Value Investing

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alex123711
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Value Investing

Post by alex123711 »

I have long believed in value investing and did quite well before I discovered indexing. I'm wondering whether it is worthwhile putting a small portion (or more) back into value stocks, however I am well aware the average investor does not outperform the index and their chances go down over time. Value investing makes sense but I found it difficult to find any conclusive evidence for value investing as a strategy and how many small investors actually do beat the market over a long period of time using value investing. We all know about buffet, munger, lynch etc but they are probably just outliers.

spiritess
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Re: Value Investing

Post by spiritess »

If you have less than 1 million then use the netnet strategy. 20-35% returns
https://www.youtube.com/watch?v=rP1sYhmENSU

spiritess
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Re: Value Investing

Post by spiritess »


plantingtheseed
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Re: Value Investing

Post by plantingtheseed »

Not too optimistic about the prospects of real future market returns, index, value or otherwise as we are in a previously uncharted waters of fed induced massive bubble.

Be fearful when others are greedy and be greedy when others are fearful would be the proper sentiment that I would express at this point.

If the "system" remains intact when the dust settles, then those with more green claim checks relative to others will fare better.

Not sure if asking who got to the finish line first is the right question.

Lucky C
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Re: Value Investing

Post by Lucky C »

Value Investing in the Benjamin Graham sense of "getting a dollar for 50 cents" will always work, but where can you get a dollar for 50 cents these days? Not many places with the combination of cheap money and investor euphoria we have today.

Value Investing in the sense of buying some value index ETF that holds 300 stocks with an average market cap of $100 billion? I don't know about that. These funds aren't looking for a "dollar for 50 cents deal" so much as they are buying everything, market cap weighted, that doesn't fall into a "growth" screen.

A value fund has pretty good odds to beat a growth fund over the next 5-10 years, but "beating" could involve an 80% drop in the growth fund and "only" a 40% drop in the value fund at some point in the next few years. Actually we may be in an even broader bubble (compared to 2000 for example) where a growth fund could drop 70%, the index could drop 60%, and a value fund could drop 50%. That would meet the goal of beating the market, but most value fund buy-n-holders probably would not be very happy with losing half their investment.

So it appears to me that one would have to be very selective and work very hard at a DIY solution (different than what the passive value funds are doing) to get great returns starting from where we are now. If you don't want to work too hard, you could instead try being patient since the odds are extremely high that there will be better opportunities for value investors in the next year or two vs. now.

By the way I am writing this based on US equities. Might be a totally different story in other countries or other markets.

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Lemur
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Re: Value Investing

Post by Lemur »

Some Mall REITs like MAC are trading below book value (Ben Graham style). Investing in these sort of REITS per 2008 crash ended up becoming very lucrative. If you think the same thing can happen (I do), then might be worth further investigation.

Dave
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Re: Value Investing

Post by Dave »

As @Lucky C said, value investing will always work because value investing is simply buying assets (and I don’t just mean asset-based stocks, but rather any sort of asset like an equity that produces cash flow) for less than they are worth, which is obviously a winning strategy, by definition. The wrinkles/uncertainty/difficulties come in that because you’re dealing with publicly-traded securities, it can at times take a long time for it to “work” (meaning the price converges with value), and then when you layer on human behavior during volatile swings in a long holding period, a large number of people are incapable of actually executing the strategy across full market cycles.

Of note, many conflate value investing (as defined above, buying assets for less than they’re worth) with buying “value” stocks, i.e. stocks with low P/B, P/E, etc. Broadly speaking, for much of the last century the relationship between these two ideas was pretty similar, as “old economy” companies could be reasonably valued off metrics like assets/book value because (for just one reason) the world was changing at a slower pace so historical metrics like ROE and book value could be applied fairly easily to derive a reasonable valuation. As more and more industries have undergone change, accounting regulations have lagged business model changes/economic reality, and other trends, metrics like book value and even reported earnings have become less useful in determining value.

The point being that P/B is not as useful in 2021 as it was in 1921, and that value stocks as bucketed by fund companies like Vanguard are probably all things equal less likely to outperform to the same degree. (Note, I’m not saying they won’t work at all though, and strategies like net-net investing as mentioned by the folks above are likely to continue to do well when applied intelligently, but perhaps “less better” than in the past.)

That’s not necessarily a cause for concern though, it just means you have to dig a little deeper to do valuation. This makes sense – as more people have applied themselves to investing, the market has become more efficient and it’s harder to outperform.

