Value Investing

Ask your investment, budget, and other money related questions here
alex123711
Posts: 34
Joined: Fri May 15, 2020 8:33 pm

Value Investing

Post by alex123711 »

I have been a proponent of value investing for a long time, however moved largely to index funds, even though my value investments outperformed over a long period it was hard to know if/ how long that would continue. Value investing always made sense to me ( why buy all the good and bad businesses, when you can just buy the good ones, buying $1 for 50 cents etc.) and I am caught in 2 minds as to whether to just buy the index or do a combination of both. Are the famous value investors (Munger, Buffet, Pabrai, Schloss, Lynch etc) just outliers? How does the average/ normal value investor fare in the long term?

jacob
Site Admin
Posts: 13685
Joined: Fri Jun 28, 2013 8:38 pm
Location: USA, Zone 5b, Koppen Dfa, Elev. 620ft, Walkscore 73
Contact:

Re: Value Investing

Post by jacob »

Asking to choose which is better for "the average person" is bound to result in a thread of general statements and slogan-based tripe that's particularly likely to turn off actual value investors and basically lead to a state of Eternal September when it comes to learning new things.

In order to create a more productive thread, I suggest inquiring what value investors do in terms of analysis, methods, downturns, thoughts, feelings, ... A cheap way to learn is to get a subscription to AAII and follow their "shadow portfolio" which essentially is small-cap value. It's been maintained since 1993 and gets a few pages of discussion in their monthly magazine a few times per year. This should give a good idea of what's involved in managing a value portfolio.

alex123711
Posts: 34
Joined: Fri May 15, 2020 8:33 pm

Re: Value Investing

Post by alex123711 »

jacob wrote:
Tue Jan 11, 2022 9:47 am
Asking to choose which is better for "the average person" is bound to result in a thread of general statements and slogan-based tripe that's particularly likely to turn off actual value investors and basically lead to a state of Eternal September when it comes to learning new things.

In order to create a more productive thread, I suggest inquiring what value investors do in terms of analysis, methods, downturns, thoughts, feelings, ... A cheap way to learn is to get a subscription to AAII and follow their "shadow portfolio" which essentially is small-cap value. It's been maintained since 1993 and gets a few pages of discussion in their monthly magazine a few times per year. This should give a good idea of what's involved in managing a value portfolio.
I probably worded it incorrectly but I didn't mean which is better for the average person I basically meant how do value investors, apart from the famous/ well known ones fair.

Dave
Posts: 384
Joined: Fri Dec 19, 2014 1:42 pm

Re: Value Investing

Post by Dave »

@alex123711

There many practitioners who are much less well known than those you listed that have attractive long-term records. I'm not aware of any comprehensive review of folks who claim to practice value investing, but if you want to scan a number of partner/investor letters written by professionals (which often show performance), you can get a sense of it. Some targeted searches online will result in such letters, spanning many years.

User avatar
Bankai
Posts: 958
Joined: Fri Jul 25, 2014 5:28 am

Re: Value Investing

Post by Bankai »

I see no reason to think why an average value investor should do better than an average investor, and an average investor barely beats inflation. Better stick to index funds, do nothing, and beat the vast majority of individual investors while also saving time and nerves.

Image

steveo73
Posts: 1516
Joined: Sat Jul 06, 2013 6:52 pm

Re: Value Investing

Post by steveo73 »

Bankai wrote:
Tue Jan 11, 2022 5:52 pm
I see no reason to think why an average value investor should do better than an average investor, and an average investor barely beats inflation. Better stick to index funds, do nothing, and beat the vast majority of individual investors while also saving time and nerves.
I just read an article via an economist that was on COVID and policy settings and I thought this quote was relevant
In the before times, whenever I’d tell someone on a plane that I’m an economist, they’d ask what will happen to the share market or whether they should buy US dollars. Ironically, a key contribution of economics has been to explain that we cannot systematically make these predictions because if we could, we’d all be rich.
My take is that I'm an elite level investor. I've been mentored via a professional trader who has made millions. He ran a billionaires hedge fund and was Treasurer for Citibank in two different countries. He became Treasurer in one country at 28. He is really smart and a massive out performer.

