Is value investing dead?
The WSJ article, “Investors Finding Little Value in Value Stocks, So Watch for the Rebound,” states the following:
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.The U.S. stock market is showing the
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.
outperformance of growth stocks is the most in such a short period aside from the last year of the dot-com bubble….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
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.
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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.
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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.
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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?
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.
I like your signature quotes. Are you a follower of the Graham investment philosophy?
indeed i am
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.
Value investing: The living dead or alive and well? (Originally Posted: 10/29/2010)
In the aftermath of 2008’s market meltdown, the markets, nay, the entire financial industry has become a veritable reflection of a zombie apocalypse.
Firms collapsed, offices were empty, and hundreds of people; lifeless, hungry, roamed the street.
That was then, but what has prevailed until today is the labeling of death. “Day trading is dead.” “Mutual funds are dead” “Fund of funds are dead.”
And probably the biggest of them all: “Value investing is dead.”
Curious as to what you guys think, is value investing a zombie strategy? Or is it alive and well? I initially wrote this to debunk that day trading, value investing, and mutual funds are dead but as much as I wanted to give value investing an “alive” stamp, I see no reason for it to be aside from optimism.
To say that macroeconomics dominate today’s markets is an understatement. With any news being closely monitored and subsequently driving prices, a company’s financials have become less and less a driver of its value.
Adding to the problem is the movement of stocks in lockstep, with correlations as high as 80% in 2008-2009 and with them at around 60% today, picking a single stock out that will outperform or is undervalued with the rest has become a frustrating exercise for managers and investors alike.
Even David Einhorn chimed in saying:
This was around the time he bought gold.Majority of these Graham and Dodd acolytes see that while the geopolitical issues affecting the markets won’t be in control forever, they agree that it will be here for some time, a notion not so welcomed by a style that has already seen billions pulled out and funds closed due to the uncertainty.
So what do you guys think? A lot of what’s going to happen to value investing is vested in future certainty, which in my opinion won’t be happening anytime soon.
Is there any reason for value investing to be alive and well today?
Advanced Happy Halloween guys, enjoy the weekend.
"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.
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.
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
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
deleted.
LOL, go back to trading pokeman cards man
lol go back to trading pokemon cards instead of stocks mate
any other argument?
so whats alive?
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.
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.
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..
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 !
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.
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.
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.
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.
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
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.
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).
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.
Buffett has been value investing for decades. I doubt it's going to end anytime soon.
Macroeconomics 101: A recession is part of the business cycle.
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.
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.
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.
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.
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.
Contrarian Value Investing: Going Against the Flow (Originally Posted: 06/20/2012)
Nokia came out with an awful earnings report yesterday, with warnings of more bad news to come, and its stock price, not surprisingly, plummeted.
While investors are fleeing the stock and a ratings downgrade looms, is it a contrarian play? What about JP Morgan Chase? Or Research in Motion? Netflix or Green Mountain Coffee, anyone? By focusing on stocks that other investors are abandoning, contrarian value investing is the "anti-lemming" strategy, but it takes a unique personality and a strong stomach to pull off successfully.
The basis for “contrarian” investing:
While you may believe that investor overreaction is the norm, is there evidence to back up the claim? The statistical and the psychological evidence is mixed and contradictory. On the one hand, there is significant evidence that investors under react to news stories (earnings reports, dividend announcements), leading to momentum (and drift) in stock prices, at least over short periods. On the other, there is also evidence that investors over react to information, with price reversals occurring over longer periods. In behavioral finance, as well, there are two dueling "psychological" characteristics at play: the first is that of "conservatism", where individuals, faced with new evidence, update their prior beliefs (expectations) too little, thus creating under reaction, and the second is "representativeness", where individuals over adjust their predictions, based upon new information. To reconcile the co-existence of the two, you have to bring in two factors. One is time, with under reaction dominating the short term (days, weeks, even months) and over reaction showing up in the long term (years). The other is the magnitude of the new information, with over reaction being more common after big events.
