Why I Am Not A Value Investor

[oddballstocks]

plus ça change, plus c’est la même chose

 

mais, mais, mais.....

[ragnarisapirate]

 

-I have thousands of readers on my blog, I blog exclusively about these little value stocks, I can't even begin to count how many people have said they enjoy reading me, but would never invest in anything I write about.  I would conservatively estimate that's about 70% or more of my readers.

 

 

I don't have nearly the readers that you do, but, I do agree that a lot of the people reading my stuff don't invest in a lot of the things I talk about (that said, I own a fraction of the stocks you do).

 

I do agree that the value field is getting crowded though- but, it seems like it gets crowded in a bull market, where people start seeing the good returns that value guys got when the market started rising in the previous recession, and wanting to emulate... There are a ton of nano cap stocks that are now talked about as value plays, when they are trading for 3-5x what they were in the recession- and considered total piece of shit stocks (that were actually great little companies) EVI, IBAL, and a host of others... Packer could name off a ton of this regional radio carriers (that, I by the way, was too stupid to invest in despite him telling me too!). Same thing with a lot of the regional banks (well, financial institutions in general) now.

 

What I am getting at, is I want to see what this forum, or the value investing community looks like when a whole bunch of us make a bunch of bone headed decisions for a year or 2 in the next downturn...

 

[txlaw]

If only we had a 300 year old investor on the forum.  He'd probably tell us it was called something else before it was called "buy low sell high".  Then later it was called "margin of safety".  And he would expect if we waited long enough a new breakthrough label for it would be adopted.

 

The new generation always wants to challenge the orthodoxy and create something new of their own.  Leave their own thumbprint on time.

 

But the more things change, the more they stay the same.

 

Wise words. 

 

I find it hard to believe that Ben Graham "invented" value investing.  Buy low, sell high is what merchants, investors, and bankers have been trying to do for aeons.  Graham just created a nice intellectual framework for capital markets investing.

[LC]

Buy low and sell high is an old fad, not a new one.

 

I suppose you might question whether "value investing" is any different than "buy low and sell high"?  Seriously, I don't think they are different.

I agree. "Value" investing is simply the rationalizing of why one should buy low and sell high

[stahleyp]

Yeah, active investment strategies, especially value investing are definitely more popular than they were historically.  Indexing is on the decline, obviously.

 

Are you sure about that? Virtually everything I've read suggests the opposite. Active is still the bigger piece of the pie by a large amount but indexing has grown a lot.

 

For example,

 

"Since September 2008, assets of passively managed U.S. and foreign stock mutual funds have doubled to $1.31 trillion, according to Morningstar. By contrast, assets in actively managed mutual funds are up 28% in the same period to $4.58 trillion.

 

Demand for exchange-traded funds, or ETFs, also has exploded since 2008. They now hold $1.5 trillion. ETFs, which trade on stock exchanges, are designed to replicate broad or narrow market indexes."

 

http://www.latimes.com/business/la-fi-1006-main-funds-20131006,0,409152.story?page=2

[JBird]

I'm waiting for JBird to give us the Charlie munger quote about how all intelligent investing is value investing.

 

But although it is intelligent, that doesn't mean it "works" day in and day out.  Oh well.

 

;D

 

 

 

 

[crastogi]

So  basic value investing won't work anymore?  If so, I am probably screwed because I am too dumb to do anything else.

 

HAHA, I'm screwed as well.  I agree with the spirit of the article that "value" now is buying the big stocks with moats at attractive prices rather than buying low P/B, low P/E, low EV..heck low anything.

 

I offer a few thoughts:

-Start a thread about some smallish profitable stock selling at 50% of BV, you'll get one or two responses.  Start a thread about the value du jour that Buffett might like and you'll have 45 pages within a week.

-While everyone seems to give lip service to the buy low P/B, valuey stocks not many do it, moat companies are seen as 'safer'.

-All of the older funds that were doing the net-nets, low P/B stuff in the 1970s and 80s have grown and graduated to the Buffett value, moats etc due to size.  Quick, name five mutual funds that are investing in the Graham/Schloss tradition.

-I have thousands of readers on my blog, I blog exclusively about these little value stocks, I can't even begin to count how many people have said they enjoy reading me, but would never invest in anything I write about.  I would conservatively estimate that's about 70% or more of my readers.

