Value Investing

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zbigi
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Re: Value Investing

Post by zbigi »

Dave wrote:
Tue Jan 18, 2022 6:08 pm
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.
Sounds a bit like a part-time low-wage job to me. Let's say your stash is $500k, then then extra 3% you get thanks to value investing amounts to $15k a year. That's better return than working at McDonald's (assuming the value investing doesn't consume 40 hours per week), but with more stress, and a risk of screwing up you stash. If someone's interested in investing anyway then it's great to be paid for a hobby, but otherwise it doesn't look like that great of a proposition.

Dave
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Re: Value Investing

Post by Dave »

Crusader brings up a good point – do you want to be an active value investor, or try a passive approach that weights value factors? This style approach has tested quite well for pretty long time periods over the last century (albeit struggling in the more recent past, though). There are advocates of it today (Joel Greenblatt, Tobias Carlisle, etc.) You can invest in funds that drill down a bit for a slightly higher fee, or it can be pretty easily done with great extremely low cost funds

My concern with it is that because of its quantitative nature, it seems more prone than the active approach to having excess profits being squeezed to zero by large quantitative investors who can do this sort of thing at scale. Its recent underperformance may suggest that, or perhaps we are just in the latter stage of a cycle.

I’m not sure either way. I haven’t dug deeply into it, and don’t know all the arguments for why it could still be valid. My rough guess is that it has a decent chance of outperformance throughout the cycle, but the alpha will be a bit less than active value investing (which makes sense given less effort).
zbigi wrote:
Wed Jan 19, 2022 9:21 am
Sounds a bit like a part-time low-wage job to me. Let's say your stash is $500k, then then extra 3% you get thanks to value investing amounts to $15k a year. That's better return than working at McDonald's (assuming the value investing doesn't consume 40 hours per week), but with more stress, and a risk of screwing up you stash. If someone's interested in investing anyway then it's great to be paid for a hobby, but otherwise it doesn't look like that great of a proposition.
This is a very fair assessment (given your assumptions, the stash level and the % outperformance), and to me cuts to the core of an ERE'rs analysis of whether it's worthwhile. It is basically a part-time job with its own unique challenges and a lot of uncertainty at first, and that's why I don't think it's especially worthwhile unless you really enjoy it and are OK with the risk that you might not succeed.

I really enjoy it, and thought I would be able to make a go of it. In the beginning, the economics are pretty poor as you said. However, to the extent you generate larger outperformance for increasingly long periods of time, it gets a significantly better. Sure, 3% extra per year on 500 is just 15, but if you run those scenarios out 10-30 years it gets significantly different as that outperformance continues to compound on itself. And even more so if you generate higher outperformance than 3%.

But I completely agree with your assessment that is basically a (part-time, or more) job, and that is a really big point for someone considering trying it. I sometimes get the impression people think that you can spend 5 hours a week reading financial news or listening to podcast or reading Seeking Alpha write-ups on a stock/theme and that that is enough to come up with ideas with alpha. That's very unrealistic.

However, for those who really enjoy reading about and studying how the world/industries/businesses work, modeling future scenarios, and monitoring a watchlist of companies, it can be pretty stimulating and enjoyable, and an enjoyable use of time like any other hobby, with the additional effect of creating more financial inflow. The growing financial capital has limited use towards funding an EREr's low-cost lifestyle, but the excess financial capital can be reallocated out of securities and into people/charity/etc. as one sees fit. So from a web of goals perspective, you have enjoyment, education, a safer financial position, and (related to the prior) the ability to allocate significant financial capital towards things you believe are valuable in the world.

WFJ
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Re: Value Investing

Post by WFJ »

Finding value is the easy part, unlocking value is the puzzle. Buffet is the activist, his presence (or any activist investor disclosures) indicates that the incumbent management must get up to speed or dust off the resume. What do you think the CEO of a company does the morning their company appears on Berkshires 13 f? The smart ones who want to keep their job politely call Mr. Buffet and ask "How high do you want me to jump?" and take notes.

