I have given up value investing

[muscleman]

I started learning value investing since 2009 and was lucky to make some money during this great bull market, though I am probably not beating the market.

I have decided to give up value investing because it doesn't fit my personality.

There are several flaws that's probably most likely related to my personality.

1. I always over analyze and paralyze. Fear to buy. (Could this go down more?) Fear to sell. (Could this go up more?)

2. My analysis has serious flaws and later earnings turn out to be bad and it turned out that if I know more about it and do more research, I could have figured it out and avoided it. (Rear view mirror always clearer)

3. Too nervous and keep checking the stock price. When it goes against me deeply, I feel depressed and can't concentrate on work or family anymore.

4. I have always thought if I started investing in 2007, how would I fair in 2008-2009 crash. I have no answers. I know friends who lost 75% in that bear market and felt distress from both self and family, but eventually made back and more after 2009. Can I psychologically withstand that? I don't think I can.

 

There are more ways to make money than value investing. I am currently exploring those.

 

Update: I never expected so many replies and a lot of them with misunderstandings of my post.

 

As John pointed out:

Post by muscleman of January 5^th 2019 in the CoBF members 2018 returns topic:

 

I had the same feeling in 2017 when my baby was born. I was sleeping 4 hours a night for many months and felt like a drunk. I have now switched to a technical heavy approach because in general it takes less time. I was lucky to make this decision around May, and was actively learning and liquidating all of my value positions, so I was not affected by the recent down turn. I ended up +10% this year mainly because of BXC and SMLR (4x and 3x).

 

What I really want to say is this:

There are many ways to make/lose money. Value investor, technical trader, value+technocal combined, quantitative approach etc.

The most important thing to become successful is to find the method that suits your personality! I have been struggling as a value investor with huge emotional up and downs, but after I switched to technical method, I no longer have those ups and downs, and I no longer freeze when I need to pull the trigger.

I am surprised to see some replies here saying value investing is the best method and giving up value investing means playing the field with significant disadvantage. I disagree. The only time when one can win big is when he finds the method that suits him the best. Therefore I am writing this post to share with members of my own experience, and alert struggling members not to treat value investing as the holy grail, and find a method that suits YOU!

[Liberty]

Congrats, that sounds like an honest self-assessment, which is actually a very important skill to have as an investor (necessary though not sufficient).

 

This line of work certainly isn't for everyone, like many other technical and stressful jobs (any surgeons in the house?).

 

What kind of other things are you looking at? Completely different, or similar occupations?

 

Good luck (and hard work) in whatever you do next.

[petec]

Congrats, that sounds like an honest self-assessment, which is actually a very important skill to have as an investor (necessary though not sufficient).

 

+1

[nickenumbers]

Muscleman, I think that you shared something that most of us have thought/feared/wondered ourselves..  [Even if only for a short while.]

 

C. Munger often retells the story of the musician that came to Mozart and asked how he may also become a composer like Mozart.  Mozart had been creating amazing work even in his teens.  Mozart and Munger both conclude that not everyone has the same gifts.  In Virginia we say "Ya can't push a square block into a round hole."

 

And, THAT IS OKAY.  Enjoyment with your family, your friends and yourself is the most important.  How you finance your lifestyle is secondary.

 

Muscleman, I bestow you an A+ for self-awareness and honesty!  The jury is still out on the rest of us, either we are going to create Alpha, or we are pissing into the wind!

 

[LC]

Good luck on whichever path you venture down!  ;D

 

Also, there's nothing wrong with indexing and going to the beach!

