Is Value Investing Dead?

[Jurgis]

I vote for Picasso to buy PIR.  :)

[tede02]

Its interesting that value strategies (which obviously vary to a great degree) have dramatically underperformed in recent years.  The very title of this thread indicates to me that "value" is likely due for a period of out-performance. 

 

On a side note, I think the idea of "value" investing being dead is ridiculous.  All value investing means (in my view) is trying to buy assets for less than they're fundamentally worth.  There is a lot of art in asset appraisal which makes it interesting. 

[Jurgis]

On the third hand, maybe I should buy Picasso. People say that art is ass appraised which would make it interesting.

 

 

 

;D

[Ballinvarosig Investors]

Its interesting that value strategies (which obviously vary to a great degree) have dramatically underperformed in recent years.  The very title of this thread indicates to me that "value" is likely due for a period of out-performance. 

 

On a side note, I think the idea of "value" investing being dead is ridiculous.  All value investing means (in my view) is trying to buy assets for less than they're fundamentally worth.  There is a lot of art in asset appraisal which makes it interesting.

When I say value, I mean in the traditional sense of the word. Buying unloved companies, companies at a discount to underlying value, companies at low PE's, etc.

[Patmo]

Yawn, I've heard that "buying what no one will own" story 10+ years ago. Yeah, sometimes it works - when someone like Picasso does really deep DD and buys a special situation. And then sometimes it works crap. Buying industries in secular decline, good for you if you really buy it supercheap and get out of the way of the steamroller before it flattens you. Or turnarounds that usually don't turn. The fact that nobody else is touching some stocks or industries does not make them wrong and you right. Contrarianism only works if you have a variant perception. LOL. I said it.  ;D Good luck, have fun.  :)

 

Sure that's true. But you can also apply that statement to literally every single strategy ever conceived. "Yeah, sometimes growth investing works - when someone like Joe Superstar does really deep DD. And then sometimes it works like crap. Buying industries at triple digit multiples, good for you if the growth pans out. The fact that everybody else is touching stocks or industries does not make you right."

 

Of course a better investor will see more success than a less skilled one, that's basic logic. But apples to apples, take a guy looking where everybody else won't, wherever he is on the skill continuum, you will see him do better than his doppelganger who isn't looking there. It's like letting the contrarian start 15 meters ahead on the 100m course, you start out with a huge handicap. It's systematic, well documented and easily explained.

 

 

[Jurgis]

Of course a better investor will see more success than a less skilled one, that's basic logic. But apples to apples, take a guy looking where everybody else won't, wherever he is on the skill continuum, you will see him do better than his doppelganger who isn't looking there. It's like letting the contrarian start 15 meters ahead on the 100m course, you start out with a huge handicap. It's systematic, well documented and easily explained.

 

I disagree with this. Someone looking where everybody else isn't would have automatic advantage only if the pool of companies/stocks they are looking at is of similar quality than the one where others are looking. But that's not true most of the time. Most of the time the companies/stocks in "contrarian pool" are actually (much?) more crappy than in the other pool. So, yeah, the guy gets advantage due to "other people not looking", but they get a disadvantage because the pool is crappier. And I disagree with your claim that the advantage automatically outweighs disadvantage.

 

In other words, if you fish by the known fishing hole, you have more competition, but you also have a tons of large good quality fish there. If you go where people know the fishes don't swim, you have less competition but fewer and smaller fish.

 

The secret of course is to find ignored fishing hole with a lot of large fish, but that doesn't happen automatically by just being contrarian.

 

And yeah, sure it happens that ignored holes exist at various times for various reasons. Whether for growth investing or value investing or art investing. ;)

 

 

[SharperDingaan]

Of course a better investor will see more success than a less skilled one, that's basic logic. But apples to apples, take a guy looking where everybody else won't, wherever he is on the skill continuum, you will see him do better than his doppelganger who isn't looking there. It's like letting the contrarian start 15 meters ahead on the 100m course, you start out with a huge handicap. It's systematic, well documented and easily explained.

 

I disagree with this. Someone looking where everybody else isn't would have automatic advantage only if the pool of companies/stocks they are looking at is of similar quality than the one where others are looking. But that's not true most of the time. Most of the time the companies/stocks in "contrarian pool" are actually (much?) more crappy than in the other pool. So, yeah, the guy gets advantage due to "other people not looking", but they get a disadvantage because the pool is crappier. And I disagree with your claim that the advantage automatically outweighs disadvantage.

 

In other words, if you fish by the known fishing hole, you have more competition, but you also have a tons of large good quality fish there. If you go where people know the fishes don't swim, you have less competition but fewer and smaller fish.

 

The secret of course is to find ignored fishing hole with a lot of large fish, but that doesn't happen automatically by just being contrarian.