I'm an elite investor because I invest in index funds. It's not about being average. It's about being elite.

steveo73
Posts: 1516
Joined: Sat Jul 06, 2013 6:52 pm

Re: Value Investing

Post by steveo73 »

alex123711 wrote:
Tue Jan 11, 2022 10:06 am
I probably worded it incorrectly but I didn't mean which is better for the average person I basically meant how do value investors, apart from the famous/ well known ones fair.
They aren't elite.

Dream of Freedom
Posts: 687
Joined: Wed Aug 29, 2012 5:58 pm
Location: Nebraska, US

Re: Value Investing

Post by Dream of Freedom »

Last edited by Dream of Freedom on Wed Jan 12, 2022 9:35 am, edited 1 time in total.

Dream of Freedom
Posts: 687
Joined: Wed Aug 29, 2012 5:58 pm
Location: Nebraska, US

Re: Value Investing

Post by Dream of Freedom »

The short answer is value outperforms on average, but the amount by which it does has lowered in the last 20 years, especially in large caps.

Long Answer:
Value stocks in the U.S. produce higher average returns for the full July 1963-June 2019 period than the market portfolio of all listed U.S. stocks (Market). Average value premiums are larger in the 28-year Fama-French (1992) period, July 1963-June 1991, than in the 28-year out-of-sample period, July 1991-June 2019, and we don’t reject the hypothesis that out-of-sample expected monthly premiums are zero. But inferences from average premiums are clouded by the high volatility of monthly premiums, and we also can’t reject the hypothesis that out-of-sample expected premiums are the same as in-sample expected premiums. In this situation, the full sample arguably provides the best evidence on long-term expected premiums. The lower average premiums of the second half lean against the strong average premiums of the first, but full-period average value premiums provide statistically reliable evidence of positive expected premiums.
The initial tests confirm that realized value premiums fall from the first half of the sample to the second. The average premium for Big Value drops from 0.36% per month (t = 2.91) to a puny 0.05% (t = 0.24). The Small Value average premium is a hefty 0.58% (t = 3.19) for 1963-1991, versus 0.33% (t = 1.52) for 1991-2019. Market Value, which is mostly Big Value, produces a first-half average premium of 0.42% (t = 3.25), declining to 0.11% (t = 0.60) for the second half.
For better understanding value premium refers to the greater risk-adjusted return of value stocks over growth stocks.

The full paper can be found here: https://papers.ssrn.com/sol3/papers.cfm ... id=3525096

WFJ
Posts: 166
Joined: Sat Apr 24, 2021 11:32 am

Re: Value Investing

Post by WFJ »

alex123711 wrote:
Tue Jan 11, 2022 9:29 am
I have been a proponent of value investing for a long time, however moved largely to index funds, even though my value investments outperformed over a long period it was hard to know if/ how long that would continue. Value investing always made sense to me ( why buy all the good and bad businesses, when you can just buy the good ones, buying $1 for 50 cents etc.) and I am caught in 2 minds as to whether to just buy the index or do a combination of both. Are the famous value investors (Munger, Buffet, Pabrai, Schloss, Lynch etc) just outliers? How does the average/ normal value investor fare in the long term?
Munger and Buffet were activist value investors who bought shares, took board seats and improved companies, this is not a strategy little guys can follow. Value investing results in FAR more investments in value traps than anything productive. Blind index unless you have enough money to take a board seat and time to wait for value to be realized. Blind index, do something else with your time will always result in higher utility than looking for value in public companies.

alex123711
Posts: 34
Joined: Fri May 15, 2020 8:33 pm

Re: Value Investing

Post by alex123711 »

WFJ wrote:
Thu Jan 13, 2022 9:21 pm
Munger and Buffet were activist value investors who bought shares, took board seats and improved companies, this is not a strategy little guys can follow. Value investing results in FAR more investments in value traps than anything productive. Blind index unless you have enough money to take a board seat and time to wait for value to be realized. Blind index, do something else with your time will always result in higher utility than looking for value in public companies.
I don't think they are activist investors, are they on the board of coca cola etc? Also there are other value investors such as Mohnish Pabrai, Walter Schloss etc I know that weren't activists.