[DocSnowball]

GLTY - maybe there is a time for indexing and a time for value and that is something I think about which keeps me going as an active investor

 

Prof. here talks about "returns per unit of stress" which made an impact on my thinking

https://fundooprofessor.wordpress.com/2012/04/05/returns-per-unit-of-stress/

 

When indexes are clearly undervalued or at least fairly valued (like in EM indexes IMHO) I'm happy to index as well now. Too much stress in a 100% active portfolio. As an individual investor with a life, I find it difficult to cultivate more than 5-10 ideas that are honestly within my circle of competence. When they are within it, it doesn't feel like work, and is fun despite the high beta. Also, the last few years have been about disconfirming so many thesis, it is tiring turning over one rock after another and not finding it worth investing. Maybe wiser ones on this thread will comment on how many years or units of learning it takes to be able to manage a full portfolio with lower levels of stress and returns that are consistently positive above inflation

 

 

[Guest cherzeca]

Good luck on whichever path you venture down!  ;D

 

Also, there's nothing wrong with indexing and going to the beach!

 

imo, indexing should be good for a large majority of your portfolio.  only where I "think I have an edge" should I get specific names into portfolio, and those circumstances are relatively few.  and these are almost by definition cases where I disagree with the market, so fear and uncertainty comes with the territory. the true pros seem to me to be .330 hitters, great in baseball and also great in investing if you manage risk and strive for survival above all else (taleb)

[John Hjorth]

Post by muscleman of January 5^th 2019 in the CoBF members 2018 returns topic:

 

I had the same feeling in 2017 when my baby was born. I was sleeping 4 hours a night for many months and felt like a drunk. I have now switched to a technical heavy approach because in general it takes less time. I was lucky to make this decision around May, and was actively learning and liquidating all of my value positions, so I was not affected by the recent down turn. I ended up +10% this year mainly because of BXC and SMLR (4x and 3x).

[Gregmal]

Well, to provide you with some modest pushback, very few of the things you listed, actually have anything to do with value investing specifically. They could apply to any strategy and deal more or less with your own temperament when it comes to handling draw-downs. Investing isnt life though, so if it takes up an excessively large portion of your mental space, and you are not comfortable with this, then I applaud you deciding to cut ties.

[no_free_lunch]

I agree with the others, index and then invest when you find something in your area of competence.

 

What are the other ways to invest?

 

My experience in 08/09 was I wasn't worried about the quality stocks in my portfolio.  I was scared about the lower quality stuff and I was scared about the ideas where I was just following someone.  So just make sure you understand your ideas (same advice applies to me).  This is why I now have  stuff that I think is quality (ok maybe 1 or 2 exceptions) and then etfs.  I am comfortable with both, I was comfortable with both on dec 24.

[Viking]

At the end of the day you need to find a strategy that lets you sleep well at night (and have great relationships). You may find that what you have learned in the past will help you at some point in the future. Best of luck on your journey :-)

[DRValue]

Very honest muscle man.

 

Personally I'm more concerned with valuing a great business and waiting for the price to fall because of some event rather than "cigar butts". And even then i won't buy until the discount to my valuation is at least 100%. I don't see any point risking any money in equity for only 10 to 20 pct. It has to be asymmetric.

 

This all makes me sleep well at night as I don't worry about the business. And if the price falls but nothing has changed, well I might buy more.

 

If I manage my cash flow too then I should be able to cope with stock price fluctuations.

 

And concentration doesn't worry me, especially if the risk is asymmetric. Hence my gse position...

[berkshire101]

I view investing like mix martial arts.  To get good, you need to take bits from everywhere to eventually create your own style.  Value investing is just one art form.  With top UFC fighters, most are well rounded and are exceptional in one-two things.  Like Jon Jones with his length and wrestling, he's also good in other aspects of the game. 

 

So just being good with value investing is not good enough nowadays, in the long run anyways.  The game is competitive nowadays so we need to constantly learn from other styles to create our own. 

 

Also, everyone peaks.  Like in sports, there are people who figured out an inefficiency and make it to the top.  Eventually, others figure it out.  Like Conor McGregor with his striking.  Other fighters learned if you make him tired then his edge goes away. 

 

I think investing is like the same.  Traditional value investing might still work, but long term its edge isn't so black and white.  So it's up to us to add to the depths that is value investing. 

