The FED is the New Value Investor

[JEast]

A nice article composed by Kaleidoscope Capital on how the FED is the new value investor and its resultant demise to value investors in aggregate (e.g. demise of hedge funds and taking away the margin-of-safety).

 

http://www.zerohedge.com/news/2015-01-30/fed-now-frontrunning-value-investors

 

Article attached in pdf form.

2015Q1_FedValueInvestor.pdf

[meiroy]

Thank you for the link.

 

"Geek note: Value investors don’t simply start buying when a stock drops below fair value. They wait for stocks to fall materially below fair value before buying. In the prior example, value investors might estimate fair value to be $40 but only start buying at $35. This gap between fair value and their buy trigger defines their “margin of safety”. To be more precise, value investors replicate the profile of an out-of-the-money -- rather than an at-the-money -- put option seller.

 

By stepping in when prices are falling, value investors provide a form of insurance to the market. Like all insurance, this activity should produce positive returns on average for the underwriter. Careful value investors have certainly prospered over the long run. The puzzle is why providing insurance through value investing has not been rewarded over the past five years."

 

What a bunch of bollocks. "Value investors are trigger happy falling knives catching insurance agents who have not been paid their bonuses for the past five years."

 

 

 

 

 

 

[stahleyp]

Thank you for the link.

 

What a bunch of bollocks. "Value investors are trigger happy falling knives catching insurance agents who have not been paid their bonuses for the past five years."

 

I would agree.

 

Longleaf, Fairholme, Weitz, Dodge and Cox etc are all fund managers that have either trailed or barely beaten the market over the past 5 years. Even Sequoia has trailed over 3 years.  Morningstar "Large Value" category has trailed the market nicely over the past 5 years.

[JEast]

My take is a little more nuanced in that maybe the FED has trimmed the premium off of the value camp because the FED has either intended, or unintended, to support businesses that would have surely cleared at lower prices then they have in the last 5 years. 

 

In the analogy the author's use, by not clearing at lower prices, collecting the value premium has been tough and maybe buying at the $35 price point was the correct move (a traditionally non-value like investment).  Case in point presently, all those billions raised to buy distressed European debt is earning very little these days because they have not cleared yet.

 

 

Cheers

JEast

[meiroy]

 

There is no doubt the FED had and has various influences on the market and is even a "market maker" at times, as do other central banks around the world (FIAT currencies galore).  What I find completely silly in their analysis is that they categorize a specific form of value investing as if that's all there is to value investing. At the end of the day this article is just some marketing shtick.

[yadayada]

They are the opposite really. If the fed had to buy those crap assets, why didn't the market buy them instead? The smart money left those things alone for good reasons. A value investor is someone who gets a good deal on something, not someone who catches falling knives.

 

The fed had to buy those things exactly because valueinvestors wouldn't want to touch them... Warren Buffett didn't even want to follow the government into certain financials, to help bail them out.