Within the construct of contrarian investing, there are at least four variants. In the first, you invest in the stocks that have gone down the most over a recent period, making no attempt to be a discriminating buyer. In the second, you focus on sectors or markets that have been hard hit and try to identify individual companies in these groups that have been "undeservedly" punished. In the third, you look at companies that have taken hard hits to their market value but that you believe have underlying strengths which will help them make it back to the market's good graces. In the final approach, you buy stock in beaten up companies with the same intent (and expectations) that you have when buying deep out of the money options. You know that you will lose much of the time but when you do win, your payoff will be dramatic.
1. The Biggest Losers
If you believe that investors tend to over react to events and information, the effects of that over reaction are most likely to be seen in extreme price movements, both up and down. Thus, stocks that have gone down the most over a period are likely to be under valued and stocks that have gone up the most over a period are likely to be over valued. It follows, therefore, that if you sell short the former and buy the latter, you should be able to gain as the over reaction fades and stock prices revert back to more "normal" levels.
In a study in 1985, bbs/images/upfile/2011-11/2011112221858.pdf" target="_blank">DeBondt and Thaler constructed a winner portfolio, composed of the 35 stocks which had gone up the most over the prior year, and a loser portfolio that included the 35 stocks which had gone down the most over the prior year, each year from 1933 to 1978. They examined returns on these portfolios for the sixty months following the creation of the portfolio and the results are summarized in the figure below:
An investor who bought the 35 biggest losers over the previous year and held for five years would have generated a cumulative abnormal return of approximately 30% over the market and about 40% relative to an investor who bought the winner portfolio.
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There is evidence that loser portfolios are more likely to contain low priced stocks (selling for less than $5), which generate higher transactions costs and are also more likely to offer heavily skewed returns, i.e., the excess returns come from a few stocks making phenomenal returns rather than from consistent performance.
If you feel that, in spite of these caveats, this strategy may work for you, you can take a look at a list of the 50 companies that have gone down the most (in percentage terms) over the last 52 weeks (June 2011-June 2012). I have added a stock price constraint (to ensure that you don't end up with low-priced stocks) and reported the dollar trading volume per day (as a red flag for trading costs). I have compiled the list for the US (with price>$5), Europe (with price>$5), Emerging Asia (with price>$1), Latin America (with price>$1) and global (with price>$5). Your timing is off (since it is not January) but you can still browse for bargains. You can also adapt the screening plus strategy that I talked about in my post on passive screening and subject the companies on these lists to follow up analysis (intrinsic valuation or qualitative assessments)>
It is not uncommon for markets to turn negative on an entire sector or market at the same time. In some cases, this is justified: a big news story that affects an entire sector, or a macro economic risk that hurts a market. In others, it may represent either an over reaction by investors to the idiosyncratic problems of an individual company in a sector or a failure to consider that companies within a market/sector may have different exposures to a given macroeconomic risk. As an example of the former, consider how banking stocks were punished on the day that JP Morgan Chase reported its big trading loss. As an illustration of the latter, you can look at the Spanish stock market, where investors have punished all companies (though some are less exposed to Spanish country risk than others) over the last year.
About a decade ago, I penned a paper on measuring company risk exposure to country risk that argued that we (as investors) were being sloppy in the way we assessed exposure to country risk, using the country of incorporation as the basis for measuring risk exposure. With this view of the world, US and German companies are not exposed to emerging market risk, an absurd argument when applied to companies like Coca Cola and Siemens that derive a large chunk of their revenues from emerging or risky economies. By the same token, all Brazilian companies are equally exposed to country risk, though some (such as the aircraft manufacturer, Embraer) derive most of their revenues from developed markets. This laziness in assessing country risk does provide opportunities for perceptive investors during crises. This was the case when Brazilian markets went into a tailspin in 2002, faced with the feat that Lula, then the socialist candidate, leading in the polls, would win election to lead the country. As Embraer fell along with the rest of the Brazilian market, you could have bought it at a "bargain basement" price. If you are interested in following this path, here is my suggestion. Start putting together a list of companies like Embraer, i.e., emerging market companies that have a significant global presence and then wait for a crisis in the emerging market in question. When there is one (it is not a question of whether, but when....), and your "global" company drops with the rest of the market, you are well positioned to take advantage.