-Look at most of the newer value investing books, they all universally disparage net-nets and low P/B stocks with comments like they were around in the 1930s when Graham was investing, but don't exist anymore. 

 

Personally, I could care less what label is given to me.  I've found a style that's suited to my personality, and suited to my intelligence.  Many of the threads on this board are way over my head, I will probably never price and option or know how to create these complicated trades, I'm not sure I could do a DCF without cheating and lookup up the formula.  But if I see a little ignored company at 50% of BV I'm usually smart enough to pull the trigger, and at the end of the day that alone has served me well enough.

 

+1. 

[crastogi]

Yeah, active investment strategies, especially value investing are definitely more popular than they were historically.  Indexing is on the decline, obviously.

 

Are you sure about that? Virtually everything I've read suggests the opposite. Active is still the bigger piece of the pie by a large amount but indexing has grown a lot.

 

For example,

 

"Since September 2008, assets of passively managed U.S. and foreign stock mutual funds have doubled to $1.31 trillion, according to Morningstar. By contrast, assets in actively managed mutual funds are up 28% in the same period to $4.58 trillion.

 

Demand for exchange-traded funds, or ETFs, also has exploded since 2008. They now hold $1.5 trillion. ETFs, which trade on stock exchanges, are designed to replicate broad or narrow market indexes."

 

http://www.latimes.com/business/la-fi-1006-main-funds-20131006,0,409152.story?page=2

 

I think he is being sarcastic  ;)

 

[booth52]

The concept of value investing no longer working in my mind ties well with the concept of EMT, efficient market theory. 

Original post/thesis is that it (value inv) is now popular/widely used, and therefore has no edge.  I'd say he's taking a small sample size/perspective bias to lead to a conclusion that value investing is now popular/predominant, and just as important, is not taking into account the fact that x% of Z% of people "value investing" in principle are not doing it correctly.  There will always be a % of people buying/selling securities at prices above/below value, whether due to alternate principles, or incorrectly applying value investing.  Otherwise, I could see EMT being true at those instances.

 

There is no way value investing leads the decisions of the majority of the activity in the market.  There's always dead money at the poker table of investing.

[ERICOPOLY]

If only we had a 300 year old investor on the forum.  He'd probably tell us it was called something else before it was called "buy low sell high".  Then later it was called "margin of safety".  And he would expect if we waited long enough a new breakthrough label for it would be adopted.

 

The new generation always wants to challenge the orthodoxy and create something new of their own.  Leave their own thumbprint on time.

 

But the more things change, the more they stay the same.

 

Wise words. 

 

I find it hard to believe that Ben Graham "invented" value investing.  Buy low, sell high is what merchants, investors, and bankers have been trying to do for aeons.  Graham just created a nice intellectual framework for capital markets investing.

 

Jeremy Grantham wrote something really funny about this in the April 2010 quarterly GMO report:

 

So I have come, friends and Romans, to tease Graham and Dodd, not to praise them, even though this is the 75th anniversary of Security Analysis. And my second point of attack is that Graham and Doddery is all a little obvious. I was brought up by a Quaker and a Yorkshireman – that is known as “double jeopardy” in the frugality business.  Quakers believe waste to be wicked and Yorkshiremen, who consider Scotsmen to be spendthrifts, consider itcriminal. The idea that a bigger safety margin is better than a smaller one, that cheaper is better than more expensive, that more cash is better than less cash, deserves, in modern parlance, a “Duh!” It is just rather obvious, and going on about it for 850 pages can get extremely boring.

[Kiltacular]

I find it hard to believe that Ben Graham "invented" value investing.  Buy low, sell high is what merchants, investors, and bankers have been trying to do for aeons.  Graham just created a nice intellectual framework for capital markets investing.

 

I think this description -- the last sentence above -- of Graham's contribution fits perfectly.  Graham captured an effective way to think about / use effectively what turned out to be not the end of capital market speculation -- the 1920's crash -- but the beginning of a stunning growth in wealth inside a capital markets system that the world -- the merchants and bankers of yore -- could never have imagined.  He was the right guy, at the right time, with, it turned out, the right pupil.

 

Buffett always points to chapters 8 and 20 of the Intelligent Investor.  Basically, they say: "Buy Low and Sell High" and, since you can't do the former on a consistent and guaranteed basis, make sure you bought really low.

