Is Value Investing Dead?

[Jurgis]

OT?

 

 

The author makes linear extrapolation mistake which he of all people shouldn't make. He assumes machine learning will stay the same in the future as it has been now. The problem with this assumption is that if you looked at ML 10-15 years ago and made linear prediction, you would not have predicted pretty much anything that happened in last couple of years.

 

Sure, the "dealing with new situation in novel way" is tough for machines. But there are tons of assumptions in this phrase. I.e. that the situation is really "new" and there is nothing in it that can be extracted into features that already exist the machine's training space. Also that it has to be dealt in "novel" way.

 

IMO, the biggest obstacle for machines taking most of human jobs is the large bandwidth interaction with real world needed for a lot of jobs. I.e. the issue is not the machine analyzing med results or legal case, but rather interacting with the patients, nurses, staff, analog medical devices, bureaucratic apparatus, etc. And it's not even that seeing a patient is "new situation", but rather that seeing a patient is multidimensional problem in ways that machines are not ready for. Though machines have pieces of dealing with that, they are still pieces and not integrated solutions. Self driving cars are probably the area where machines are now coming really close to dealing with the multitudinous real world parts/inputs/situations/etc. But overall that will be the biggest issue to overcome. Once (if) we get to machines that can tackle the real world as input/output, human jobs are gone. Period.

 

Returning back to investing, IMO most of people who invest shouldn't (myself included  8) ). I've talked about this in past, but investing is interesting area. On one hand, the baseline (index) is so good as to beat 9X% of investors. On the other hand, because businesses (and market) in general have positive return and humans are not good in dealing with variability and statistics, a lot of people can make money in investing even if they underperform baseline and even though their clients would be better taking money elsewhere. So (Value/whatever) investing is alive, though most of the people who do it are just deluding themselves (or having good time in rather unproductive way ;)).

[KinAlberta]

Nothing has changed under the sun.  How many have invested in oil related companies this year?

 

Canadian stocks?  The whole cdn. market was in a bear this year, and has rebounded in kes than 6 months. 

 

Its all about temperament.  Blainehodder can stick to the magic formula.  SD and I are in oil related stuff, Oddball is in banks.  Somewhere soon something else will go on sale.

 

I agree that the small cap end of the market remains generally inefficient and poorly followed. Proliferation of ETF's, brokers putting all of their clients money into WRAP accounts and other  structured products, the decline in the number of small cap funds and assets under management (at least in Canada) have all seen money move away from this space. Also the overall mantra in the markets and investing nowadays is overwhelmingly "liquidity". How many times do I mention a stock to your mainstream investor and many other managers of money and the question or refrain is "is it liquid"?

 

Buffett has been described as a learning machine, constantly reading and learning. He also got ideas through asking others what they were buying.  Aka Scuttlebutt.

[scorpioncapital]

I think the old Ben Graham/Walter Schloss/Buffett Partners version of value investing is basically dead. On life support, anyway. Trying to sell the idea of buying ultra-cheap companies with very visible problems to the masses was never going to be popular, but I'm even seeing the idea of it die out even among value investors.

 

It has evolved into a flight to quality. Everybody thinks paying a reasonable valuation for compounders is the new definition of value investing. That's certainly one way to go about it, but I'm not sure that's value investing. I consider it more just "investing."

 

So we have that Graham formula of <1.5x BV and <15x earnings. Well, the earnings part is still quite valid, but the BV criteria not so much.

 

Why? I wonder if in the old days companies either:

 

a) retained earnings out of a deep conservatism due to the Great Depression causing BVs to be inflated. Today such companies might buyback stock or return to shareholders. If they didn't they'd meet the criteria.

b) companies were more capital intensive due to the industrial/manufacturing stage in human evolution and less globalization. Today, many companies are in the 'cloud' and so the average P/BV is going to creep up as more money is made with less physical investment.

 

So if you keep the P/E criteria as a reasonable price for growth, it does still look very similar. Of course quality of earnings and qualitative factors are another thing to look at, but you can't really put a number on them.

 

 

[Uccmal]

IMO, investing nowadays takes more imagination/insight.

If you're looking for spectacular returns, I agree.

 

Speaking of imagination/insight, I am reminded on Buffett's purchase of Coca Cola 30 years ago. It was already a large, well followed company with scores of analysts. Yet Buffett was able to make a simple extrapolation that vast untapped markets outside of the US could be opened up to Coke's products. It was a simple deduction that a ham sandwich could have made, yet Buffett was the only one to do so.