It is trickier, though, playing this game within a sector. Consider the JP Morgan Chase case. While the trading loss was clearly specific to JPM, you could argue that the event affected the values of all banks at two levels. The first is by increasing the chance that the Volcker rule, barring proprietary trading at banks, would be adopted, it affects future profitability at all banks. The second is the fear that in response to the loss, the regulatory authorities would require higher capital ratios be maintained at all banks. If those are your concerns, you should focus on banks that do not make have a large proprietary trading presence and are well capitalized. If investors have over reacted across the board, those banks should be trading at attractive prices.
3. Comeback Bet
When stock prices drop precipitously for an individual stock, there is usually a reason. If the drop reflects long term, intractable problems, there may be no reversal. If the drop reflects temporary or fixable problems, you are more likely to see prices reverse. As you look at the reasons for the price drop, you should keep in mind your overriding objective, which is to find a company whose price has dropped disproportionately, relative to its value
Here are some possible reasons for a stock price collapse, with the ingredients for a comeback:
a. Unmet expectations:
When expectations are set too high or at unrealistic levels, it is inevitable that investors will be confronted with reality not matching up to expectations. When that happens, they will abandon the stock, causing stock prices to drop. (Netflix and Green Mountain Coffee, both of which make the list of biggest losers over the last year are good examples of what happens to high flyers when they disappoint...)
Ingredients for a comeback: Expectations have dropped not just to realistic levels but below those levels. Investors have over adjusted.
b. Corporate governance issues:
Events that lay bare failures of managers and oversight by the board of directors shake investor faith and, by extension, stock prices. A case in point would be Chesapeake Energy, where the CEO, Aubrey McLendon, stepped down after evidence surfaced that the board of directors had allowed him to use $800 million in personal loans to acquire stakes in company-operated oil wells.
Ingredients for a comeback: (a) A new CEO from outside the firm, (b) with a full cleaning out of management team and revamping of board of directors, and (c) an activist investor presence.
c. Accounting fraud/ manipulation:
As investors, we start with the presumption that financial statements, while reflecting accounting judgments that may work in the company's favor, are for the most part true. Any suggestion of accounting fraud can lead to a meltdown in the stock price, not to mention open the company up to legal jeopardy.
Ingredients for a comeback: (a) Full reporting of all accounting misstatements, with (b) removal of top management, and (c) no legal jeopardy.
d. Operating/Structural problems:
Operating problems can range from problems with a key product (see Dendreon, on the list of biggest losers last year) to deeper structural problems, where the company's products just don't match up well to consumer demands or to the competition.
Ingredients for a comeback: (a) Management that is not in denial about operating problems and (b) a realistic plan for dealing with operating problems.
e. Financial problems:
When operating problems combine with significant debt burdens, you have the seeds of distress, which can spiral very quickly out of control, as suppliers, employees and customers react pushing the company deeper into trouble.
Ingredients for a comeback: (a) A clear debt restructuring/repayment plan, (b) Solid operating performance.
Whatever the reason or reasons for a price collapse, investors have to follow up by asking and answering three questions:
1. Is "it" a one-time or continuing problem?
While the line between one-time and continuing can be a shade of grey, the answer is critical. One time problems tend to have much smaller impact on value than continuing problems, and are easier to deal with and move on.
2. How fixable is the problem?
Some problems are more easily fixable than others. In making this judgment, you should look at three factors. The first is whether the problem is entirely an internal problem or whether it is partly or mostly due to outside or macro factors. Internal problems are easier to remedy than external ones. The second is whether the solution can be "quick" or will take "time". Thus, a firm with significant debt may be able to restructure that debt quickly, whereas a firm that has deep-rooted structural problems will need more time. The third is whether the managers of the firm seem to have both a reading of the problem and a solution in hand.