Dave
Posts: 384
Joined: Fri Dec 19, 2014 1:42 pm

Re: Value Investing

Post by Dave »

You see a healthy mix of both with Buffett and Munger with some activist positions and some not. This became more doable as their AUM grew. Certainly in the beginning they didn't have the capital to do this, and still had a lot of success. As they grew, they did more of it. Obviously by the time Buffett wound down his personal operation and moved everything to Berkshire they were in control of Berkshire, and of anything it fully or largely acquired. But even then, they often took positions in stock and didn't have much special influence.

For what it's worth, he was on the board of KO for a good while, and then his son was. But you could find a lot of positions where neither he nor Munger were actively involved.

The upshot of all this is if you don't have control, it becomes extremely important to invest in companies with management who are focused on creating (public) shareholder value. Lots of these companies exist, but it's certainly not status quo.

steveo73
Posts: 1516
Joined: Sat Jul 06, 2013 6:52 pm

Re: Value Investing

Post by steveo73 »

Dave wrote:
Fri Jan 14, 2022 10:16 am
The upshot of all this is if you don't have control, it becomes extremely important to invest in companies with management who are focused on creating (public) shareholder value. Lots of these companies exist, but it's certainly not status quo.
I still don't get it. Let's assume the goal is to make money.

Just to clarify the situation:-

1. The average investor under performs the index. So if you are an active stock picker you are immediately in the pool of people that under perform.
2. Assuming you can somehow beat the market the profit differential is likely to be negligible. It's not like the index investor isn't already really close to your performance. You aren't being the index by much year on year. It's not going to happen unless you are leveraged. If you can actually pick markets why not trade and make big dollars. It's pretty easy if you can actually pick the market correctly and you use leveraged investments like futures.
3. If you pick stocks and win there are other complications. I've actually made money trading. You have to pay tax on those profits. If you make a loss though you do get a tax credit but for me it was only on future profits.

I fail to see why anyone would actually do this if you are trying to make money.

If anyone really believes differently surely they are multi-millionaires because it's so easy to make millions if you can trade markets well. So if you aren't at least a decamillionaire then you aren't one of the rare people who have the ability to trade and make money successfully over time.

I'll just add that Buffet/Munger are old. They grew up in a different time. The markets have changed. They aren't small time investors now.

white belt
Posts: 1012
Joined: Sat May 21, 2011 12:15 am

Re: Value Investing

Post by white belt »

If you're committed to value investing, you might find this interview with Mariusz Skonieczny interesting: https://www.youtube.com/watch?v=s5-CWaFytnQ

He basically argues that a publicly listed company is likely going to have everything priced in already if one is using a value lens, however there are opportunities with OTC companies. Obviously there are a risks specific to trading in OTC land, but it may be something worth looking into.

WFJ
Posts: 166
Joined: Sat Apr 24, 2021 11:32 am

Re: Value Investing

Post by WFJ »

alex123711 wrote:
Fri Jan 14, 2022 12:26 am
I don't think they are activist investors, are they on the board of coca cola etc? Also there are other value investors such as Mohnish Pabrai, Walter Schloss etc I know that weren't activists.
This is exactly what Buffet did. Without action, value will remain unlocked. Buffet/Munger were not as aggressive as Carl Icahn, but they all buy companies, take board seats or threaten to take board seats and unlock value of public companies. One can give capital to these value investors (usually long lockups) but doing it on your own is a waste of time/money. I'd never heard of Pabrai or Schloss. I saw Pabrai is buying BABA and would steer clear of this "value". Another issue is an annual report was shorter than a take-out menu when Buffet/Munger had their highest returns relative to the market.

In 1962, Warren Buffett began buying stock in Berkshire Hathaway after noticing a pattern in the price direction of its stock whenever the company closed a mill. Eventually, Buffett acknowledged that the textile business was waning and the company's financial situation was not going to improve.[vague] In 1964, Stanton made an oral tender offer to buy back Buffett's stake in the company for $111⁄2 per share. Buffett agreed to the deal. A few weeks later, Warren Buffett received the tender offer in writing, but the tender offer was for only $113⁄8. Buffett later admitted that this lower, undercutting offer made him angry.[15] Instead of selling at the slightly lower price, Buffett decided to buy more of the stock to take control of the company and fire Stanton (which he did). However, this made Buffett the majority owner of a failing textile business.