 

He adds some stuff about thinking about a security like a business but basically, that just says it is your analysis that tells you whether something is low or high and not the movement(s) of the market price. 

 

Thinking about stocks as businesses is great but often feels useless for us OPMI's -- as comments here often attest.  The solution for Buffett was often to buy the whole thing or to get special tax treatment on the dividends from the ones he didn't buy all of.  Munger's advice is to look for the cannibals -- so you know, at least, that the manager of a great business will, at the very worst, use his company's geyser of cash in a way that is unlikely to be disastrous. 

 

So, the Graham / Munger advice for the current generation of value investors:  "Buy Low and make sure it is a cannibal".

 

EDIT: fixed strikethrough

[thefatbaboon]

My 2 cents

 

I think value investing in some important ways has changed over the past 75 years.  The theoretical fundamentals are the same - Burr Williams etc. - but much of the Graham/Dodd net-net and low PE approach is less useful today.

 

For me the reasons are quite simple: 

 

1. Over the last 75 years the world economy has changed and the nature of the average "asset" has changed.  Most businesses do not carry their important assets on their balance sheets anymore.  Receivables, inventory, plant...these things are simply not that relevant in an economy dominated by brands and intellectual property.  Asset value is in the cash flows.

 

2.  Graham and Dodd were not particularly sophisticated regarding the differences between Earnings and Distributable Free Cash Flow.  Buffett (Fisher, Munger and others) have been very smart at looking at the essence of the Burr Williams model and developing refinements: High ROIC, management quality, tax, trading frictions, competitive advantage.  In a funny way all these improvements are directed at closing the equity/longbond gap.  Size of coupon, longevity of coupon, predictability of coupon; size of principal, longevity of principal, predictability of principal.

 

 

[Uccmal]

plus ça change, plus c’est la même chose

 

+1

 

just wait until the next downturn....  Not alot of people were buying JPM in the low 30's, BAc sub $10, WFC below $30, Aig below $30.(all within the last year).  Adaptation of the philosophy is necessary to reflect the times, where "hard" assets are less relevant.  Good businesses will always go through times of trouble.  I guess our job is to determine if the value of a business still exists on an ongoing basis.  This an be as simple as driving around and checking out bank branches or the lineups at Starbucks, after reviewing their finances, of course.

[Kraven]

These discussions remind me of when I was in high school.  Depending on what type of music you liked you were labeled and god forbid once you were in a group you crossed the line.  For example, if you liked heavy metal you were a "rocker" and to admit that a Duran Duran song was catchy would be to risk being permanently banned from the group.  There used to be arguments on what genre a certain band fell in and for some reason this mattered greatly.  I remember people arguing vehemently that the Police were really a reggae group and this seemed to be an important point.  Certain groups like Madness were really ska and not new wave and this mattered very much.  Then there were the sub discussions like who was the best drummer (Alex Van Halen or Neil Peart?) or guitarist (Eddie Van Halen or, for some reason, Michael Schenker?). 

 

It wasn't about what was good music or what anyone liked, it was about labels.  In terms of investing who gives a crap what it's called.  I can't stand the holier than thou attitude some have as to whether investing is done in a pure manner.  Is a person Buffett enough for them?  Do they think about the proper latticework a la Munger?  Graham said it best.  If you can invest by forecasting, do it.  If squiggly lines tell you what you need to know, more power to you.  It just didn't work for him.  There are multiple ways to get to heaven.  It's all about making money by buying something worth more than what you paid for it, however you get there and whether it's heavy metal, I mean, value investing or whatever.

[Redskin212]

Kraven

 

++++1

[boilermaker75]

Yeah, active investment strategies, especially value investing are definitely more popular than they were historically.  Indexing is on the decline, obviously.

 

Are you sure about that? Virtually everything I've read suggests the opposite. Active is still the bigger piece of the pie by a large amount but indexing has grown a lot.

 

For example,

 

"Since September 2008, assets of passively managed U.S. and foreign stock mutual funds have doubled to $1.31 trillion, according to Morningstar. By contrast, assets in actively managed mutual funds are up 28% in the same period to $4.58 trillion.