 

And yeah, sure it happens that ignored holes exist at various times for various reasons. Whether for growth investing or value investing or art investing. ;)

 

Some would say that both parties are actually looking at the same fishing hole, and that just one of them - chooses not to fish there. Of course there may be various reasons for that - some of them having nothing to do with the quality, or size, of the fish.

 

The contrarian fisherman might also spend all day at that fishing hole to catch one fish. Whilst his/her more skilled competitor at the same fishing hole may take less than 5 minutes to catch that same one fish - & have better things to do with the rest of his/her day. 

 

SD

 

[LR1400]

I think most people who quote Graham don't actually read him. In the Intelligent Inevstor he specifically talks about growth companies as an option for "enterprising" investors. He doesn't advocate momentum investing, rather he bases it on earnings.

 

The same stuff Buffett advocates. It's all there. People just seem to brush by it or want to invent something new.

 

Graham doesn't just advocate net nets, he advocates anything where a bargain be reasonably calculated: bonds, arbitrage, net nets, growth in earnings. Again, it's all there.

[scorpioncapital]

He also says in that book that the investing public is incorrigible, they will buy anything at any price. He seems a mild fellow so not sure if he was being a little annoyed, however, this sheep-like public which makes 10x their money in a few months because there is 'risk-on' or there is a cyclical boom in some sector can make up for a lifetime of bargains. Some get out and keep their profits, others lose it on the way down. Many traders buy puts to protect their gains. How many tech companies do you know over the last little while that make either no money or very little money and trade at valuations that you know expectations will hit a wall at some point for most of them. Yet, these things can last quite a while. You can imagine the lure - make a lifetime of value investing gains in 1-2 year instead of profiting only when you're old.

 

[LR1400]

It's tempting to speculate for a bit, get the massive gains, then switch really quickly back to value investing for the long term. Kidding.

 

I have thought about using margin. I probably will never do it.

 

 

[LR1400]

Here's a quick list of value investors, many still alive.

 

Buffett

Graham

Munger

Pritzker

Zell

Icahn

Ackman

Schloss

Shelby Davis

Tom Evans

Einhorn

 

That's just the billionaire ones I can remember.

 

None of them do anything that Graham didn't do or didn't write about. They use the same valuation methods and strategies he wrote about. He wrote about or practiced activism, growth, net net, distressed bonds, arbitrage, etc. I don't recall Graham writing about real estate but it wouldn't surprise me if he did. The principles are the same.

[dyow]

You guys sound like a bunch of nevada turkeys.

 

Value investing and "growth" are not mutually exclusive.  But a value investment is one where you buy based on a price that is below a value based on a conservative estimate of earnings that ignores "growth".  Value investors buy cigar butts and ignore growth.  Warren buffett drifted from this because he had to, when you get that big finding cigar butts becomes near impossible. 

 

Value investing is cyclical.  2008/2009 (everything), 2011 (banks), and 2016 (energy) all saw crashes in the market or a specific sector.  That is where and when you make your money as a value investor.  If you weren't buying during these crashes (or at least trying) you are not a value investor.  You are merely a nevada turkey.

 

Edit: My main point above is that value investing is not dead. It will never die because people are people and they will never change.  Fear and greed and not straying from the crowd is so deeply embedded within us from our hairy tree climbing ancestors whose main objective in life was getting sex, not straying from the tribe and finding food (while trying not to become food).

 

Value investing will never die.  Benjamin Grossbaum < respect the name boy.     

 

 

[RichardGibbons]

But a value investment is one where you buy based on a price that is below a value based on a conservative estimate of earnings that ignores "growth".  Value investors buy cigar butts and ignore growth. 

 

Interesting perspective.  I think ignoring growth in value investing is a bad idea because growth often has a huge impact on the value, particularly long-term value.

 

Buffett's perspective in his 1992 letter seems to match my perspective (his italics, not mine):

 

In our opinion, the two approaches are joined at the hip:  Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

 

Of course, since we're just talking about terminology, everyone's right--one can define "value investing" any way one likes.

[Ballinvarosig Investors]

Here's a quick list of value investors, many still alive.

 

Buffett

Graham

Munger

Pritzker

Zell

Icahn

Ackman

Schloss

Shelby Davis

Tom Evans

Einhorn

 

That's just the billionaire ones I can remember.

 

None of them do anything that Graham didn't do or didn't write about. They use the same valuation methods and strategies he wrote about. He wrote about or practiced activism, growth, net net, distressed bonds, arbitrage, etc. I don't recall Graham writing about real estate but it wouldn't surprise me if he did. The principles are the same.

You are missing the most important one (of our time). Klarman.

[Guest 50centdollars]

You guys sound like a bunch of nevada turkeys.