3. Is the market decline disproportionately large?
To make this assessment, you have to work through the consequences of the problem for the determinants of value: its effect on current cash flows, the expected value of growth (both the level and the quality) and the risk in future cash flows.
Using this framework, let's look at JP Morgan Chase. At first sight, it looks like a slam dunk. The trading loss was reported to be $2 billion at the first announcement and it seems like a fixable problem in the short term, with better risk management in place. The fact that the market capitalization went down by more than $30 billion on the announcement of the loss seems to suggest an over reaction, but there is more to this story than meets the eye. The first is that the trading loss of $ 2 billion is an estimate and the actual losses may be higher (the rumor mill suggests that they could exceed $5 billion). The second is that the loss will reduce the current regulatory capital and may increase the target regulatory capital ratio that JP Morgan aspires to reach over time; the combination of a lower current capital ratio and an increasing target capital ratio will translate into lower returns on equity, going forwards, and lower cash flows available to stockholders in the future (in the form of dividends or buybacks). To make a judgment on whether the stock is a bargain at the current price, I used a simple test. The price to book ratio for a mature bank can be written as:
Price to book ratio = (ROE - Expected growth)/ (Cost of equity - Expected growth)
Conservatively, if you assume a growth rate of 1.5% in perpetuity and a cost of equity of 9% (about 1% higher than the cost of equity for an average risk company), the return on equity implied at the JPM's current price to book ratio of 0.73 is about 7%:
0.73 = (ROE - 1.5%)/ (9%-1.5%)
Implied ROE = 6.98%
The ROE in the most recent year for JPM, prior to its loss, was 10.34%. Even allowing for higher regulatory capital requirements (which will increase book equity) and lower profits (perhaps from the Volcker rule), the adjustment seems like an over reaction. I know that there are other fears hanging over large banks, but I have a spreadsheet that I think contains a a conservative valuation of JPM that yields a value of about $46/share, well above the current stock price of $35. You can use it to make your own judgments for JPM or any other bank.
4. "Long odds" option
There is one final scenario: a company whose stock price has collapsed, with good reason and where a turnaround is neither anticipated nor expected. In other words, the stock looks fairly priced, given its prospects and problems today. However, let's assume that the firm has proprietary assets is in a risky business, where technology shifts could make today's winners into tomorrow's losers and vice versa. You could consider investing in this company's shares, for the same reasons that you buy an out of the money option.
In effect, you are leveraging the fact that equity in a publicly traded company has a floor of zero and that your losses are therefore restricted to the prevailing market value of equity. For your option (equity investment) to have a big payoff, though, you will need the value of the firm's assets to increase significantly from existing levels (because of a new product, market shift or an eager acquirer) and that will require that your firm have a proprietary technology/product/license and operate in a shifting, risky business. While the value of the assets could drop just as precipitously, you care less about downside because you don't have much to lose (since your equity value is so low).
Nokia (NOK) and Research in Motion (RIM) come to mind as potential option plays. They both have proprietary technologies and patents (though the market does not think that either technology looks like a potential winner in the market today) and operate in a risky business where the landscape can shift dramatically over night. While the Blackberry technology is a more reliable cash provider for RIM, there are three factors that tip me towards Nokia. The first is Nokia's stock price has dropped far more than RIM's over a shorter period, reducing the cost of my option. The second is that Nokia's debt burden is a mixed blessing: it could cut my option game short, if Nokia defaults, but it also leverages any upside in value. Small changes in Nokia's asset value will translate into big changes in equity value. The third is that the turmoil in the Euro zone adds to the value of my option. Put differently, I like Nokia because it is riskier than RIM, but risk is my ally, not my enemy, with an option. If you plan to invest in Nokia, do so with the full recognition that you may have to write off the entire investment a few months or years from now, but if the stars align, watch out!!!
