Value Investing

[steveo73]

While the question of whether active value investing is doable/worthwhile is relevant, it is certainly not the only point of this thread, and the brushing aside of other aspects of value investing probably what was being suggested is/was the “problem”.

Not true at all. The problem is people trying to brush aside any criticism of active investing. That is the issue. No one has stated you can't mention active investing. The only brushing aside is people trying to make out that any talk about passive vs active investing is not acceptable.

So the brushing aside is clearly the people trying to shut down any discussion which states that active investing isn't as good as what they think.

I think the real issue is that active investing doesn't hold up and this forum has a bunch of people who want to be special snowflakes.

[prudentelo]

@steveo73

What concerns me is that ETF makes index investing so easy that it must suppress returns. At one time index investing needed both insight and some time and complex juggling with broker creating and maintaining a personal index. Now it's default approach and you execute with three clicks. Take some work out of it, and you should suppress return as well.

That doesn't mean anything else is better and doesnt mean return suppressed to zero either (most return of index approach comes from buying dips/selling peaks that are driven by the overexcited and undisciplined and inviting more retail investors might even increase this return).

But does call in to question "rules" based on back-testing.

Countervailing factor is that with brokers expenses were high so the expense-adjusted return may now be higher for small-cap investors like most of us here (lower for big fish). Back-testers tend to ignore extremely high expense ratios of old style broker investing that effectively priced normal people out of equities.

Same factor that today kills diversification with e.g. oil.

[conwy]

Just want to mention, if it hasn't been mentioned already, that you can be a value investor while using index-like / passive-ish funds.

Avantis provides ETFs such as AVUV (US Small Cap Value), AVDV (International Developed Small Cap Value), AVES (Emerging Markets Value), etc. They are technically actively managed, but in reality, based on very rigorous rules, not subject to investor biases and charging very low fees, so overall very index-like. Kind of like Russel 2000 but also filtered for value metrics (e.g. price to book).

Advisors adhering to this evidence-based Fama-French school of thought recommend allocating a smaller percentage of your portfolio to these small-value/value funds and keeping the rest in total market index funds. The idea is that the value funds will help smooth returns and slightly increase overall returns but the total market funds will help carry you through extended periods of value underperformance without you having to sell down.

[steveo73]

What concerns me is that ETF makes index investing so easy that it must suppress returns.

Why ?

But does call in to question "rules" based on back-testing.

Back-testing is the only thing you can do but the future will not be the same as the past so back-testing is far from perfect.

Back-testers tend to ignore extremely high expense ratios of old style broker investing that effectively priced normal people out of equities.

Same factor that today kills diversification with e.g. oil.

I have a personal preference against commodity investing. I have actually traded which I think is unusual on this forum. There is a cost to holding gold and/or commodities. There can actually be a positive holding cost if you purchase a currency with a higher interest rate than the currency you are selling against. This carrying cost can be extremely beneficial or it can hurt your position. Commodities have a high holding cost.

I'll add that having a personal preference against something is very different to stating that it's a dumb thing to do. I think people in general can make this work.

I don't think many if any people make active investing work.

[steveo73]

Just want to mention, if it hasn't been mentioned already, that you can be a value investor while using index-like / passive-ish funds.

Avantis provides ETFs such as AVUV (US Small Cap Value), AVDV (International Developed Small Cap Value), AVES (Emerging Markets Value), etc. They are technically actively managed, but in reality, based on very rigorous rules, not subject to investor biases and charging very low fees, so overall very index-like. Kind of like Russel 2000 but also filtered for value metrics (e.g. price to book).

Advisors adhering to this evidence-based Fama-French school of thought recommend allocating a smaller percentage of your portfolio to these small-value/value funds and keeping the rest in total market index funds. The idea is that the value funds will help smooth returns and slightly increase overall returns but the total market funds will help carry you through extended periods of value underperformance without you having to sell down.

This sounds a better approach but again personally I don't really like it. I just think why not just put all your money in the total market index fund.

One other point I'd make is that if I was super-rich I would diversify further. When you are trying to retire with as small a pot as money as possible I think trying to game your results is extra risky. You are playing with money that you need.