[Broeb22]

If I may give my two cents, these reflections about your temperament may mean you would be better suited risking a smaller % of your money in the stock market, and perhaps should own more bonds.

 

I totally get where you're coming from. Real estate has been a lot easier for me emotionally, so I've been moving more cash to that area.

[CorpRaider]

Don't take this the wrong way but I've long thought you might be a great candidate for an index product, like a low ER balanced or target date fund (or like a low fee RIA).  You could also consider whether being a "dividend-growth" type investor might help you with some of the behavioral issues we all face.  Many of the other options are inferior to what you've been doing and you will probably lose more money (e.g., growth or momentum/technical investing or "trading").

[Uccmal]

Dividend growth investing here.  I am down to 2 stocks in my portfolio that aren't growing their dividends annually  These two pay high dividends, they just aren't going to grow.  As soon as I can find a couple of more dividend growers At A Reasonable Price then I will get out of the last couple. 

 

The exception I suppose is BAM, my largest single holding.  It grows its dividend but is more like Berk. and uses more of its retained cash flow in a productive manner. 

 

 

 

 

[Cigarbutt]

Hi muscleman,

I enjoyed exchanging info with you in the last few months and commend you on this conclusion as it helps compensate the survivorship bias that is implicit on this Board.

You often finished your posts with questions and I will do the same in this post:

Are you switching from value investing to investing in values?

Good luck to you

-----

 

CorpRaider's post caused me to reflect on the relevance and timing of some comments and morphed into the following exercise:

 

 

                                                -capacity to deliver excess returns                -incapacity to deliver excess returns

 

-indexer                                              A=waste of talent                                        C=realistic assessment

 

-aiming for excess returns                    B=investing nirvana                                    D=over-confidence issue

 

 

I assume that the B group is over-represented on this Board but would like to submit that, in the real world out there, about 85 to 90% of investors aiming for excess returns do not achieve their objective, making the C category perhaps a better option in some instances.

 

Interesting to note that "Jack" Bogle (RIP) started out being ridiculed (by some) and ended up as a hero (for most).

Time is your friend if you end up in the right category.

[vinod1]

Admire the way you are intellectually honest and looking at performance in a rational manner. It is a rare quality and I think would serve you very well in whatever you choose to do.

 

I think Gregmal hit it in the head. The problems you mentioned have little to do with value investing. Even if you take up indexing you would face the same problems. I think with indexing, it might be even more of a problem. When you take an individual company, you might have some insight, right or wrong about that company, which might give you some confidence in your decision making. With indexing you have less insight and the things that are going to determine the value tend to be macro variables. Which are even more uncertain which basically causes investors to let their emotions dictate.

 

The very first thing you need to check is your behavior when an investment goes down 50% or more in value after you bought it upon no news.

 

1) If you can honestly see yourself saying "Meh!" and increasing the allocation, then you are a viable candidate for investing. You can think more about how to go about addressing the behavioral issues.

 

2) If that is going to cause you to lose sleep, then you need to think of something very different. Something where you would have little insight into the investments. Use DFA funds  which slice and dice into a dozens of index funds with an advisor to boot who can talk you down from making radical changes. Or buy  Target date funds, which hide all the fluctuations due to them being a mix of stocks and bonds, etc which reduces volatility. End result is you see your overall portfolio value change only modestly. This way you can stick with an allocation for the long term.

 

Vinod

 

 

 

 

[jfan]

Thank you Muscleman for your post.

 

Like yourself, I started this value investing journey in 2010. After 8, going on 9 years, hacking away at this hobby with no formal training, I would have to also admit that I have not come close to outperforming the index. And reading the thread "CoBF members 2018 returns" were, also made me reflect on what am I doing here.

 

Perhaps it is a bit of rationalization on my part, but I wouldn't consider all those years wasted time. It has forced me to learn a whole lot of things that should have learned two decades prior. Subjects such behavioral finance, decision-making, leadership, mental models, psychology, innovation in addition to learning a bit more about my personal biases and tendencies. These things have added significant non-monetary value to my personal and (non-finance) work life. I would consider the money that I lost or could have made indexing, the cost of this education.