 

Anyone care to speculate what in plain site opportunity like KO exists today? My thought would be Bank Of America. You have a CEO that is telling you that the company has $35-$40bn in normalized earnings. you have all the wreckage of the financial crisis now firmly in the rear view mirror, you have a stock that's priced well under book value. I don't think it'll be a 20 bagger like KO, but in 5 years time, I simply cannot see how it will not double from today's price.

 

Incidentally, it ticks the value investing criteria ;D single digit PE, priced under book, in a sector that is hated.

 

I have always found Buffett's Coke investment rather un-imaginative.  He paid a fair price for a growth company.  Thousands, if not tens of thousands of people came to Buffett's conclusion long before him.  Coke had already had 50 years of international expansion when Buffett arrived on the scene.  IMO, Coke came at a time when Buffett had firmly shifted out of Ben Graham's style into GARP stocks. 

 

What he has re-shown the investing world is that buying good companies and never selling is the most productive form of investing, all the better if you get a reasonable price.  His ability to let things ride is one of his stronger suits. 

[Uccmal]

I think the old Ben Graham/Walter Schloss/Buffett Partners version of value investing is basically dead. On life support, anyway. Trying to sell the idea of buying ultra-cheap companies with very visible problems to the masses was never going to be popular, but I'm even seeing the idea of it die out even among value investors.

 

It has evolved into a flight to quality. Everybody thinks paying a reasonable valuation for compounders is the new definition of value investing. That's certainly one way to go about it, but I'm not sure that's value investing. I consider it more just "investing."

 

Is it wrong if its just investing, that creates value over time? 

 

 

[Picasso]

If you want to be a real value investor these days, buy the type of securities that most managers would get fired for owning.  There's simply too much pressure to be like everyone else when you manage others peoples money.  It's simply not worth it for a manager to answer why they own Valeant or whatever happens to be taking a beating from popular publications.  Creates a lot of opportunities these days.  At the moment I'm a bit intrigued by certain stocks in the retail sector...

[Uccmal]

IMO, investing nowadays takes more imagination/insight.

If you're looking for spectacular returns, I agree.

 

Speaking of imagination/insight, I am reminded on Buffett's purchase of Coca Cola 30 years ago. It was already a large, well followed company with scores of analysts. Yet Buffett was able to make a simple extrapolation that vast untapped markets outside of the US could be opened up to Coke's products. It was a simple deduction that a ham sandwich could have made, yet Buffett was the only one to do so.

 

Anyone care to speculate what in plain site opportunity like KO exists today? My thought would be Bank Of America. You have a CEO that is telling you that the company has $35-$40bn in normalized earnings. you have all the wreckage of the financial crisis now firmly in the rear view mirror, you have a stock that's priced well under book value. I don't think it'll be a 20 bagger like KO, but in 5 years time, I simply cannot see how it will not double from today's price.

 

Incidentally, it ticks the value investing criteria ;D single digit PE, priced under book, in a sector that is hated.

 

 

I have always found Buffett's Coke investment rather un-imaginative.  He paid a fair price for a growth company.  Thousands, if not tens of thousands of people came to Buffett's conclusion long before him.  Coke had already had 50 years of international expansion when Buffett arrived on the scene.  IMO, Coke came at a time when Buffett had firmly shifted out of Ben Graham's style into GARP stocks. 

 

What he has re-shown the investing world is that buying good companies and never selling is the most productive form of investing, all the better if you get a reasonable price.  His ability to let things ride is one of his stronger suits.

 

On the other hand Buffett has always been about minimizing the drag of taxes, and not losing money.  Coke is probably the best in breed to do both of these for a very long time.  I cant easily come up with a better mega cap that has continued its growth trajectory with such consistency for 26 years.  In this era of creative destruction, not losing money has become ever more important.

[Jurgis]

@Picasso: contrarianism by itself doesn't work. But it might be a place where to start looking.

 

Anyone care to speculate what in plain site opportunity like KO exists today?

 

AXP. ;) It got everything: brand, moat (?), growth (??), Buffett, value, temporary (?) issues, tailwinds, headwinds, some hate.

 

 

[Guest Schwab711]

There is the famous example of Ben Graham testifying to Congress on the 'mechanism of price correction', or something to that effect.

 

https://www8.gsb.columbia.edu/sites/valueinvesting/files/files/stockmarketstudy.pdf

 

I don't think I've seen anything from Graham or others discuss this, but how the price of stocks become dislocated from their value seems equally as important as how they corrected. I'm not sure "value" stocks become dislocated by the same magnitude and/or frequency as in the past (though, they may appear to be due to other reasons). Non-quantifiable or difficult-to-quantify valuation components, such as qualitative factors or trends, seem less likely to be correctly price.