There is a guy on the MMM forum who invests in things like selling options to jack up his returns due to having a small portfolio. I think he is doing okay but there is no way I would take that risk.

[herp]

@steveo73

What concerns me is that ETF makes index investing so easy that it must suppress returns. At one time index investing needed both insight and some time and complex juggling with broker creating and maintaining a personal index. Now it's default approach and you execute with three clicks. Take some work out of it, and you should suppress return as well.

I don't think there's any reason to be concerned about passive investing suppressing returns. Passive funds still only perform a fraction of active trading, so they are far from dominant in price setting

https://occaminvesting.co.uk/the-market ... investing/

[alex123711]

Just want to mention, if it hasn't been mentioned already, that you can be a value investor while using index-like / passive-ish funds.

Avantis provides ETFs such as AVUV (US Small Cap Value), AVDV (International Developed Small Cap Value), AVES (Emerging Markets Value), etc. They are technically actively managed, but in reality, based on very rigorous rules, not subject to investor biases and charging very low fees, so overall very index-like. Kind of like Russel 2000 but also filtered for value metrics (e.g. price to book).

Advisors adhering to this evidence-based Fama-French school of thought recommend allocating a smaller percentage of your portfolio to these small-value/value funds and keeping the rest in total market index funds. The idea is that the value funds will help smooth returns and slightly increase overall returns but the total market funds will help carry you through extended periods of value underperformance without you having to sell down.

I have also looked into this and there are some problems with it e.g the metrics they use. I think I will keep investing a small % in value stocks while keeping the rest in the index. In my head I just don't see how buying good companies for fair or cheap prices can underperform in the long term, although I know its obviously not that simple.

I also think value will outperform the index in general in the next decade as the market has been on a bull run. I expect both returns to be on the low side.

[prudentelo]

Is value investing young men showing their belief they are immortal?

[steveo73]

Is value investing young men showing their belief they are immortal?

The way you view finances is a lot like the way you view the world. We all have biases. I suppose the way people invest highlights their biases and even approach to life.

[Dream of Freedom]

Is value investing young men showing their belief they are immortal?

What would make you assume that most value investors are either young or men? And could anyone even know the answer without mindreading? I assume this was a rhetorical question.

[steveo73]

What would make you assume that most value investors are either young or men? And could anyone even know the answer without mindreading? I assume this was a rhetorical question.

The issue is that if you take a step back and be rational it doesn't appear rational to not invest via following the guidelines of modern portfolio theory. So the question becomes why do it ?

It's a big question and you have to take out of the equation a lack of education and a lack of care. Plenty of people would fit into these categories. If you don't fit into that category is the only real reason hubris ?

[frommi]

The issue is that if you take a step back and be rational it doesn't appear rational to not invest via following the guidelines of modern portfolio theory. So the question becomes why do it ?

It's a big question and you have to take out of the equation a lack of education and a lack of care. Plenty of people would fit into these categories. If you don't fit into that category is the only real reason hubris ?

Maybe because you have your own bias and think "modern" portfolio theory is the holy grail? As Ben Graham or Charly Munger said, all intelligent investing is value investing

[steveo73]

Maybe because you have your own bias and think "modern" portfolio theory is the holy grail? As Ben Graham or Charly Munger said, all intelligent investing is value investing

That would be hubris but I don't think that is my situation. I also don't believe a holy grail exists when it comes to investing and maybe nowhere in life. I just believe MPT is the most well thought out, researched and proven approach to investing that exists right now. If something better comes along I expect I'll change my approach.

You make a good point though. I was thinking that one way to see people's bias is that you state them openly. The problem is that requires self-awareness and we are talking about hubris when it comes to investing. How many people can do this ?

In stating that I'll articulate my bias which I think puts it all out there.

I am a rational data driven person, I don't believe that I (or anyone else) are investment guru's. As I follow a data driven approach I follow modern portfolio theory and invest in index funds. I want simple proven ways to manage my wealth and I want that approach to scale.