 

Not being in the finance field, does give a few advantages to the outsiders like me. I allows me to play a different game where poor performance does not lead to career risk. What I realized over the years, is that what people like me need to do, is to find companies that they really like, do enough homework (and keep doing it) to convince yourself that you can hold these businesses (and their management) for very long periods (10+ years). Maybe there were be a few duds, maybe there will be a few winners. We all hear about the cases of know nothing savers buying stocks that they only recognize because of their brands, and hold them for multi-decades, and produce extraordinary results.  I figure that if I find opportunities with founders that are local to my geography, figure out their businesses, rule out why I shouldn't fall in love with them, and hold them "forever". I would expect a reasonable outcome.

 

Don't know if this is a crazy strategy, I'll let everyone know in about 40 years.

 

Jerome

[Lakesider]

I've been hedging against my own stupidity by putting any retirement contributions into index funds.  ::)

[james22]

Like yourself, I started this value investing journey in 2010. After 8, going on 9 years, hacking away at this hobby with no formal training, I would have to also admit that I have not come close to outperforming the index.

 

These have been especially difficult years for value investors given QE.

 

I'd be very leery of shifting to a Boglehead buy-and-hold index strategy at a time of QT.

[SHDL]

Best of luck to muscleman, but to me this feels like exactly the wrong time to give up on active value investing...

[Spekulatius]

Like yourself, I started this value investing journey in 2010. After 8, going on 9 years, hacking away at this hobby with no formal training, I would have to also admit that I have not come close to outperforming the index.

 

These have been especially difficult years for value investors given QE.

 

I'd be very leery of shifting to a Boglehead buy-and-hold index strategy at a time of QT.

 

Index funds started to be available to me in 1998 when I started my 401k.if I had bought in back then, I would have just been flat in 2010 or so. Some foreign indices have even longer periods of underperformance. The enlightment of indexers comes after 10 years of pretty much straight bull markets if you take out Q4 2018 and some dips along the way. I fully expect to see another 50% down market in the next 10 years again.

[writser]

Probably a good decision Muscleman. And one that more forum members should make. FWIW, as others pointed out, will point 3 & 4 really change if you put all your money in index funds? If you feel depressed when your portfolio is down, maybe the problem is the size of your portfolio and not the composition?

[jfan]

Like yourself, I started this value investing journey in 2010. After 8, going on 9 years, hacking away at this hobby with no formal training, I would have to also admit that I have not come close to outperforming the index.

 

These have been especially difficult years for value investors given QE.

 

I'd be very leery of shifting to a Boglehead buy-and-hold index strategy at a time of QT.

 

Index funds started to be available to me in 1998 when I started my 401k.if I had bought in back then, I would have just been flat in 2010 or so. Some foreign indices have even longer periods of underperformance. The enlightment of indexers comes after 10 years of pretty much straight bull markets if you take out Q4 2018 and some dips along the way. I fully expect to see another 50% down market in the next 10 years again.

 

I agree that perhaps the majority of retail investors should be in index funds. However, with institutional money also piling into indices along with QE, I think indexation is setting people (and all those robo-advisors) up for long-term disappointment. And if Jack Bogle is correct that indexation may reach levels of 50% of the ownership of public securities, the role of active management becomes even more vital in price discoveries. I think the overall market needs to have a balance of indexers and active managers, however nature being as it is, the pendulum will swing between the 2.

 

Here is a podcast on the history of financial theory that people may be interested in:

https://www.hiddenforces.io/podcast/show/daniel-peris-financial-theory-history

 

And here is Bogle's letter in the Wall Street Journal about his current thoughts of indexation:

https://www.wsj.com/articles/bogle-sounds-a-warning-on-index-funds-1543504551?mod=searchresults&page=1&pos=9