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FT article on value investing

Guest brooklynvestor

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Guest brooklynvestor

Just quickly posting, don't have time to comment:


Value investors suffer during steady QE rally

By John Authers

Financial Times



"Cheap stocks have an annoying habit of staying cheap these days. The “value” style of investing — buying companies that look cheap relative to their fundamentals, such as earnings, book value or cash flow — is locked into a persistent run of underperformance and has taken a further hit during the first quarter of this year."


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I guess this is only true if you straight-jacket value investing to mean very low P/Es and P/Bs. Maybe the quantitative index style value investing has under performed, but value investing is more nuanced than this. Its good to understand the difference between value and price and that sometimes there is no quantifiable relationship between them. Quantitative value indices also make this error of assuming low price automatically means high value.


To me value investing means

1. Identifying contrarian/asymmetric opportunities

2. Being selective of the businesses you invest in

3. Demanding a large margin of safety (either quantitative or qualitative)


Its basically play the odds only when they are in your favor


You can't make an index using these rules (and I am a professional indexer). So anyone saying value investing hasn't worked, isn't analyzing this properly. If you could identify value in FB when it was trading in the teens and held it because you believed there was a high probability of the growth they would show, that's value investing for me. But buying radio shack because it had a low PE and low PB isn't value investing for me.

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"Value" strategies certainly have not performed well relative to the market or other strategies if you go back to 2009.  Would others agree that this should not be a surprise?  It seems that value naturally would underperform in a strong bull market, particularly in the latter stages when multiples get lofty.  Value investors are most likely to avoid the sectors that are driving market returns because chances are they are trading at lofty valuations (and can often get loftier as the crowd chases the bull).  This is going to drag on relative performance, in the short-term.  I think those with a sound process and strategy will be redeemed when the bear finally returns. 


Many of the shareholder letters I've read from fund managers echo these sentiments.  Steve Romick of FPA Crescent had a lot of valuation data in his letter to support the funds conservative positioning.  I think he makes a great case even though the fund has suffered in the short-term. 

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I watch "the note" on the FT youtube channel.  I sort of feel sorry for him now that he seems to be in NYC with a bunch of cubes with people chattering away loudly behind him when he tries to film it.  He used to be in their London location with a view in the background and he could actually have guests and whatnot.  I wish the FT would sell out to Bloomberg and pump up a US version and use the rest of the paper with the INTL coverage to fill in all of the other sections in the WSJ that I don't care about, including opinion, NY metro, weak world coverage, basically 80% of the paper.  I would subscribe so hard.

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