I am actually discussing how to invest a large amount of wealth now (10's of millions) and it's interesting seeing people's bias in play when it comes to how to do this. Some people want to build condominiums in order to improve the yield on this portfolio. No one wants index funds. Index funds are boring. They also provide the best risk reward return that you can get. I think the financial literacy of the average person is extremely low and I think the reason for this is basically people like bright lights rather than cold hard facts.

Do you think Ben Graham and Charlie Munger would be investment guru's if they were born today ? It's an interesting question right. My take is no chance.

[frommi]

To follow MPT you have to agree in EMT. But i have seen so many stupid market moves that EMT is just a joke. Stock split announcement and the stock is up 8% on that news, wtf?
In the very long term the market prices a stock correct, but in a shorter timeframe like 2-5 years the market will be wrong more often than right. So how do you know if the market price is right or wrong right now? EMT says its always right, but that is pure bullshit, you just have to watch the market prices long enough to understand that. So you have to have some kind of financial model to understand what the real value of an asset is. Of course you can buy a lot of assets at once and hope that at least some prices are cheap or fair. But at some point you will only buy expensive assets because liquidity in the market has driven prices of all assets up to a point where the future return is zero or negative. Because what really drives prices in the market is liquidity. And of that we had a lot in the past years.

[steveo73]

To follow MPT you have to agree in EMT. But i have seen so many stupid market moves that EMT is just a joke. Stock split announcement and the stock is up 8% on that news, wtf?

This isn't true at all. It's not even a valid criticism.

The reason index investing is a safer approach is that your risk is limited to basically market risk. It doesn't have anything at all to do with EMT.

The market can go crazy up and/or down and you get that return. You aren't taking on specific stock (or commodity or whatever ) risk.

So how do you know if the market price is right or wrong right now?

You don't care. It's not your problem. You invest to get a piece of the pie long term. The price is in some ways irrelevant.

But at some point you will only buy expensive assets because liquidity in the market has driven prices of all assets up to a point where the future return is zero or negative. Because what really drives prices in the market is liquidity. And of that we had a lot in the past years.

This completely misses the point. The assets are only high because there is excess liquidity. That excess liquidity goes into everything. I suppose you can invest in cash and wait it out but we are back in the domain of hubris. You think you know better than the market. You may get that right sometimes but the kicker is you can be right and lose money hand over foot.

[frommi]

Ask japanese investors how good it was to invest in the market in 1990 at absurdly high prices. But of course they just took the market risk.

[sky]

The true economic value of any equity is 25x what they can reliably and consistently pay out in dividends each year. Any additional cost to purchase the equity is based on speculation.

[steveo73]

Ask japanese investors how good it was to invest in the market in 1990 at absurdly high prices. But of course they just took the market risk.

It's a good argument for having a broader index but it's also how it goes. You can make it a lot broader and get a world stock index but even if you did that could have negative returns for years.

The thing is MPT helps with this.

Who wins if we get 50 years of negative stock returns - the value investor or the person who follows MPT. I know which one I'm betting on. The MPT might have a permanent portfolio type of approach and do well. The value investor is in the same position as the 100% stock index investor. I'd still go for the index investor over the value investor anyway. The value investor gets the market return plus or minus his stock picking ability. I bet he'll get it more wrong than right.

I still think if you openly state your bias that helps highlight the potential hubris but I think that is too hard for people to do because they want to have their little fantasies about how smart they are,

[steveo73]

The true economic value of any equity is 25x what they can reliably and consistently pay out in dividends each year. Any additional cost to purchase the equity is based on speculation.

Not dividends. It doesn't work like that.

Paying dividends is the same as selling stock. Dividends and appreciation both matter.

[frommi]

Ok steve i got it, 50% of posts in this thread are from you and you just want to do MPT, i get it. Maybe you should just create a thread called "MPT investing" and discuss it there?

The true economic value of any equity is 25x what they can reliably and consistently pay out in dividends each year. Any additional cost to purchase the equity is based on speculation.

This is much too simple, but maybe we can get back later to this topic

My starting point for value investing was:

What is an american business with 10 million $ cash in the bank, 0 employees, 0 liabilities and and 1 million shares outstanding worth per share? What is the true value? Why can i sometimes buy similar businesses for 50% of that value in the market?