 

Demand for exchange-traded funds, or ETFs, also has exploded since 2008. They now hold $1.5 trillion. ETFs, which trade on stock exchanges, are designed to replicate broad or narrow market indexes."

 

http://www.latimes.com/business/la-fi-1006-main-funds-20131006,0,409152.story?page=2

 

And a significant fraction of those managed funds are really shadow indexing. They don't want there performance to be worse than the index.

[alwaysinvert]

 

-I have thousands of readers on my blog, I blog exclusively about these little value stocks, I can't even begin to count how many people have said they enjoy reading me, but would never invest in anything I write about.  I would conservatively estimate that's about 70% or more of my readers.

 

 

I don't have nearly the readers that you do, but, I do agree that a lot of the people reading my stuff don't invest in a lot of the things I talk about (that said, I own a fraction of the stocks you do).

 

I do agree that the value field is getting crowded though- but, it seems like it gets crowded in a bull market, where people start seeing the good returns that value guys got when the market started rising in the previous recession, and wanting to emulate... There are a ton of nano cap stocks that are now talked about as value plays, when they are trading for 3-5x what they were in the recession- and considered total piece of shit stocks (that were actually great little companies) EVI, IBAL, and a host of others... Packer could name off a ton of this regional radio carriers (that, I by the way, was too stupid to invest in despite him telling me too!). Same thing with a lot of the regional banks (well, financial institutions in general) now.

 

What I am getting at, is I want to see what this forum, or the value investing community looks like when a whole bunch of us make a bunch of bone headed decisions for a year or 2 in the next downturn...

4 years ago when I started reading this board, macro informed value investing seemed to be all the rage. People were putting on hedges and buying puts and shorting indicies. "You can't ignore macro", was a common statement. I never quite got to the bottom of what that actually meant. But anyhow, I hardly ever see anyone say that now.

 

The equivalent these days seems to be moat investing. I don't know wtf that really means either. Except that apparently you are better off buying Google than HPQ. I listen to the manual of ideas podcasts and every single fund manager they interview rave on about high-quality businesses and moats. I'm quite jealous, how do people find all these super businesses trading at bargain prices? I must be doing something wrong, apparently.

[Hielko]

I think the author of the article mentioned in the first post has a bit of a narrow view of what value investing is and who value investors are.

 

Scepticism about intrinsic value Many value investors place great stress on the concept of intrinsic value – the discounted future cashflows of a company, as distinct from its book value, liquidation value or market value.

I don't know a lot of value investors who rely heavily on discounted cash flow analysis. Most use heuristics just like the author such as PE-ratio's and the presence of director purchases.

 

Scepticism about deep research

Is value investing about deep research? It can be, but buying a basket of net-nets is absolutely the opposite.

 

Willingness to look foolish

Isn't that the essence of value investing too? If you are buying stuff that all other investors think is a solid idea you are probably doing something wrong...

[Uccmal]

These discussions remind me of when I was in high school.  Depending on what type of music you liked you were labeled and god forbid once you were in a group you crossed the line.  For example, if you liked heavy metal you were a "rocker" and to admit that a Duran Duran song was catchy would be to risk being permanently banned from the group.  There used to be arguments on what genre a certain band fell in and for some reason this mattered greatly.  I remember people arguing vehemently that the Police were really a reggae group and this seemed to be an important point.  Certain groups like Madness were really ska and not new wave and this mattered very much.  Then there were the sub discussions like who was the best drummer (Alex Van Halen or Neil Peart?) or guitarist (Eddie Van Halen or, for some reason, Michael Schenker?). 

 

 

 

Best Drummer: Obviously Neil Peart

 

Best Guitarist: Jimi, Living: Alex Lifeson;

 

Best Songwriter: Neil Young

 

All Canadian Line-up.  Only a loser would disagree. 

 

[Cardboard]

""Buy Low and Sell High" and, since you can't do the former on a consistent and guaranteed basis, make sure you bought really low."

 

That is exactly what margin of safety means. Buffett also mentioned fat pitches dozen of times and did compare it to someone entering a room who is obviously overweight to everyone. It has to be really noticeable, a large standard deviation.

 

Interestingly, by buying something really cheap, you do protect your downside by giving yourself a chance that the current price paid could end up being close to the real intrinsic value. So you could exit with little damage. But, you also put the probabilities on your side with having something so undervalued that you are exposed to the highest returns available.