 

Long way of saying, I have nothing to add to PatientCheetah's comment.

[SharperDingaan]

I think the old Ben Graham/Walter Schloss/Buffett Partners version of value investing is basically dead. On life support, anyway. Trying to sell the idea of buying ultra-cheap companies with very visible problems to the masses was never going to be popular, but I'm even seeing the idea of it die out even among value investors.

 

It has evolved into a flight to quality. Everybody thinks paying a reasonable valuation for compounders is the new definition of value investing. That's certainly one way to go about it, but I'm not sure that's value investing. I consider it more just "investing."

 

So we have that Graham formula of <1.5x BV and <15x earnings. Well, the earnings part is still quite valid, but the BV criteria not so much.

 

Why? I wonder if in the old days companies either:

 

a) retained earnings out of a deep conservatism due to the Great Depression causing BVs to be inflated. Today such companies might buyback stock or return to shareholders. If they didn't they'd meet the criteria.

b) companies were more capital intensive due to the industrial/manufacturing stage in human evolution and less globalization. Today, many companies are in the 'cloud' and so the average P/BV is going to creep up as more money is made with less physical investment.

 

So if you keep the P/E criteria as a reasonable price for growth, it does still look very similar. Of course quality of earnings and qualitative factors are another thing to look at, but you can't really put a number on them.

 

+1

 

Keep in mind that these formula were developed when 'big' businesses were primarily 'value chains' and everybody was using Porters 'differentiate' or be the 'lowest cost provider' strategies. Scale, brand-name, capital intensity, operating leverage, etc. mattered - & underpinned the 'moat' that every 'value' investor strived for. P&G, or Coke, were great businesses - in large part because their scale was prohibitive to replicate, & they were too big to acquire outright. All good - but pre internet.

 

Todays model is internet enabled 'platform' business - driven by network effects. IT/Capital Intensity is cloud sourced, & value is measured entirely differently. In the 'old days' we called this 'platform' business the 'brokerage' business, as it does the same thing; for a small fee, bring buyers & sellers together to purchase a good or service. The management of the hotel, mutual fund, and head hunting industries have long been brokerage businesses - it is not restricted to just the tech sector. However, one of THE biggest enablers in this brokerage industry - is the new 'blockchain' technology; & its ability to dramatically improve the standard operational metrics of efficiency, effectiveness, speed, flexibility, data quality, and transparency. We just don't want to hear it, because its new - & disturbing. Nobody likes being reminded of their obsolescence.

 

Hence you are valuing 'potential' - where most of the metrics are actually non financial, & the smaller P/E multiple has to be compensated for by large volume. Seeing where 'XYZ coy' could be in 2-3 years, handicapping the various possibilities for likelihood & ability, how (& if) it monetizes, & whether 'XYZ coy' is the right kind of firm for that future space (buy-out, die-out, etc.). It is really a form of venture capital investing, but we think of tech - primarily because it has been the poster child for this kind of approach.

 

Very different from Graham, but very much in the same grain as well.

Grandpa used formula & pen & paper, we just use different techniques, & we can expect our successor generations will do much the same. All good - but it highlights that all techniques have a natural lifespan to them.

 

SD

 

 

 

 

 

 

[Patmo]

If you want to be a real value investor these days, buy the type of securities that most managers would get fired for owning.  There's simply too much pressure to be like everyone else when you manage others peoples money.  It's simply not worth it for a manager to answer why they own Valeant or whatever happens to be taking a beating from popular publications.  Creates a lot of opportunities these days.  At the moment I'm a bit intrigued by certain stocks in the retail sector...

 

Holy crap Picasso, You are like my internet big brother or something... Agreed 100% again...

 

Value investing has always been dead, and what is dead may never die (isn't that a profound use of GoT quotes? They don't call me The Philosopher for nothing........................)

 

 

[plato1976]

jez, pls don't tell me you are thinking about shld...

 

If you want to be a real value investor these days, buy the type of securities that most managers would get fired for owning.  There's simply too much pressure to be like everyone else when you manage others peoples money.  It's simply not worth it for a manager to answer why they own Valeant or whatever happens to be taking a beating from popular publications.  Creates a lot of opportunities these days.  At the moment I'm a bit intrigued by certain stocks in the retail sector...

[Picasso]

jez, pls don't tell me you are thinking about shld...

 

If you want to be a real value investor these days, buy the type of securities that most managers would get fired for owning.  There's simply too much pressure to be like everyone else when you manage others peoples money.  It's simply not worth it for a manager to answer why they own Valeant or whatever happens to be taking a beating from popular publications.  Creates a lot of opportunities these days.  At the moment I'm a bit intrigued by certain stocks in the retail sector...