Value investors now have to compete with a Bloomberg that can search 30,000+ variables, analyze the variable over all time windows, all rebalance frequencies, with all control variables, against all benchmarks and all strategies (called quantamental analysis) with terminal and a 1-800 number. Anyone that can deliver 300 bps in value investing will be a household name in five years as their alpha would be 600+ bps and be featured on CNBC/Bloomberg/Davos. Besides the "Borrow until you die" or any use of leverage advice, the value trap is probably the second most damaging investment strategy for long term investors.

I own some value ETFs that are defined by low PEs or high dividends (SCHV and SCHD) as a volatility dampener/buffer and to de-tech the S&P 500.

alex123711
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Re: Value Investing

Post by alex123711 »

zbigi wrote:
Wed Jan 19, 2022 9:21 am
Sounds a bit like a part-time low-wage job to me. Let's say your stash is $500k, then then extra 3% you get thanks to value investing amounts to $15k a year. That's better return than working at McDonald's (assuming the value investing doesn't consume 40 hours per week), but with more stress, and a risk of screwing up you stash. If someone's interested in investing anyway then it's great to be paid for a hobby, but otherwise it doesn't look like that great of a proposition.
This is definitely a factor, time is valuable. Also imagine how frustrating it would be spending all that time and under performing the index.

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Sclass
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Re: Value Investing

Post by Sclass »

+1 Dave. I recall listening to a buffetology guru about Buffet’s deals in the seventies. He bought up cheap companies that had restricted collateral still on the books. Odd stuff like Greenstamps. They needed to keep hundreds of millions on the books to back up the liabilities for the uncashed stamps. Buffet couldn’t spend the money but he was allowed to invest it in stocks which made the bankrupt company instantly valuable. He did the same thing with insurance companies which are basically banks with money that needs to be invested in specific ways. The seventies was an implosion of hundreds of tiny insurance companies as Buffet and his competitors snapped them up for their investable capital. This is true “value investing”.

The guy told me while a lot is written about Buffet, you have to really analyze his deals to understand exactly how he makes money. Apparently he liked to throw up a bit of smokescreen in the early days.

plantingtheseed
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Re: Value Investing

Post by plantingtheseed »

To the op, the concept of value investing is easy to understand and can be applied in many situations other than stocks.

As an example, I have used the concept in a casino, not through gambling, but by understanding the value of what I was being given - paid for many enjoyable luncheons with fiends and co-workers for well over a year.

Added:
P.S. I do have to qualify this, as everyone has a different style or method(s) that work for them. My investments professor in college was Graham/Buffet value investor and let's just say he did exceptionally well. He gave much to charities and mainly invested in stocks. But he lived in a modest home and drove a modest car. His estate was much much larger than the typical boglehead with 5M asking if they can retire on the bh forum - and this was almost 10 years ago! And he kept reminding us, which I still remember like it was yesterday - keep your day job.

WFJ
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Re: Value Investing

Post by WFJ »

plantingtheseed wrote:
Thu Jan 20, 2022 6:21 pm
To the op, the concept of value investing is easy to understand and can be applied in many situations other than stocks.

As an example, I have used the concept in a casino, not through gambling, but by understanding the value of what I was being given - paid for many enjoyable luncheons with fiends and co-workers for well over a year.

Added:
P.S. I do have to qualify this, as everyone has a different style or method(s) that work for them. My investments professor in college was Graham/Buffet value investor and let's just say he did exceptionally well. He gave much to charities and mainly invested in stocks. But he lived in a modest home and drove a modest car. His estate was much much larger than the typical boglehead with 5M asking if they can retire on the bh forum - and this was almost 10 years ago! And he kept reminding us, which I still remember like it was yesterday - keep your day job.
If one were to evaluate his portfolio, I can almost guarantee the overriding reason for success was the market, nothing to do with the strategy. Teachers, professors and other related to education have a distinct advantage of having a semi-secure paycheck despite varying economic conditions. When portfolios are evaluated, most teachers/professors exhibit exceptional "timing" skills relative to other investors as they buy more when the markets are down precociously because they don't change their contributions while workers must sell into bear markets as many lost their jobs and need the money and buy more when markets are ripping and their paychecks are expanding.

