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Value investing is a mistake


NormR
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In an effort to combat confirmation bias, please let me know how, where, and why value investors are wrong. 

 

I'm most interested in themes and patterns rather than specific examples of the form "company XYZ is a bad bet due to ABC".  What is the best evidence against the efficacy of value investing in general? 

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I'd say the best evidence is by seen by looking at many of its practitioners. Look at most "value investors" and they have trailed the market over the past 10 years. Before that, they did well with the .dot come crash...but trailed again before that.

 

Look at Weitz funds, Dodge and Cox, Fairholme, Longleaf, etc. What value funds have done well over the past 10 years besides Oakmark and Sequoia?

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You might want to define value investing. For instance, Buffett & Munger have indicated that value investing is merely exchanging some purchasing power now with the expectation of receiving more purchasing power later -- which is definitionally not a mistake.

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Nothing is wrong with value investing. Broadly defined, all good investing is value investing; as far as I know, not many people aim to overpay for a security.

 

Where value investors frequently go wrong, in my experience, is that they often mismeasure value and value creation. I've talked about this multiple times in the past, so I won't get into it here, but all my previous diatribes on the subject here & on Twitter are relevant.

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I think value investing makes sense.  What can be a mistake is when the cost to implement it are greater than the benefits received. This can happen in efficient sectors of the market where there are many participants with a lot of capital.  This IMO that is why the larger cap value managers have a tough time beating the market.  In theory given their large AUMs they should be able to lower their fees (as costs for the most part are fixed) to offer a more compelling proposition to investors.  Unfortunately I do not see many doing that however.

 

Packer

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I'd say the best evidence is by seen by looking at many of its practitioners. Look at most "value investors" and they have trailed the market over the past 10 years. Before that, they did well with the .dot come crash...but trailed again before that.

 

Look at Weitz funds, Dodge and Cox, Fairholme, Longleaf, etc. What value funds have done well over the past 10 years besides Oakmark and Sequoia?

 

+1. In last couple years, the market has not been very expensive and yet value investors (or maybe it's just active managers overall) trailed the indexes.

 

Other than that, nothing wrong with value investing as long as you can outperform. Value investing itself does not guarantee outperformance though.

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I think a fair number of value investors put too much emphasis on book value, at the expense of earnings, cash flow and especially ROE/ROIC. Another way of putting it is they overemphasize accounting at the expense of economics.

 

x1,000,000 yes

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I disagree with people above who try to say that only Buffetty (ROE, cash flow) value investing works. There are people who do very well by looking at book value. I personally go for Buffetty approach, but dismissing the net-net, P/book people just because it does not work for you is IMHO condescending.

 

Peace.

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my favorite analogy of value investing from buffett is in one of the videos i've seen he said it's like your college education .... there's a 'price' for the education, but the 'value' of the education is tremendous -

 

so if there's a degree in geography at 50% discount from Harvard vs a law or medical degree from Harvard at no discount or even at a premium...  I hope most value investors would agree with me which has more value over the long term LOL  (no offense to geography degrees)

 

price is what you pay; value is what you get :))

 

Gary

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I'll put this out there.  Maybe one can think of value investing as a mistake because it doesn't work all of the time in every market (as evidenced by others here, notably the big mutual fund managers during the most recent bull market). 

 

But that's the beauty of it.  It works over time, but not every time, and that's why everyone doesn't adopt it.  Joel Greenblatt talks about this in his book "The Big Secret." 

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I disagree with people above who try to say that only Buffetty (ROE, cash flow) value investing works. There are people who do very well by looking at book value. I personally go for Buffetty approach, but dismissing the net-net, P/book people just because it does not work for you is IMHO condescending.

 

Peace.

 

I'm not against any investment approach that works. Low price to book with a lot of cash is a proven successful strategy. My comment was aimed at a strategy that I perceive as not working very well - low price to book with low ROE and not much cash.

 

This topic is about pointing out potential flaws in other people's investment strategies, so there is a risk that any answer can be perceived as dismissive and condescending.