Buy JPM
Wow, that's what I call an excellent post!
Was just thinking about Nokia today.
Thanks a lot!
great post, thanks
only 2 SBs?....give the man some love.
Even the biggest contrarians in macro maintain a variant view for about 25% of the time. Doing so otherwise will get your balls clipped.
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?
Great post! Keep 'em coming!
Great piece, thank you. Please also read the Value Traps Presentation by James Chanos.
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.
Value Investing: An Identity Crisis? (Originally Posted: 06/13/2012)
Any post about value investing always evokes strong responses, but I thought I would start this one by turning the focus inwards. So, here are a few questions for you :
1. Would you classify yourself as a "value investor"?
a. Yes
b. No
2. If yes, what makes you a value investor?
a. I try to estimate the value of a stock before I invest in it
b. I only buy stocks that trade at attractive multiples (low PE, low PBV etc.)
c. I do my homework, looking at the fundamentals, before I invest
d. I don't know. I just am.
3. Finally, do you think that value investors collectively do better than other investors in the market?
a. Yes
b. No
c. Not Sure
If yes, what is the source of their advantage? If not, why do you think they fail?
What is the key characteristic that separates value investors from the rest of the world? In my view of the world, and I understand that yours might be different, the key to understanding value investing comes from breaking down a business into assets in place and growth assets.
It is this mechanism that I used to my posts on estimating how much you are paying for growth and how much that growth is worth.
If you are a value investor, you make your investment judgments, based upon the value of assets in place and consider growth assets to be speculative and inherently an unreliable basis for investing. Put bluntly, if you are a value investor, you want to buy a business only if it trades at less than the value of the assets in place and view growth, if it happens, as icing on the cake.
It is how you find investments that sell for less than the value of assets in place that provides a framework to understanding the different strands of value investing, and there are three ways you can go about this mission:
a. Passive Value Investing
The oldest strand of value investing traces its lineage back to Ben Graham and his use of screens to find cheap stocks. Reviewing those screens, which combine market and accounting data, from Graham's book on security analysis, you are looking at stocks that trade at low multiples of earnings, pay a high proportion of these earnings as dividends and have a high proportion of assets that can be liquidated for close to their book value. In the years since, investors have added other screens (good management, stable earnings, strong competitive advantages etc.) that are all designed to reduce the potential for downside on the investment.
b. Contrarian Value Investing
In contrarian value investing, you adopt a different tack. You look for companies whose stock prices have collapsed for one reason on another. In its least sophisticated variant, you just buy the biggest losers (at least in terms of stock price), on the assumption that markets generally over react and that the portfolio of these losers will bounce back over time. In its more refined forms, you add other criteria to the mix. Thus, you may buy stocks that have gone down but only if they have a strong brand name and/or little debt.
c. Activist Value Investing
In activist value investing, you focus on poorly performing companies and look at the value of its assets in place, with better management in place. You then try to change the way the company is run by either acquiring control of the firm or putting pressure on existing management. Activist investing requires far more resources than either passive or contrarian value investing.
The skills and strengths you need to succeed in each of these value investing approaches is different and it is not clear than an investor who succeeds using one strand of value investing will be comfortable with the others.
In the next three posts, I will focus on each of these strands of value investing. In the last post, I will examine the most contentious issue of all, which is whether value investors collectively generate value from their efforts or whether this too is "fool's gold".
Really looking forward to this!
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/value-investing-iden…
Noted. Thanks.
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......
Appears to be based on this paper:
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2042657
Long term buy and hold value investing is for suckers
This aint the 1980s/90s no mo'
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.
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
Also, for people looking to get an accurate introduction to value investing, this video, although a little old now, is very good:
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
It's a 8 year bull market with low interest rates...
Value Investing: Where is the beef? (Originally Posted: 07/04/2012)
In my first post in this series on value investing, I noted that value investing is a broad brush that covers a range of different approaches, ranging from screening for cheap stocks to looking for bargains in the "loser" bin to being catalysts for change in poorly managed, mispriced companies.