As most on this forum understands the two most important factors in accumulation is time and ratio of income to spending and all strategies after this are not significant in AUM measures.

plantingtheseed
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Re: Value Investing

Post by plantingtheseed »

That's an interesting observation. To view value investing as a strategy is a different way of looking at things, so there could be merit.

The devil is in the details, and perhaps that has been his success as well.

And of course, he has had a good fortune of investing in the country at a time of much more stable democracy, an overall population that were happier with good work ethics and better morals in general, a higher affordability in the living standard, a better social safety net, a much lower income inequality, and lower debt.

frommi
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Re: Value Investing

Post by frommi »

Looks like the time is right to do value investing, not one here is doing it or is even considering it, even with markets at nose-bleed valuation and the first cracks already visible :). Value investing has underperformed the market over the last 14 years in large part, but it will make a comeback, as it always has.
Those that are interested, just start by reading "The Intelligent Investor" by Ben Graham. It either clicks or it wont.

plantingtheseed
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Re: Value Investing

Post by plantingtheseed »

Added:

Investing is the act of foregoing present consumption, in exchange for a chance at a much larger consumption in the future.

For this process to work, a viable future must exist.
  • If being amoral becomes an acceptable way of life in this country, where lying, cheating and stealing dominate the social norms, then I believe the pursuit of investing will be moot.
  • If laws become selective - disregarded when inconvenient and over-burdening when in favor, then as a nation of laws and not of men, we will have nothing to stand on. I believe the pursuit of investing will be moot.
  • If blaming everyone else instead of accepting responsibility is the guise under any racial, political and social differences, then our strength in diversity will be transposed to our dissolution. I believe the pursuit of investing will be moot.
You are solely responsible for creating the kind of world that you will get to live in. Think about that.

The United States, is no longer considered a stable democracy. It is a flawed democracy.
https://pages.eiu.com/rs/753-RIQ-438/im ... x-2020.pdf

And a nation is the mirror of the people that are in it.

Do you really think there is no correlation between democracy and investment success? Think again.

Investing is much more than mere timing and strategy.


Added:

As for the investing future in the United States, if one cannot distinguish an actual socialism vs. a cry against socialism under the disguise of a dictatorial fascism, God help you. For democracy is fragile, as is investing. They share the same fate:
Last edited by plantingtheseed on Sat Jan 22, 2022 6:16 am, edited 1 time in total.

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Seppia
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Re: Value Investing

Post by Seppia »

Fair, still I’d pick the USA over almost any other place (maybe tied with the nordics) for the next 50 years.
For all its flaws it’s still #1 in my opinion.

I am Italian, have lived in the USA for 6 years and now in Asia, so I don’t think I have a “team” bias in this (I may have other biases of course)

WFJ
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Re: Value Investing

Post by WFJ »

plantingtheseed wrote:
Sat Jan 22, 2022 3:36 am
Added:

Investing is the act of foregoing present consumption, in exchange for a chance at a much larger consumption in the future.

For this process to work, a viable future must exist.
  • If being amoral becomes an acceptable way of life in this country, where lying, cheating and stealing dominate the social norms, then I believe the pursuit of investing will be moot.
  • If laws become selective - disregarded when inconvenient and over-burdening when in favor, then as a nation of laws and not of men, we will have nothing to stand on. I believe the pursuit of investing will be moot.
  • If blaming everyone else instead of accepting responsibility is the guise under any racial, political and social differences, then our strength in diversity will be transposed to our dissolution. I believe the pursuit of investing will be moot.
You are solely responsible for creating the kind of world that you will get to live in. Think about that.