 

Cardboard

[Dustin T]

I guess my definition of value investing is fairly broad. Anything from Walmart to Apple to a Microcap drug company can fit my definition if the price is right.

 

I liked the article in that it does warn against group think, which I don't see as a problem on this board, it's full of intelligent and independant thinkers,  but I think it does infect some value investors.

 

I do have reverance for Graham, Buffett, Peter Lynch, and Watsa. Their words carry much weight with me. I also believe that succesful value investors of the future must build on there lessons, not blindly follow them. Isaac Newton once said "If I have seen further than others, it is by standing on the shoulders of giants" I'm not sure who will be annointed as the next great value investor but I fully expect it will be someone that absorbs all the knowledge available and then adds to it.

[Kraven]

These discussions remind me of when I was in high school.  Depending on what type of music you liked you were labeled and god forbid once you were in a group you crossed the line.  For example, if you liked heavy metal you were a "rocker" and to admit that a Duran Duran song was catchy would be to risk being permanently banned from the group.  There used to be arguments on what genre a certain band fell in and for some reason this mattered greatly.  I remember people arguing vehemently that the Police were really a reggae group and this seemed to be an important point.  Certain groups like Madness were really ska and not new wave and this mattered very much.  Then there were the sub discussions like who was the best drummer (Alex Van Halen or Neil Peart?) or guitarist (Eddie Van Halen or, for some reason, Michael Schenker?). 

 

 

 

Best Drummer: Obviously Neil Peart

 

Best Guitarist: Jimi, Living: Alex Lifeson;

 

Best Songwriter: Neil Young

 

All Canadian Line-up.  Only a loser would disagree.

 

Best drummer - agreed on Peart

 

Best guitarist - gotta be Eddie, although I have a soft spot somewhere down deep for Michael Schenker and his Flying V.  The cool pick back in the day was the "fastest" guitarist, Sweden's favorite son, Yngwie Malmsteen.  The songs sucked, but he played fast!

 

Best songwriter(s) - Lennon and McCartney of course!

 

All Canadian line up?  Jimi wasn't Canadian, was he?  I thought he was born in Seattle, but can't remember.  You can't have an all Canadian line up without including Triumph and, um, Aldo Nova?

[Uccmal]

Jimi - honorary of course. 

[boilermaker75]

These discussions remind me of when I was in high school.  Depending on what type of music you liked you were labeled and god forbid once you were in a group you crossed the line.  For example, if you liked heavy metal you were a "rocker" and to admit that a Duran Duran song was catchy would be to risk being permanently banned from the group.  There used to be arguments on what genre a certain band fell in and for some reason this mattered greatly.  I remember people arguing vehemently that the Police were really a reggae group and this seemed to be an important point.  Certain groups like Madness were really ska and not new wave and this mattered very much.  Then there were the sub discussions like who was the best drummer (Alex Van Halen or Neil Peart?) or guitarist (Eddie Van Halen or, for some reason, Michael Schenker?). 

 

 

 

Best Drummer: Obviously Neil Peart

 

Best Guitarist: Jimi, Living: Alex Lifeson;

 

Best Songwriter: Neil Young

 

All Canadian Line-up.  Only a loser would disagree.

 

Best drummer - agreed on Peart

 

Best guitarist - gotta be Eddie, although I have a soft spot somewhere down deep for Michael Schenker and his Flying V.  The cool pick back in the day was the "fastest" guitarist, Sweden's favorite son, Yngwie Malmsteen.  The songs sucked, but he played fast!

 

Best songwriter(s) - Lennon and McCartney of course!

 

All Canadian line up?  Jimi wasn't Canadian, was he?  I thought he was born in Seattle, but can't remember.  You can't have an all Canadian line up without including Triumph and, um, Aldo Nova?

 

I'll agree with Hendrix as best guitarist and Neil Young as the best song writer. But the best all-time drummer is a tie between Keith Moon and John Bonham.

[Kraven]

I'll agree with Hendrix as best guitarist and Neil Young as the best song writer. But the best all-time drummer is a tie between Keith Moon and John Bonham.

 

How is Neil Young a better songwriter than Lennon and McCartney?  Keith Moon and John Bonham are definitely contenders for the crown.  Both had that crazy drummer thing going on.