 

See, your response illustrates my point.  I've doubled my investment in SHLD once before, made a very good return in two of their recent rights offerings, and I'm not even bullish on the name.  I make fun of SHLD all the time.  But it's not going to stop me from investing in it if an opportunity presents itself.

 

A few months ago I was at this event where Jeff Gundlach was presenting.  I heard him talking about all these crazy trades he was placing in his portfolio, long nat gas and short vol, long miners, etc.  I thought, hey, he might like to hear this cool bond tender where the bonds are being put back at par (or close to it) but they trade at $65, are owed accrued interest of $8 (plus warrants) and you'll get the par return in a few months.  Two guys own 85% of the equity, they need the tender to happen, the senior lenders and noteholders have all agreed to it, etc.  So he says to me "this sounds great, so who exactly is selling us these bonds at 65?"  Well I did a little digging ahead of time and called up the top mutual fund holders as a prospective investor.  One of them flat out said they got rid of, or are getting rid of, ALL their energy/coal exposure.  It doesn't matter that they're getting redeemed at par in a few months, they market their funds as having far fewer defaults than the index so they would rather sell ahead of the offer and miss out on 0.001 performance contribution to their fund.  At which point Gundlach says "wait, this is a coal company? Ick, that's never coming back."  In my excitement I forgot to mention this was the bond of a coal company.  He lost interest after that.

 

There are so many securities where the marginal buyer/seller aren't guys like you or me.  And these marginal buyers/sellers have all kinds of weird ways of managing money for AUM versus getting the best returns to the detriment of additional volatility.  So if you want to really outperform, you have to be willing to step in front of some volatility trains that no one else seems willing to do.  Even if the value is clearly there.

 

I only mention retailers because it suddenly seems acceptable for value investors to buy AMZN.  The fear of missing that ride has become too much to bear.  But heaven forbid you buy a retailer like WMT or M or DDS... you're going to get redeemed.  Not that it means to go out and buy retailers, but you'll probably get additional opportunities you won't find in all the securities that have already sucked in the bulk of that marginal investment capital.  Being a cigar butt investor is a little different today...

[Jurgis]

Haha lol just saw this: http://brooklyninvestor.blogspot.com/2016/07/record-valuation-spreads.html

 

Timely for this discussion, no?  ;D

[Jurgis]

Picasso, your spiel is making me seriously consider buying AXP...  ::)

[Picasso]

If you want to be a real value investor these days, buy the type of securities that most managers would get fired for owning.  There's simply too much pressure to be like everyone else when you manage others peoples money.  It's simply not worth it for a manager to answer why they own Valeant or whatever happens to be taking a beating from popular publications.  Creates a lot of opportunities these days.  At the moment I'm a bit intrigued by certain stocks in the retail sector...

 

Holy crap Picasso, You are like my internet big brother or something... Agreed 100% again...

 

Value investing has always been dead, and what is dead may never die (isn't that a profound use of GoT quotes? They don't call me The Philosopher for nothing........................)

 

We need more GoT quotes on here.

 

The other thing is that everyone is suddenly the same type of value investor.  They all read the same books (you have the bibles like Graham, but everyone reads Greenblatt), the same CFA material, they attend very similar business school programs, their pitches sound the same, they're on Seeking Alpha as a "deep value," "special situation" investor, etc.  9/10 pitches on VIC have the same boring thought process.  But you'll learn so much more by talking to PM's, getting a sense for why they shut down ideas, all the biases that form, and really understanding why certain stocks get cheap or expensive.  Learning about the kind of pressure that gets put on a manager to sell out of a position even if it doesn't make economic sense to do so.  All the rest of the value investing stuff is easy to learn, and with the internet it's free knowledge open to starving kids in Africa. 

[BeerBBQ]

Care to elaborate re: retail?

 

[TwoCitiesCapital]

If you want to be a real value investor these days, buy the type of securities that most managers would get fired for owning.  There's simply too much pressure to be like everyone else when you manage others peoples money.  It's simply not worth it for a manager to answer why they own Valeant or whatever happens to be taking a beating from popular publications.  Creates a lot of opportunities these days.  At the moment I'm a bit intrigued by certain stocks in the retail sector...

 

Holy crap Picasso, You are like my internet big brother or something... Agreed 100% again...

 

Value investing has always been dead, and what is dead may never die (isn't that a profound use of GoT quotes? They don't call me The Philosopher for nothing........................)

 

We need more GoT quotes on here.

