that sticks to analyzing the fundamentals of the industry and particular company.

However, I do believe that the main principles of value investing rely on common sense and catering the philosophy to your own personal style. Benjamin Graham simply looked at the fundamentals; others, such as Buffett, Einhorn, Klarman, Greenblatt, have taken this philosophy and added their own rules to it (strong managerial leadership, a competitive "moat", etc.). This is my main reason for keeping in mind Fed policies while still analyzing the fundamentals of the business.

With this in mind, how does the average value investor take advantage of current Fed policies? I guess the answer would be to continue looking at the fundamentals, while understanding that Fed policies have, in the short-term, inflated equity prices and instilled a sense of fear in the institutional investor.

Happy hunting everyone.

To echo what is said above, you don't seem to think like a value investor.

To your question: "How does the average value investor take advantage of current Fed policies?"

You don't and you don't try to. This does not change the fundamental bottom-up analysis that you should be conducting on an individual company. This stuff is all just noise to a value investor. I am happy when I get home from work and I don't even know what the S&P did that day; it just does not matter what is happening in the OPMI markets on a day to day basis when it comes to long term value creation. The NAVs of well-managed, shareholder-friendly businesses should continue to grow in spite of the Fed's policies. It is not of concern to a value investor when the OPMIs realize this value gap so much as it is important that the gap exists and there are meaningful catalysts over the mid to long term to help narrow that gap boosting your CAGR when coupled with the NAV growth itself.

Dec 4, 2017

Also, your title bothers me because a Value investor does not ebb and flow between styles based on market climate. It should say "Value Investing-Right?"

Best Response
Dec 3, 2017

Everything is cyclical. I repeat, everything is cyclical.

One of the best things you can do to improve yourself as an investor is to learn how the business cycle impacts the investment process. I recommend this to start. https://www.fidelity.com/viewpoints/investing-idea...
The greatest determinant in a portfolio's performance to the market in the vast majority of cases is not individual security selection, but allocation to different sectors and asset classes. If you hold lower allocations to tech, especially FANGs, you are underperforming right now. If the market turned and you hold higher allocations to Consumer Staples and Telecom you will outperform.

The next thing you can do is learn about Behavioral finance. Humans determine markets. It is human nature for people to expect current trends to continue into the future....until something unexpected happens. A stock is worth what the consensus is willing to pay and the price consensus is willing to pay is based on the expectations for future business performance. Eventually a negative event will occur drastically shifting market expectations and you will see two types of stocks underperform. 1. High growth stocks aka stocks with high expectations factored into valuations and 2. companies that have high operating leverage and earnings volatility. At this time value investing should in theory outperform due to margin of safety.

Analyzing something on a period less than two economic cycles is dangerous, as you need to know what happens when both ends of the spectrum occur. Yes this stock may have high upside, but do you know it's peak to trough draw-down? Look at the stock chart of Winnebago (WGO), the RV manufacturer. See the draw-down from 2007 to 2009? Now look at how it has performed recently, do you think it would have a similar draw-down if the market turned?

Value managers were getting slaughtered during the tech bubble for having lower allocations to tech stocks, but outperformed after as they had much a much lower draw-down and now a greater universe of relatively cheap stocks to choose from.

This is why it is important to have a diversified portfolio between different investment styles and asset classes because it is extremely difficult to time cycles, but the investment styles, asset classes, and sectors that outperform in down markets will decrease portfolio risk.

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    • 5
Dec 4, 2017

You might want to fix the title of your post. When I first read it I thought you were referring to investing in Vale, the mining company.

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Dec 4, 2017

Hi Hausdorff Space, don't worry, the WSO Monkey Bot is here.... I'm hoping one of these links will help find your answer:

Or maybe the following users have something to say: @acenventura69 @Equityausanalyst @landerad

You're welcome.

Dec 4, 2017
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