Re: Value Investing
Posted: Tue Apr 05, 2022 3:57 am
@ EMH/MPT fans:
I think there is something valuable in being challenged by believers in other systems, but I find the EMH/MPT group misses much of their own theory. For instance, 10 reasonably diverse bets is nearly equally diversified risk wise to owning the whole market: https://www.investopedia.com/articles/s ... cation.asp . If anything, MPT would say having bets outside of stocks/bonds is more valuable than to argue what method of stock picking you use.
Of course for just the stock portion, some might argue a more ideal portfolio might be to use multiple forms of stock picking (E.g. Trend following, special sits, etc.) and by that point maybe an index is "best". However, that is missing the point data the EMH believer believes in. All value stocks are fairly valued per EMH, so picking any value stock is just as reasonable as picking all stocks. Thus the only reasons to be concerned are volatility and diversifiable risk. If you only have say 40% of your portfolio in stocks because of MPT, then who cares about the method of picking as long as it is reasonably diversified? It seems to be a poorly thought out position to say a .4 * +/-2% (or +/-.8%) difference in std dev of portfolio returns is the high priority factor in returns. In other words, the difference in ETF fees vs buy and hold of 10 diverse value stocks might make the debate near nil. A hill no one should want to die on for a long term portfolio. You might argue if you have a 60 or 80+% stock portfolio the difference is large enough to start to matter, but that is getting into portfolio construction. Meaning MPT is more important than EMH arguments for this discussion, but that is not the main topic of this thread, so once that caveat is mentioned, what more is there to say on it? In other words, if you size your value investing bets well relative to your overall portfolio, there is little to concern the theory would point out, be it upside or downside risk wise. Or am I missing something?
I think there is something valuable in being challenged by believers in other systems, but I find the EMH/MPT group misses much of their own theory. For instance, 10 reasonably diverse bets is nearly equally diversified risk wise to owning the whole market: https://www.investopedia.com/articles/s ... cation.asp . If anything, MPT would say having bets outside of stocks/bonds is more valuable than to argue what method of stock picking you use.
Of course for just the stock portion, some might argue a more ideal portfolio might be to use multiple forms of stock picking (E.g. Trend following, special sits, etc.) and by that point maybe an index is "best". However, that is missing the point data the EMH believer believes in. All value stocks are fairly valued per EMH, so picking any value stock is just as reasonable as picking all stocks. Thus the only reasons to be concerned are volatility and diversifiable risk. If you only have say 40% of your portfolio in stocks because of MPT, then who cares about the method of picking as long as it is reasonably diversified? It seems to be a poorly thought out position to say a .4 * +/-2% (or +/-.8%) difference in std dev of portfolio returns is the high priority factor in returns. In other words, the difference in ETF fees vs buy and hold of 10 diverse value stocks might make the debate near nil. A hill no one should want to die on for a long term portfolio. You might argue if you have a 60 or 80+% stock portfolio the difference is large enough to start to matter, but that is getting into portfolio construction. Meaning MPT is more important than EMH arguments for this discussion, but that is not the main topic of this thread, so once that caveat is mentioned, what more is there to say on it? In other words, if you size your value investing bets well relative to your overall portfolio, there is little to concern the theory would point out, be it upside or downside risk wise. Or am I missing something?
How did the business get the cash? I assume from the 0 liabilities you are saying it will never owe taxes on that cash, but that largely varies by structure. REITs owe no taxes, but the shareholders pay taxes on the legally required dividends, thus a discount might exist for that. That is the point of the "How" it got the cash, the structure of the business matters. Then the second question is what is management like for this 0 employee company? Management might choose to make a real company or invest the money or buy lotto tickets. Maybe build a golf course right next to the CEO's house using leverage. As to the second question, maybe because the CEO is building a golf course next to his house and the board is a bunch of worthless spineless yes men. All of this is just straight valuation, but many other questions might exist outside of traditional valuation, like what alternative investments do I have? What alternative investments does the world have? Do not forget the market dislocation in the famous line, "My kingdom for a horse!" Marketplace preferences matter and depending on the speed of a catalyst is an important aspect that traditional valuation misses. There are lots of other risks, too many for me to list, like who is the investor? A Russian today might value that 10 million in cash a lot less than an American would, given banking system limitations/sanctions. So while it seems straight forward to value, there are lots of questions to be asked.