 

Value investing and "growth" are not mutually exclusive.  But a value investment is one where you buy based on a price that is below a value based on a conservative estimate of earnings that ignores "growth".  Value investors buy cigar butts and ignore growth.  Warren buffett drifted from this because he had to, when you get that big finding cigar butts becomes near impossible. 

 

Value investing is cyclical.  2008/2009 (everything), 2011 (banks), and 2016 (energy) all saw crashes in the market or a specific sector.  That is where and when you make your money as a value investor.  If you weren't buying during these crashes (or at least trying) you are not a value investor.  You are merely a nevada turkey.

 

Edit: My main point above is that value investing is not dead. It will never die because people are people and they will never change.  Fear and greed and not straying from the crowd is so deeply embedded within us from our hairy tree climbing ancestors whose main objective in life was getting sex, not straying from the tribe and finding food (while trying not to become food).

 

Value investing will never die.  Benjamin Grossbaum < respect the name boy.   

 

And precious metal stocks the last 3 years.

[dyow]

But a value investment is one where you buy based on a price that is below a value based on a conservative estimate of earnings that ignores "growth".  Value investors buy cigar butts and ignore growth. 

 

Interesting perspective.  I think ignoring growth in value investing is a bad idea because growth often has a huge impact on the value, particularly long-term value.

 

Buffett's perspective in his 1992 letter seems to match my perspective (his italics, not mine):

 

In our opinion, the two approaches are joined at the hip:  Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

 

Of course, since we're just talking about terminology, everyone's right--one can define "value investing" any way one likes.

 

Your last statement pretty much sums it up, Buffett admitted he drifted away from BG and more towards Fisher and Munger.  So his definition of value has changed.

 

I'll go back to what BG said about buying growth: 1) wall street loves sweetheart growth companies and as a result growth is more likely to be priced in and 2) you have to be in before it is priced into the stock and you have to be right in your future projections.  That is a double whammy hurdle. Extra links in the probability chain.  It increases risk because it requires more guesswork and you are up against more competition.

 

On top of that these billion $ hedge funds with tons of resources can't even guess growth right.       

 

Ignoring growth just makes sense to me..........unless the market goes up and no value is left then you BUY BUY BUY like 1999!

[RichardGibbons]

Buffett's perspective in his 1992 letter seems to match my perspective (his italics, not mine):

 

In our opinion, the two approaches are joined at the hip:  Growth is always a component in the calculation of value, constituting a variable whose importance can range from negligible to enormous and whose impact can be negative as well as positive.

 

Of course, since we're just talking about terminology, everyone's right--one can define "value investing" any way one likes.

 

Your last statement pretty much sums it up, Buffett admitted he drifted away from BG and more towards Fisher and Munger.  So his definition of value has changed.

 

I agree that Buffett moved away from Ben Graham toward Fisher and Munger, but I don't think that implies that his definition of value has changed to assign value to growth.  Heck, contrary to your implication, Ben Graham assigned value to growth.  His 1962 formula for the intrinsic value of a stock was EPS * (8.5+2*(growth rate)).

 

(To me, that transition from Graham to Munger was mostly a recognition of the incredible power of a long-term moat.)

 

Do you have any evidence that Buffett ever thought that growth shouldn't be taken into account when valuing stocks?  I suspect there is no such evidence, but I'd find it really interesting if evidence does exist.

 

To me, ignoring growth is a terrible idea.  I think one should spend a huge amount of effort looking for companies with competitive advantages that enable them to grow for a long time, and then try to buy them cheaply.

 

Richard

 

 

 

[dyow]

You are taking that formula out of context BG promoted using logic, common sense and sound business practices for valuation, not an arbitrary formula or a future guess of growth.  And i never said WB doesn't look at growth. 

 

The point is simply why look for a moat/growth when you can look for a company trading at .25 or .50 on the dollar and all you need as a catalyst is a reversion to mean back to normalized earnings.  This is what value investing is, why make it more complicated or force the issue.  If i add moats and growth to the thesis it brings an extra and significant element of risk that i do not want to deal with.         

 

I believe the way people invest has a lot to do with their personality, so we probably won't agree on this.

 

[Guest Schwab711]

If you buy a "moat"/"growth" company at a discount to IV (market mis-evaluates future growth) then you are buying $0.50 dollars, no? The difference is you won't need a catalyst. Anyway, I agree that there're different methods for different folks.

 

Rush really hit the nail on the head:

 

If you choose not to decide [a growth rate], you still have made a choice.

[TwoCitiesCapital]

Value investing is paying less for what you get.

 

If that means you foresee incredible growth, but it's not priced in, you can buy a growth stock and be value investing. Or you can buy a cigar butt that is priced for negative growth that merely remains stable and still win and be value investing.

 

The problem with the paying less for the value of growth is that it's much harder to accurately estimate the growth trajectory of a company over a 3, 5, or 10 year horizon and to discount that back to today to determine if the price is reflecting that growth or not while it's generally easier to find the value of presently available assets.