There is one characteristic that some value investors seem to share, which is that they are the grown-ups in the investing world, and that investors with different views of the world (a belief in momentum, hope for growth or that markets are efficient) are deluded. Implicit in this view is also the belief that value investors are the long term winners in markets, but is this a belief that is backed up by the evidence? Or as one of my favorite commercials of all time would put it:
http://www.youtube.com/embed/Ug75diEyiA0
Does spending more time researching a company’s fundamentals generate higher returns for investors? More generally, does active value investing create value? A simple test of the payoff to the "active" component of value investing is to look at the returns earned by active value investors, relative to a passive value investment option. In the figure below, I compute the excess returns generated for all US mutual funds, classifed into small cap value, mid cap value and large cap value, relative to index funds for each category. Thus, the returns on small cap value mutual funds are compared to the returns on index fund of just small cap, value stocks (low price to book and low price to earnings stocks).
If you are an individual value investor, you may attribute this poor performance to the pressures that mutual funds managers operate under to deliver results quickly and their tendency to drift from their core philosophies, and argue that disciplined individual value investors do better. Since it is difficult to track the performance of individual investors, the question of whether individual value investors deliver better results than mutual funds has no clear empirical answer. However, there are some intriguing findings in the literature.
While none of these studies of individual investors classify superior investors by investment philosophy, the collective finding that these investors tend not to trade much and have concentrated portfolios can be viewed as evidence (albeit weak) that they are more likely to be value investors.
Faced with this evidence, some value investors fall back on the old standby, which is that we should draw our cues from the most successful of the value investors, not the average (or the median). Arguing that value investing works because Warren Buffett and Seth Klarman have beaten the market is a sign of weaknesss, not strength. After all, every investment philosophy (including technical analysis and charting) has its winners and its losers. A more telling test would be to take the subset of value investors, who come closest to the meeting the purity standards of value investing, and see if they collectively beat the market. Have those investors who have read Ben Graham's investment tomes generated higher returns, relative to the market, than those who just watch CNBC? Do investors who trek to the Berkshire Hathaway annual meeting every year have superior track records to those who buy index funds?
I don't think we will ever know the answers to those questions, but I am willing to hazard a guess. I don't think that value investors as a group, no matter how tightly that group is defined, beat the market. I also think that some value investors do beat the market consistently, and that their success cannot be attributed to luck. I would go further and argue that they share some common characteristics:
This is the last in a series of posts that I have on value investing. You can read the paper that I have on value investing (see link below) and I did make many of these points in a presentation (Warning: It is a little caustic...) in Omaha this year at a value investing conference, just before the Berkshire Hathaway meeting.
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.
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2358
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
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.
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...
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?
hence the research into factor rotation strategies--it's REALLY hard to generate outperformance, esp. after transaction costs
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.
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
Care to comment on the monkey shit? (whoever threw it)
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.
Future of value investing? (Originally Posted: 05/25/2012)
Where do you think the future of value investing and the corresponding equity funds is headed?
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!"
Value Investing: Right for 2012-2013? (Originally Posted: 10/10/2012)
Hey everyone,
I am relatively new to the forum, have been perusing a lot of the other posts and decided I would chime in.
First, a quick intro: I graduated from a top 20 undergrad in 2009 and have been a management consultant for the past 2 years (think one level below MBB). I am studying for the GMAT while starting to build connections that could land me a job in equity research/investment management at an entry-level position. Still unsure if the MBA is the right course, or taking out a $50,000 loan, starting a business and failing/succeeding spectacularly.
I was first introduced to value investing a little over a year ago and since then have read Graham, Greenblatt, Klarman, Munger, Buffett and a few others. The common sense approach rings true to me. Since a little kid I have always been fascinated with making a profit. The Intelligent Investor has become my Bible, and I cringe every time I recommend it to my friends (which I now find myself doing all the time). Alas, the secret has been out for a while, I suppose.