MBBboy
Posts: 16
Joined: Sat Jan 01, 2022 12:11 pm

Re: Value Investing

Post by MBBboy »

While we're on he subject of Buffett, realize that almost all of his money came after he turned 60

https://www.cnbc.com/2020/09/08/billion ... -rich.html

Yes, his initial success was based on value / activist investing. It's not useful or fair to dismiss his initial success. But he did not make the vast majority of his fortune by doing things we can't replicate. Once he was already rich, he was able to play a different game. And he's been playing that different game for a LONG time - and there's no shortcut for time.

More on topic - if there's a hunting ground to apply the principles of value investing, it's in private markets. Once you become an accredited investor, you can then start to participate in a bunch of private deals. Companies have stayed private longer, been much bigger when they've gone public, and the number of public companies has been declining over time. There are a few interesting reasons why that can be discussed (Increased regulatory cost for being public, high amounts of capital looking for a home), but developing the ability to get in that game may be important going forward.

But of course, VC investing is a complete crapshoot and there's a ton of ways to get burned

alex123711
Posts: 34
Joined: Fri May 15, 2020 8:33 pm

Re: Value Investing

Post by alex123711 »

steveo73 wrote:
Fri Jan 14, 2022 9:09 pm
I still don't get it. Let's assume the goal is to make money.

Just to clarify the situation:-

1. The average investor under performs the index. So if you are an active stock picker you are immediately in the pool of people that under perform.
2. Assuming you can somehow beat the market the profit differential is likely to be negligible. It's not like the index investor isn't already really close to your performance. You aren't being the index by much year on year. It's not going to happen unless you are leveraged. If you can actually pick markets why not trade and make big dollars. It's pretty easy if you can actually pick the market correctly and you use leveraged investments like futures.
3. If you pick stocks and win there are other complications. I've actually made money trading. You have to pay tax on those profits. If you make a loss though you do get a tax credit but for me it was only on future profits.

I fail to see why anyone would actually do this if you are trying to make money.

If anyone really believes differently surely they are multi-millionaires because it's so easy to make millions if you can trade markets well. So if you aren't at least a decamillionaire then you aren't one of the rare people who have the ability to trade and make money successfully over time.

I'll just add that Buffet/Munger are old. They grew up in a different time. The markets have changed. They aren't small time investors now.
Even a 2-3% out-performance is significant over time/ when compounded.

steveo73
Posts: 1516
Joined: Sat Jul 06, 2013 6:52 pm

Re: Value Investing

Post by steveo73 »

alex123711 wrote:
Tue Jan 18, 2022 6:39 am
Even a 2-3% out-performance is significant over time/ when compounded.
Of course but that doesn't change the picture at all though.

1. The people who think they can outperform typically don't. They underperform.
2. If you can manage that performance you are probably a guru. If you are a guru you can make a fortune trading. Why try and outperform like that when you can trade futures and clean up big time.

If you aren't a decamillionaire then you are in group 1. If not why not become a decamillionaire and be in group 2.

Dave
Posts: 384
Joined: Fri Dec 19, 2014 1:42 pm

Re: Value Investing

Post by Dave »

A lot of claims about Warren Buffett and value investing being made here are true to a degree, but a bit misleading. Some notes:

-Buffett and Munger did not perform activism or have the ability to influence boards at all companies they invested in. There’s no doubt they did this at some – look at Berkshire as the obvious blatant example – but there have been innumerable situations where they took purely passive stakes. To the extent that their excess returns ONLY came from activism, then this would indeed imply that active value investing is pointless. However, this is just not true – Buffett was putting up incredibly strong results far before he had enough capital to move the needle in getting board seats or otherwise influencing business management/capital allocation.

Which ties into what I said above: if you are not taking controlling stakes, you need to invest in a business whose management are focused on creating shareholder value. You can see this in Berkshire’s recent investment in AAPL. He didn’t invest in AAPL until the business was mature/predictable, and a new CEO who was focused on shareholder value was at the helm.

I don’t know the exact breakout here, but I’ve read both Buffett biographies, all his partnership letters, and all of Berkshire letters, and it is highly misleading to imply that activism accounts for a significant amount of his alpha throughout his whole career. There were definitely phases where it did, though.

-While it is true that without action it is harder to unlock value, it is not true that it will remain unlocked indefinitely. There are several paths to value for non-controlling investors.