 

Both are value investing. Both work well if done correctly. One is just harder than the other and probably a good bit less reliable given the ever-fluctuating nature of forecasts/estimates/outcomes - but if it's done well, you get tremendous results.

[scorpioncapital]

TwoCitiesCapital, you've hit on the gist of the nature of value investing!

 

Not sure if it's a separate category but these days there is a class of profit-less companies growing revenues fast valued at price to revenue. This is mind-boggling to me even as a growth-value investor, mostly because of the present-day faith in the materializing of future profits. Yet you can't deny that some very successful companies do grow an intangible franchise-network value without much in the way of earnings but do build a valuable asset over time. However if they get the business model wrong, or it changes while they are "growing" and the promise changes (sort of like the government might have to change pension promises due to massive liabilities and slow growth), I imagine these quickly become neither growth nor value when that realization occurs.

[Guest Schwab711]

Value investing is paying less for what you get.

 

If that means you foresee incredible growth, but it's not priced in, you can buy a growth stock and be value investing. Or you can buy a cigar butt that is priced for negative growth that merely remains stable and still win and be value investing.

 

The problem with the paying less for the value of growth is that it's much harder to accurately estimate the growth trajectory of a company over a 3, 5, or 10 year horizon and to discount that back to today to determine if the price is reflecting that growth or not while it's generally easier to find the value of presently available assets.

 

Both are value investing. Both work well if done correctly. One is just harder than the other and probably a good bit less reliable given the ever-fluctuating nature of forecasts/estimates/outcomes - but if it's done well, you get tremendous results.

 

If you assume 0% growth and it's actually -2% over an extended period then you have the exact same problem (maybe worse with operating leverage). You still can't ignore "growth". That's what I meant by you still have made a choice.

 

Incredible growth has certain connotations that I didn't mean to imply if I did. I only meant that folks will miss out on a lot of value opportunities if they always use 0% growth rate. I think they would end up in a lot of bad situations by failing to correctly handicap the odds of negative growth (no different than assuming 2% growth when 0% was the correct figure).

 

There's only so many mispricings at any given time. I don't think it makes sense to broadly reject a large portion of them.

[scorpioncapital]

I think you can analyze the numbers like this.

Say the 30 year bond is 2.5%.

And say you think this is unusually low and it will go to 5%.

And say you want your stock investment to yield 2x the bond yield or around 11-12x P/E max.

 

Two ways to find this:

 

The Value Stock Way: Just find a stock with a P/E of <= 11-12 and you get that immediately. Any growth is gravy.

 

The Growth Way: You find a stock with a P/E of 20 but that has a growth rate of 20%. Your first year you get 5%, year 2 - 6%, ..year 5 - 9.6%. So you've reached your target based on your purchase price but it took 5 years.

 

That's sort of the link between growth and value, the growth of the expanding coupon which is your initial yield. Buffett has done a few of these plays described in the book by Mary Buffett , Buffetology.

 

Some things you can see from this...if growth rate is too low, you won't reach that yield fast enough to offset the difference between the bond yield and the equity yield if you pay a high P/E.

In essence you can say the margin of safety is not there or you overpaid, you have to wait a long time.

 

Today, it's scary what is happening with very low bond yields and P/Es of growth stocks in the 1-2% range. Often lower than the 30 year! Especially high flyer tech stocks. These stocks better have phenomenal growth for quite a few years to come.

 

Of course it seems this era of very slow rate increases (possibly to change?) gives companies the luxury to grow. I would say two big risks are large bond interest rises faster than expected or an operational misstep that causes you to not get the growth you desperately need.

 

If you pay a moderate price, you will be less stressed out. Buying 3% yielding stocks growing at 30% per year seems like you will have your eyes glued to each earnings report and start feeling like a trader to make sure that growth doesn't drop off.

[dyow]

I'll just refer back to what BG said about growth.   

 

Also, all things equal, I believe buying $1 you can see today is always better than buying $1 you won't see until tomorrow. 

 

On neg growth.. ignoring growth doesn't mean assuming flat revenue going forward. The lower end of your IV calculation should be based on a worst case scenario.  Looking at the worse case scenario is my interpretation of what value investing is.  You assume a worst case scenario, and if the price is still well below this value, that is when you buy.  Because of this view by definition i have to ignore growth and assume negative revenue bc that will determine my intrinsic value estimate. 

 

But again a lot of how you view this depends on your style of investing.

[bbarberayr]

Another article showing how Value has been underperforming and due for a turn:

 

http://www.advisorperspectives.com/commentaries/20160818-allianz-global-investors-when-will-value-investing-come-back-around?channel=Income

 

I think discussions like this happen when Value investing is out of fashion like it has been and will be changing soon.