The United States, is no longer considered a stable democracy. It is a flawed democracy.
https://pages.eiu.com/rs/753-RIQ-438/im ... x-2020.pdf

And a nation is the mirror of the people that are in it.

Do you really think there is no correlation between democracy and investment success? Think again.

Investing is much more than mere timing and strategy.


Added:

As for the investing future in the United States, if one cannot distinguish an actual socialism vs. a cry against socialism under the disguise of a dictatorial fascism, God help you. For democracy is fragile, as is investing. They share the same fate:
Are we all going to die, Greta? This utopia you speak of must be in the FB Metaverse. The Economist wrote something negative about the US, WOW, must be true.

Buy more crypto so you can be a world citizen and create a utopia with other zealots.

One of the best cures for speculating the US is doomed is to live in other countries.

WFJ
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Re: Value Investing

Post by WFJ »

plantingtheseed wrote:
Fri Jan 21, 2022 3:56 pm
That's an interesting observation. To view value investing as a strategy is a different way of looking at things, so there could be merit.

The devil is in the details, and perhaps that has been his success as well.

And of course, he has had a good fortune of investing in the country at a time of much more stable democracy, an overall population that were happier with good work ethics and better morals in general, a higher affordability in the living standard, a better social safety net, a much lower income inequality, and lower debt.
And at the right time. No world wars, plagues, massive natural disasters (imagine San Fran quake today). Value investors didn't right many books in the 1930's or 1970's as everyone got crushed.

Beardstown lady's investment club saga is a good example of how "gurus" overestimate their investing abilities (they were counting club dues as part of investment returns, but people still buy their books and leave positive reviews). Another way to look at it is when was the last time you read a book written by an English professor or watched a movie made by a film professor? Probably never. I've had three positive years in the last 20 and feel like a top 1% as it's very difficult to beat the market adjusted for risk. Anyone who believes they deliver excess returns over long time periods without a personal butler and private jet is deluding themselves. I once knew a finance professor who claimed to deliver 20% returns for his life (over 25 years) and with some basic calculations asked where he parks his jet as his AUM would be well above $50,000,000. He never mentioned this again.

plantingtheseed
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Re: Value Investing

Post by plantingtheseed »

@Seppia Thanks, as a person with a bias for my country, I do appreciate your views. Don't give up on us. :)

I do not see anything further to contribute to this thread, so best wishes in your investing.

The Old Man
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Re: Value Investing

Post by The Old Man »

WFJ wrote:
Sat Jan 22, 2022 12:20 pm
Value investors didn't right many books in the 1930's or 1970's as everyone got crushed.
"Security Analysis" first edition was published in 1934 by Benjamin Graham and David Dodd. This book is one of the most influential financial books ever written. Benjamin Graham is considered to be the father of value investing.

https://www.amazon.com/Security-Analysi ... 0071592539

Dave
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Re: Value Investing

Post by Dave »

WFJ wrote:
Sat Jan 22, 2022 12:20 pm
And at the right time. No world wars, plagues, massive natural disasters (imagine San Fran quake today). Value investors didn't right many books in the 1930's or 1970's as everyone got crushed.
As @The Old Man mentioned, the value investing "bible" wasn't published until 1934, so their weren't really very many value investors other than Graham and Dodd themselves active in the 1930s. Without digging, I can't pull up the results by year, but I know Graham's partnership put up some solid results in the period following the Great Depression. In fact, TGD was an important driver in Graham developing a method that approached investing by focusing on buying at a discount to measurable value, such that the investment would work out even in adverse market outcomes.

Regarding the 1970s, and at the risk of cherry picking (although this is the best list I know of), one can look at Buffett's The Superinvestors of Graham and Doddsville, available online. Those are some pretty impressive records, on both a relative basis and an absolute basis.