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Like other posters have mentioned previously, it's codification/rigidification of value investing that was hampering its performance. IMO, too much attention was paid to current/historical financial statements, not enough attention was paid to the changing underlying economics. 

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I'm not against any investment approach that works. Low price to book with a lot of cash is a proven successful strategy. My comment was aimed at a strategy that I perceive as not working very well - low price to book with low ROE and not much cash.

 

OK, thanks for explanation, I think that's fair. :)

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I think a fair number of value investors put too much emphasis on book value, at the expense of earnings, cash flow and especially ROE/ROIC. Another way of putting it is they overemphasize accounting at the expense of economics.

 

x1,000,000 yes

 

x1,000,000 yes

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Willi Schlamm, an Austrian ex-communist journalist, said, "The trouble with socialism is socialism.  The trouble with capitalism is capitalists."

So it may be useful to separate NormR's question into "Is value investing, as a discipline, mistaken?" from "How do value investors, as practitioners, make mistakes?"

 

I certainly would be interested in any theoretical objections to value investing theory and principles.  I don't think there are any, but maybe I (along with everyone on this board) am just biased.

 

I would bet most answers in this thread touch on the cognitive and psychological mistakes that value investors make, they being human, after all.  Which is far from saying value investing per se is a mistake.

 

Does anyone know, for example, a technical chartist who would say, "The trouble with value investing is value investing.  The trouble with technical analysis is technical analysts"?

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What many Chinese investors would say is that value investing only works in certain contexts, but not in markets such as China, where politics is too important. That's the line they say all the time, anyways. They read Buffett and Lynch and then buy stocks not based on business fundamentals but based on this week's government pronouncements.

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Inability for most active manager, value or otherwise, to outperform passive index over long enough horizon.  Market is more efficient than most active managers would like to believe.  What visually looks like value based on whatever metric, P/B, P/E, EV/EBITDA, etc., may well be simply higher risk. 

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Personally, l love the fact that many (most?) people feel value investing is a mistake. This simply ensures a nice selection of securities over time for small investors to nibble on and earn better than market returns.

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Value investors are wrong when they think they can be capable value investors when they don't have the appropriate tools. As Buffett and Munger have pointed out numerous times there is a patience and control of emotions required to arbitrage price and value that maybe only a small subsection of humans are actually capable of doing.

 

This board is a self reported 68.0% INTJ/P (http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/myersbriggs-type-indicator/) versus an expected occurrence in the population of 2 to 7%. Assuming this board also has a higher weighting of successful value investors than the general public I think this suggests personality traits may play a significant factor in value investing success.

 

I don't know what the exact number would be, but I think value investing is a mistake for a majority of the population.  The Superinvestors of Graham and Doddsville proves that value investing can work, but it does not prove that there will be no Loserinvestors of Graham and Doddsville.

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I think value investing is a limited framework that can make you miss out on great opportunities. Value investing isn't buying stocks below intrinsic value, but rather those looking for opportunities among low multiple stocks.Well, when high multiple stocks like AMZN keep rising in front of you for years with its 100 PE, value investors have no idea how to handle a stock like that.

 

 

 

*ducks gunfire*

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Value investors are wrong when they think they can be capable value investors when they don't have the appropriate tools. As Buffett and Munger have pointed out numerous times there is a patience and control of emotions required to arbitrage price and value that maybe only a small subsection of humans are actually capable of doing.

 

This board is a self reported 68.0% INTJ/P (http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/myersbriggs-type-indicator/) versus an expected occurrence in the population of 2 to 7%. Assuming this board also has a higher weighting of successful value investors than the general public I think this suggests personality traits may play a significant factor in value investing success.

 

I don't know what the exact number would be, but I think value investing is a mistake for a majority of the population.  The Superinvestors of Graham and Doddsville proves that value investing can work, but it does not prove that there will be no Loserinvestors of Graham and Doddsville.

 

I'd never seen that poll before, just did the test and I'm an INTJ as well. It's crazy how concentrated this forum is in that category!

 

I would question how many big fund managers are INTJ though, not a lot I imagine. Perhaps that's why they underperform :p

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