I don’t have as much concern as many other people about how investors are necessarily doomed for mediocre/poor returns in the coming years. I consider myself a “value investor”, and as someone who does bottom-up stock picking I see a lot of cheap stocks out there. I’m not ignorant of all of the concerns regarding things like index price levels, interest rate prospects, etc. It’s just that there are something like 10,000 stocks trading in just the US alone (I’m including over-the-counter stocks), and then there is the whole rest of the world with far more. If one is willing to embrace more concentration, it’s pretty much certain one could find a sufficient number of cheap stocks out of 10,000+.

Ultimately, a value investor is concerned with getting more value than they’re paying for. A simple/obvious way to think about this is the cash flow earned on the price you’re paying. I own a stock that’s trading at less than 5x what it earned last year. I have reason to think this company can sustain such profits for well more than 5 years, so I’m going to do OK. It’s true that if markets plunge and stay down, or simply stay flat, this company’s stock may not move much (although this is likely for the more obscure stocks out there, as generally correlations with indices are lower) for quite a length of time. In that case, I’ll have to be patient and deal with price volatility – the two things I noted above.

But, I am just as hopeful today for value investing, as defined as buying assets for less than they’re worth, as any other time. One just needs to be correct in their assessment of how the company’s cash flows hold up in various environments and how changes in interest rates might affect the value of the company. If one does these things, and is able to hold their stocks sufficiently long, one will do well.

Tying back to the OP, I’m less optimistic about “value funds” (the low P/E, P/B, etc.) than real value investing. I don’t spend much time looking at value funds, but I know they have underperformed for quite a while (relative to markets and specifically growth) and many think we are do for a reversion. I don't have a useful opinion on that.

Lucky C
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Re: Value Investing

Post by Lucky C »

To add some history to what I was getting at above combined with some points Dave was making:

Absolute value always works but dramatically varies in difficulty over time. At valuation extremes for the overall market, the absolute value typically matters more than relative over/undervaluation of value vs. growth.
1982: Buy a few "blue chip" stocks without doing any research and hold for a few decades, and you'll retire a millionaire.
2021: Do tons of research and be extremely selective and you might be able to beat inflation over the next decade.

Relative value (e.g. a value fund or simplistic screening method) can be as difficult as you want it to be (from just buying a fund to doing a ton of research on individual stocks), but only sometimes works since value vs. growth can over/underperform for many years at a time.
1997-2000: Everybody gets more in love with growth while value dramatically underperforms
2000-2002: Everybody rushes out of growth, value declines but not nearly as much as growth
2003-2007: Everybody was recently burned by growth and value greatly outperforms.
etc...

Unfortunately in 2021 it appears that valuations are very high on an absolute level, plus there is not as much of a relative difference between value and growth as in 2000 for example. Reasonable value opportunities of just a few months ago (e.g. GME) have since been bid up to extreme levels that doesn't make them much better than growth stocks. For these reasons I believe this is one of few points in our history where it makes sense to hold extra cash for future opportunities despite being in a bull market that has still been making new highs in the past week.

alex123711
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Re: Value Investing

Post by alex123711 »

Lucky C wrote:
Tue Feb 09, 2021 10:46 am
Value Investing in the Benjamin Graham sense of "getting a dollar for 50 cents" will always work, but where can you get a dollar for 50 cents these days? Not many places with the combination of cheap money and investor euphoria we have today.

Value Investing in the sense of buying some value index ETF that holds 300 stocks with an average market cap of $100 billion? I don't know about that. These funds aren't looking for a "dollar for 50 cents deal" so much as they are buying everything, market cap weighted, that doesn't fall into a "growth" screen.

A value fund has pretty good odds to beat a growth fund over the next 5-10 years, but "beating" could involve an 80% drop in the growth fund and "only" a 40% drop in the value fund at some point in the next few years. Actually we may be in an even broader bubble (compared to 2000 for example) where a growth fund could drop 70%, the index could drop 60%, and a value fund could drop 50%. That would meet the goal of beating the market, but most value fund buy-n-holders probably would not be very happy with losing half their investment.

So it appears to me that one would have to be very selective and work very hard at a DIY solution (different than what the passive value funds are doing) to get great returns starting from where we are now. If you don't want to work too hard, you could instead try being patient since the odds are extremely high that there will be better opportunities for value investors in the next year or two vs. now.

By the way I am writing this based on US equities. Might be a totally different story in other countries or other markets.
I don't believe it has/ will always work for everyone, I'm sure many people have lost money value investing

alex123711
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Re: Value Investing

Post by alex123711 »

spiritess wrote:
Tue Feb 09, 2021 1:02 am
If you have less than 1 million then use the netnet strategy. 20-35% returns
https://www.youtube.com/watch?v=rP1sYhmENSU
I don't think those returns are realistic, not even buffett etc made those sorts of returns

Redo
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Re: Value Investing

Post by Redo »

^ Buffett has also said he could average 50% a year managing millions instead of billions.

white belt
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Re: Value Investing

Post by white belt »

@Spiritess

Where are you pulling these return numbers from for net-net? I’ve only read a little bit about net-net, but I’m highly skeptical of an investment strategy that doesn’t factor in larger macroeconomic trends. The strategies that worked the past 40 years are unlikely to work the next 40 years. See 60/40 portfolio, various “value strategies” that rely on low volatility, strategies that rely on an information edge, etc.