Not to take away from your point though - timing certainly plays a huge role in the level of performance achieved, and it's going to be hard for anyone to have strong absolute results in a period of market strife.
WFJ wrote:
Sat Jan 22, 2022 12:20 pm
Anyone who believes they deliver excess returns over long time periods without a personal butler and private jet is deluding themselves. I once knew a finance professor who claimed to deliver 20% returns for his life (over 25 years) and with some basic calculations asked where he parks his jet as his AUM would be well above $50,000,000. He never mentioned this again.
I know what you're saying and I think it's fair. The qualification of "over long periods..." is important here. But it's maybe worth expanding on a bit.

If someone crushes the equity market over 30 years, the odds are they are going to end up pretty wealthy. How wealthy depends on a few things: the absolute level of return, the starting capital, and the contributions throughout the investment periods. For successful investors who manage outside capital, this last category (contributions) can hugely drive the outcome, as fees on a large and growing capital base can be massive. So stack up a maybe some starting personal capital, a large and growing fee income, and compounding personal capital, and you're going to end up with that jet and butler.

I'm not so sure that everyone is going to end up at that level, though. If you have 3% outperformance in a 50 year period where the market does 5%, your outperformance is really significant (see math in an earlier post of mine), but you aren't going to be fantastically wealthy unless you started with a ton of capital or had very large income along the way. This can be easily confirmed by running a variety capital/income/return scenarios in Excel.

This is perhaps a trivial point, but I just want to point out that the strategy can be legitimately effective without resulting in massive wealth. So just because someone isn't insanely wealthy (even after the long periods) doesn't mean they didn't add alpha. So the idea mentioned in this thread "if you're not super rich you aren't generating alpha" is a bit simplistic.

While I don't mean to suggest it's common, I bet there are quite a few people who fit into this bucket. Private investors who have done quite well over long periods of time. They aren't broadcasting it to the world, so there is no record (back to the OPs question), making it hard to know.

Haha to your point though, yeah, if someone put up 20% returns for over two decades while earning an above-average salary, yeah you would expect them to be a in a pretty stellar place financially...unless perhaps they hadn't read ERE and are only saving 5% of their income :P.

alex123711
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Re: Value Investing

Post by alex123711 »

Dave wrote:
Sat Jan 22, 2022 3:41 pm

Haha to your point though, yeah, if someone put up 20% returns for over two decades while earning an above-average salary, yeah you would expect them to be a in a pretty stellar place financially...unless perhaps they hadn't read ERE and are only saving 5% of their income :P.
In regards to this point, it is possible that they only put a portion of their savings/ investments into a value portfolio to lower the risk. Which is one of the arguments for index investing over long periods, your are able to put a larger portion in without the risk (or a much lower risk) of blowing up.

frommi
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Re: Value Investing

Post by frommi »

20% over 20 years is just multiplying your stash by 38. If you start with 10k this is still not a lot of money, especially if its pretax. Savings/living frugally is much more important at least until your networth has a good size.

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Sclass
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Re: Value Investing

Post by Sclass »

No. All the terms in the TVM calculation are important. $10k one time at year zero is too little as you point out.

The reality is it is easier to contribute $1000 a month than it is to deliver a 20% average return over twenty years. So uhhh…better do both.

steveo73
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Re: Value Investing

Post by steveo73 »

Sclass wrote:
Thu Jan 27, 2022 9:44 am
No. All the terms in the TVM calculation are important. $10k one time at year zero is too little as you point out.

The reality is it is easier to contribute $1000 a month than it is to deliver a 20% average return over twenty years. So uhhh…better do both.
Here is the crux of the problem. If the index returns 5% year on year then you should expect to return 3% year on year.

Once you stray from MPT you have to use the right data in your calculations. Statistically you are the under performer.

Are you okay with that ?

The problem is people think that they are going to be the unicorn and they put 7% into their calculations.

It's a psychological bias where people exaggerate their abilities and can't think rationally. You may as well try and be an NBA player. It's probably the same odds.

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