I understand how the efficiencies of information travelling make value investing a more difficult endeavor in today's market (not many attractive "net-nets"), but I still believe the simple philosophies of buy-low sell-high will always make sense. However, the market today has left me confused (shocker!)
Currently, P/E yields are trading a historically lower levels. P/E yields in the United States are around 12, another figure lower than its historical average. The current overall economic sentiment is that of fear, whether in Europe (debt crises), Asia (China slowdown) or the US (fiscal cliff, unemployment, election). According to some of the names mentioned earlier, these times of distress would make this the apt time to invest.
However, the current policies of Ben Bernanke and our Federal Reserve leave me nervous. With no end of the printing press in sight, what effects will this have (long-term) on individual equities and the market as a whole? Will the economy (as the stock market seems to have done, for the moment) follow the enthusiasm of the Fed and employment will improve? Or will the Fed's policies turn out to be erroneous, unemployment will rise, and inflation will kick in? Frankly, at this point wouldn't it be good to allow some inflation?
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...
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
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.
@ladubs111 thanks for the data/sources, lots of good info
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.
Do pair trades?
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..
@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.
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?"
Why active value investing doesn't pay off as expected (Originally Posted: 05/15/2013)
I've seen that Prof. Damodaran's blog is reproduced here. For those who haven't read it I am posting a link to his latest "white paper" on value investing, which is a fairly easy read.
SSrn link
If you wish to delve further I would recommend reading "Buffett’s Alpha" by Andrea Frazzini, David Kabiller, and Lasse H. Pedersen (published in 2012).
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-ideas/business-cycle-inve…
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.
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.
Variant perspective in (value) investing for the long term (Originally Posted: 11/22/2017)
Hi guys,
I work for a small, long-only fund in Asia with "value investing" as its investment philosophy. This is my third year working as an investment analyst (a generalist with no particular sector for coverage). Unlike many HFs in the US or elsewhere where an analyst is required to pitch her idea and thereby contribute to the firm's P&L, here we're basically assigned 2~3 companies a week (more like 4 days) to do research on, to be presented to the PM the following week. Due to time constraint, our research largely ends up being descriptions about the company business, its industry, recent trends, etc. and a very rough valuation. Although I am a believer of the firm's investment philosophy and its concentrated positions, the lack of depth in our research and culture discouraging independent thinking have led me to look elsewhere.
I'm trying to come up with stock pitches for interviews and am having difficulty coming up with a variant perspective (that is different from market consensus) and a catalyst to push up/pull down the stock price. The research I've been doing thus far focused primarily on whether the "company" was good, not necessarily on whether the "stock" was a buy/short.
1) I am wondering if the situation is similar at value funds with long-term perspective? i.e. even if your view does not necessarily differ from the consensus and there's no identifiable catalyst, if the company has solid business, its shares would slowly but climb up in the long run? Like Visa and MasterCard. So you'll make money by identifying a wonderful business and let time work its magic?
2) Does coming up with a variant perspective and identifying catalysts pertain primarily to L/S HFs with shorter investment horizon? Are most HFs run this way?
3) How do you come up with a variant perspective when you're a generalist with not much depth in one particular area but a little from here and there? (Is this where problem solving and thinking-out-of-the-box come in?)
My apologies for being verbose. Thank you for reading thus far and really appreciate your taking the time to share your thoughts with me.
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Accusantium corporis qui necessitatibus perspiciatis aspernatur. Ut dolores atque consequatur non. Iusto ipsa possimus ea. Impedit minus corrupti mollitia. Consequatur vel deserunt quasi. Qui incidunt magnam aut rerum perspiciatis in.
Aliquam eius et consequatur molestiae ut aut. Reiciendis et deleniti iste dolores tempora ipsum. Nobis dolorum et laborum voluptatem provident qui. Quae neque eum velit et aut optio asperiores ut.