Edit: If an investing strategy is written about in a pop non-fiction book, then it’s probably 10+ years too late to implement it.

alex123711
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Re: Value Investing

Post by alex123711 »

white belt wrote:
Sat Feb 20, 2021 3:23 pm
@Spiritess

Where are you pulling these return numbers from for net-net? I’ve only read a little bit about net-net, but I’m highly skeptical of an investment strategy that doesn’t factor in larger macroeconomic trends. The strategies that worked the past 40 years are unlikely to work the next 40 years. See 60/40 portfolio, various “value strategies” that rely on low volatility, strategies that rely on an information edge, etc.

Edit: If an investing strategy is written about in a pop non-fiction book, then it’s probably 10+ years too late to implement it.
Not too sure what you're saying here but are you saying you think 60/40 will be unlikely to work in the future?

white belt
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Re: Value Investing

Post by white belt »

@alex123711

Correct. Many of the popular portfolios today suffer from recency bias. Consider that 91% of the price appreciation over the past 90 years of a 60/40 portfolio came from 1984 to 2007*. We've had the longest bull market in history for both stocks and bonds over the past 40 years. Do you really think we're due for another 40 years of all time highs in stocks and bonds?

Stocks and bonds are not a good hedge in different economic scenarios because they are actually quite correlated if we look at historical periods beyond the past 40 years.

To pull another famous quote that sums up my skepticism of putting a ton of faith into strategies used by investing "titans", there's this one from Bill Gross' Man in the Mirror (also referenced in Chris Cole's work):
Bill Gross wrote: But let me admit something. There is not a Bond King or a Stock King or an Investor Sovereign alive that can claim title to a throne. All of us, even the old guys like Buffett, Soros, Fuss, yeah – me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience. Since the early 1970s when the dollar was released from gold and credit began its incredible, liquefying, total return journey to the present day, an investor that took marginal risk, levered it wisely and was conveniently sheltered from periodic bouts of deleveraging or asset withdrawals could, and in some cases, was rewarded with the crown of "greatness." Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch.
That's not to say these strategies don't work for short/medium periods of times. But you're going to get burned when the game changes if you don't understand the macroeconomic backdrop that makes a strategy work.


* = check out Chris Cole's Allegory of the Hawk and Serpent for more in-depth analysis.

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Bankai
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Re: Value Investing

Post by Bankai »

white belt wrote:
Sun Feb 21, 2021 6:39 pm
Do you really think we're due for another 40 years of all time highs in stocks and bonds?
I don't know about 40 years and bonds, but equities - why not? Innovation is only accelerating. Pretty much the whole world ex-US went nowhere for the last 13-30 years: Nikkei just exceeded its 1991 peak, FTSE is still below 1999 level, so is CAC, emerging markets went nowhere since 2007. Only Dax is not in red, but doubling in 20 years in barely spectacular. And all that is in nominal terms, in real terms all these markets are still underwater (except Dax) compared to their peaks decades ago. Looks to me like the world (ex-US) might be ripe for some serious catching up over the next decade or so.

white belt
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Re: Value Investing

Post by white belt »

@Bankai

I was speaking from the US perspective but I agree there will probably be opportunities in emerging markets in the coming decades.

What makes you think innovation is accelerating? Innovation flourishes with the free flow of goods, ideas, and capital around the world. That free flow has slowed down dramatically during COVID19 and likely won't ever return as the world becomes de-globalized into several large spheres of influence, each with their own supply chains and trade agreements (my guess is these spheres will be the USA, Europe, and China at the very least).

spiritess
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Re: Value Investing

Post by spiritess »

white belt wrote:
Sat Feb 20, 2021 3:23 pm
@Spiritess

Where are you pulling these return numbers from for net-net? I’ve only read a little bit about net-net, but I’m highly skeptical of an investment strategy that doesn’t factor in larger macroeconomic trends. The strategies that worked the past 40 years are unlikely to work the next 40 years. See 60/40 portfolio, various “value strategies” that rely on low volatility, strategies that rely on an information edge, etc.

Edit: If an investing strategy is written about in a pop non-fiction book, then it’s probably 10+ years too late to implement it.
https://www.netnethunter.com/net-net-st ... -strategy/

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