One common one is that a larger fish than you will see the value and create some sort of action (making a large position, an announcement, etc.) that will drive the price up. So it doesn’t have to be you, because others will see it, too.

But even without that, stock prices just oscillate a lot, generally around value, if in (to a value investor’s framework) random patterns. Most value investors say that within 2-5 years generally price intersects with value. This matches my experience. One thing I would clarify here is you have to be realistic about what’s happening at the business – if you own a business in long-term decline with exorbitant management comp, even a stock trading at 50% its NCAV can be a loser. It needs to be real, legitimate value.

-A point about annual reports being as long as a menu is a bit of an exaggeration, but the broader point that things are more complicated is certainly true. The world and its industries move faster, there is far more disclosure, and there are far more eyeballs/stocks out there hunting for cheap stocks. It’s certainly harder than it was in the 1950s, but there are also pockets of the market that are less efficient (@white belt hits on this above, but it’s a lot broader than just looking OTC). I’m not 100% on this figure, but I believe there are over 100,000 publicly traded stocks in the world (when factoring in things like OTC stocks in the US and similar elsewhere).

For those who have spent time looking at such things, it’s laughable to think that all of these are efficiently priced. There’s a lot of reasons for such inefficiency, one of which is there is little economic incentive for big money to be looking at companies with market caps of sub-$50M. And these companies are often much easier to understand, and their stock prices can be wild.

-I’m not sure what the point is about the dollar-weighted return analysis of Buffett – of course most of anyone’s returns, in a lifetime of positive returns, will come later in life. If the point was that he had some sweetheart deals later in life, sure, that’s true to a degree. But it’s not all-compassing. Again with AAPL, Berkshire has made an absolute fortune in AAPL (to date) without a controlling or influencing position. This shows the ability to generate excess returns without influence, but the dollar amounts involved in AAPL, a mammoth amount of Berkshire’s value relative to its lifetime results, are just a function of how compounding works.

-Comparing someone who has the length of record with Jim Simons to Buffett is silly – you can’t sustain high returns as your capital base grows (and you have fewer and fewer investment options, and effectively get closer and closer to being the market). In their dominant fund(s?), Simons/Renaissance returns most of their profits to investors every year for this very reason, and if they didn’t their record would be nowhere close to what it is. Not to take away – it’s incredibly amazing!

-There is a sentiment expressed in this thread that it’s impossible/worthless to try to beat the market via value investing, but in my personal experience (admittedly just 7 years) and in those of my more experienced friends/mentors/teachers, there are most certainly people who practice value investing and beat the market by at least the 2-3% annual outperformance @alex mentioned. As @alex said, this amounts to massive outperformance over time. As a simple example, the difference between a 5% and an 8% return over 50 years is 4x. Or perhaps more to home for early retirees, an extra 3% per year could be the difference between having to save up 14 years of expenses, or 25 (granted this is a little simplistic). And I'm just talking about 3% outperformance.

Despite all of the above, I do not want to give off the wrong impression at all. Value investing is hard work, it takes a lot of time, many people will find it very boring, it can be emotionally frustrating, outperformance is often lumpy meaning there are individual years and series of years you underperform, and most humorously you have people tell you it’s impossible over and over :-D. Despite all of this, there are people doing it successfully.

To the OP, I think it’s really, really hard to know how the “average/normal” value investor does, because there is extremely little data on how folks who practice value investing specifically do. I would love to know the answer to this, too.

My guess is that people learn within a few years whether or not they have the cognitive/emotional wiring and time/interest for it, and if they don’t they move on and do other techniques like indexing, because they are cognitive that there is an opportunity cost to what they are doing, and why do all that work for equal or worse returns? Those who succeed probably keep going until they lose interest/where it’s no longer worthwhile.

Crusader
Posts: 213
Joined: Wed Aug 19, 2020 11:16 pm
Location: Toronto, Canada

Re: Value Investing

Post by Crusader »

If you want to get exposed to value investing while being diversified and systematic, why not look into factor investing?
https://www.amazon.com/Your-Complete-Gu ... B01N7FCW2D

You don't have to go all out on factors. I will only slightly tilt my index portfolio using factors next time I rebalance (probably using AVUV and AVDV).

Post Reply