 

The other thing is that everyone is suddenly the same type of value investor.  They all read the same books (you have the bibles like Graham, but everyone reads Greenblatt), the same CFA material, they attend very similar business school programs, their pitches sound the same, they're on Seeking Alpha as a "deep value," "special situation" investor, etc.  9/10 pitches on VIC have the same boring thought process.  But you'll learn so much more by talking to PM's, getting a sense for why they shut down ideas, all the biases that form, and really understanding why certain stocks get cheap or expensive.  Learning about the kind of pressure that gets put on a manager to sell out of a position even if it doesn't make economic sense to do so.  All the rest of the value investing stuff is easy to learn, and with the internet it's free knowledge open to starving kids in Africa.

 

+1 I'm very much into buying what no one will own. I'm in full support of movements to green energy, but coal assets just got way to cheap not to own. I'm currently making a killing on coal equities like CNXC and CLD that I started buying in late 2015/early 2016. I know coal is on it's way out, but I also know it's going to be years and there's going to be winners along way because literally NO ONE will touch these things with a 10 foot pole and I get faces from everyone that I tell that I own them...

[scorpioncapital]

What's dead is patience & temperament more than value investing, hopefully there will be sufficient losses by those who don't manage risk to ensure patience comes about by the apathy produced when you don't want to open your computer to look at your net worth balance anymore :)

 

[Jurgis]

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.  :)

[Picasso]

Jurgis, you're right.  Being a contrarian and buying everything that investors hate just because investors hate it will give you mediocre results.  Which is why I get annoyed when people quote Buffett in the middle of some beaten down POS pitch. "Be greedy when others are fearful."  Or, "buy when there is blood on the street."  Sometimes the market is telling you that things are going to get a lot worse, and having a lack of respect for market price action is waiting to get taken to the cleaners.

 

There are so many things that go into buying something that is hated.  You need better reasons than "oh, just a silly Mr. Market being Mr. Market."  It requires a real understanding on why the market is giving you such a great deal.  You need to look at the company of your "co-investors," the probabilities of various outcomes, addressing changes as they come, taking losses and managing your risk, taking big and small bets depending on how probable success looks, living and breathing an idea until it's time to move on and put your capital elsewhere.  Deep DD isn't really that helpful when you read all the cues incorrectly or draw bad conclusions, so you need the right mindset from the beginning.  It's all very hard right?  Which is why I think Buffett is right that almost everyone should just index.  It's hard to win long-term if you fail at just a few of the character traits required to take concentrated, contrarian bets. 

 

There's so much more that goes into buying really cheap securities... There's a massive difference between buying something beaten down in the hope things turnaround, and buying something beaten down that doesn't require things to turnaround to turn a large profit.  I see so many investors get caught up investments that require a turnaround.  Those just aren't typically good bets... And there's no playbook that will consistently make value investing look like a piece of cake.  It's almost supposed to be constantly changing and in flux.  Anyway I could rant about this for hours...

[Jurgis]

Picasso, you are right. :)

[Picasso]

You're going to get me all fired up and end our discussion like that?  Jerk! :)

 

BerrBBQ, just as an example there's Macy's.  They have BBB 2023 debt that yields 3%.  Meanwhile the free cash yield on the equity is around 10%, plus they are heavy in different real estate assets that collectively are probably worth the majority of the EV.  Maybe there's more risk than I'm giving it credit for, but it seems like the cash generated from owning the equity will be many multiples of owning their debt.  I don't own it yet, but looking out for situations in retail where the cap structure is simple telling two different stories.  DDS is another like it.  Debt yields 4%, equity over 10%, etc. 

 

There was a discussion on WMT vs. AMZN at some point late last year.  AMZN has gone from $670-770 and all the AMZN bulls are pulling out victory signs and high fiving.  Over a 15% return?  I think WMT has done about 30% total return since then and I'd argue with way less risk.  No Bezo's getting hit by a bus risk.  We'll see how they do in five years but I doubt it was risky to buy WMT at $58 or whatever.  Wouldn't surprise me if WMT ends up being an easy three year double like when everyone was hating on JNJ...

[Guest roark33]

If there is a new 13D on ODP, we will know it is Picasso. 

[Picasso]

If there is a new 13D on ODP, we will know it is Picasso.

 

Office Depot is pretty hated...

 

https://www.google.com/search?q=office+depot&biw=1056&bih=790&source=lnms&tbm=isch&sa=X&ved=0ahUKEwjB9LT-27nOAhVSzmMKHVAZBHYQ_AUIDCgA#tbm=isch&q=office+depot+hitler