I have given up value investing

[james22]

Index fund's diversification is arguably the only free lunch in finance, reducing risk without reducing reward.

 

If you've given up value investing (and a margin of safety), not sure how you'll avoid the problem of buying and seeing an investment tank 50% without reducing your expected reward at the same time.

[thepupil]

muscleman, have you considered changing your asset allocation to reflect your (apparently high) drawdown sensitivity?

 

It seems that you want to invest in risk assets (no matter the strategy, value/technical/etc.) without significant drawdowns.

 

Therefore, I'd consider the following:

a) recognizing that you're 33 have a long runway of net savings ahead of you and can in most scenarios handle a drawdown

 

but if that doesn't work then

b) including cash/bonds/i-bonds/TIPs etc. in your asset allocation to mitigate volatility.

c) potentially even buying insurance on your risk assets or investing in something like TIAA traditional.

 

Based on your post you have the ability (you are employed and young) to bear downside risk but not the willingness. Therefore some type of low-risk (and suboptimal and potentially expensive over the long term) investment should perhaps be in the mix.

 

I think you are receiving a lot of (warranted) criticism because it sounds like you stopped value investing because of your low tolerance of drawdowns, but I'm not sure if your new method really solves the problem of keeping your emotions in check or your apparent goal of making equity or above equity returns without major drawdowns. I just think that's wanting your cake and to eat it too. In other words, I don't think it's really possible to do sustainably and that you should realize you have to save more and make a lower return if you can't handle the drawdowns.

 

Also, there is such a thing as low octane value investing where one invests in relatively low risk overcapitalized enterprises that (in general) also have experienced low volatility, in part because their intrinsic value is less volatile, but I think that's beside the point. Go Che

 

It just feels like the your cure doesn't really fit the disease

 

Note: I edited out some stock specific stuff I deemed not relevant

 

 

[james22]

Maybe a barbell strategy?

 

Something like Swedroe's suggested 15% Small Value, 10% International Small Value, 5% Emerging Market Value, and 70% 1-year Treasuries would give you an expected return equal to that of the S&P 500.

[Cardboard]

Hey guys I feel like you don`t understand what he is doing and has done.

 

He basically looks for stocks with strong momentum. Buys them. Then if they go down for some reason afterwards he sells after they drop 10% below his cost. I am also assuming that the stops are moved higher as the stock moves higher.

 

So he can`t suffer from a large drawdown or over 10%.

 

Since he is looking for stocks using technical indicators (trying to gauge interest via supply and demand for shares), he does not "fall in love" with his stocks like us value investors as we look at calculated intrinsic value. If they don`t go up, they are not worth holding, period.

 

To figure out if this works, he ran historical models and apparently that it does even after accounting for the mis-starts on some of them when the 10% safety valve is triggered.

 

Anyway, Muscleman that is my understanding. You are also not the first guy that hear of using technical analysis and making money as there are many ways to skin a cat.

 

If you would not mind sharing some of the technical tools that you are using to detect momentum that would be appreciated. I will continue using value investing since that is what I have known and used with success for years but, would not mind tools to improve my entry points.

 

Cardboard

[Gregmal]

Except how do you limit your losses to 10% rolling the dice on momo names? A good majority of these get their momo from earnings. So unless you are basically just a day trader, I feel like seeking out companies that by and large are the biggest earnings movers, and expecting to cut losses at 10% is a bit flawed...FB was the momo poster boy until its 25% earnings related gap down last year. A 10% stop wouldn't have done any good there.

[thepupil]

Hey guys I feel like you don`t understand what he is doing and has done.

 

He basically looks for stocks with strong momentum. Buys them. Then if they go down for some reason afterwards he sells after they drop 10% below his cost. I am also assuming that the stops are moved higher as the stock moves higher.

 

So he can`t suffer from a large drawdown or over 10%.

 

Since he is looking for stocks using technical indicators (trying to gauge interest via supply and demand for shares), he does not "fall in love" with his stocks like us value investors as we look at calculated intrinsic value. If they don`t go up, they are not worth holding, period.

 

To figure out if this works, he ran historical models and apparently that it does even after accounting for the mis-starts on some of them when the 10% safety valve is triggered.

 

Anyway, Muscleman that is my understanding. You are also not the first guy that hear of using technical analysis and making money as there are many ways to skin a cat.

 

If you would not mind sharing some of the technical tools that you are using to detect momentum that would be appreciated. I will continue using value investing since that is what I have known and used with success for years but, would not mind tools to improve my entry points.

 

Cardboard

 

So does the portfolio close out flat at the end of each trading day? If not, then what happens if these stocks open more than 10% down? Does it automatically sell and thus realize a loss greater than 10%? Or does it hold and thus lead to a single name drawdown potential >10%. I think the idea of being able to mechanically exit after a 10% drawdown has technical limitations and that you could get destroyed in a single name or market like flash crash (we all know how the whole "portfolio insurance" thing worked).

 

 

[Spekulatius]

The Problem with technical approaches is not how to avoid losses, it when to get back in. Stock markets during bear markets and early in the recovery are very volatile and probably will give you many conflicting signals. You can get whipsawed easily a few times and probably accumulate losses, if you are in the wrong side. That’s the hard part to figure out, imo.

[investmd]

Adam Robinson - thinker, master chess player, founder of Princeton Review (cracked the SAT) & hedge fund advisor would agree with you that value investing does not work. I am heavily invested in the philosophy of value investing and not in a position to pivot yet. As much as I can hope that there are caveats where it does work, the following are some quotes from Adam Robinson's conversation with Shane Parrish on The Knowledge Project podcast ( link to full podcast : https://fs.blog/adam-robinson-pt1/) that support argument against value investing:

 

And I believe, as the fundamental analyst: A, that I can determine that true value; B, that I will have good reason to know that I’ve determined that true value and it’s not a guess; C, that everyone else is one day going to wake up and realize what the true value is in a reasonable time frame...

 

...Buffett and Charlie Munger—are pretty unique in their investment results. I mean, there may be a handful of other investors in the world who have beaten the market to that degree by that length of time. So if fundamental analysis works the question is, why is Buffett the only person who can do it? Clearly he’s doing something else. I don’t know what the something else is. So here’s the other problem with fundamental analysis, it’s one of hubris. Every fundamental analyst believes he or she, using exactly the same tools that every other—and information that every other MBA, former MBA student has acquired reading security analysis, is going to discover something no one else has discovered

 

...Right the fundamental view of investing is that you can figure out something about the world that no one else has figured out. It’s a bit like prospecting, right, gold prospecting. You can go out with your pan and find something that no one else has found. Well, the difference between investing and gold prospecting is that gold prospecting, you actually find gold that you can actually go sell, right? If you find

a value that no one else has found, what makes you think.... If people are irrational enough to believe that the price of gold is different from what you think it is or should be, what makes you think they’re going to become rational tomorrow? There’s that great quote by John Maynard Keynes, “Markets can stay irrational longer than you can stay solvent.” Good luck with that.

[wabuffo]

A propos of this subject -- the median stock rose 14.5%*... in January!  How's your portfolio return doing so far in 2019 vs a bunch of dart-throwing monkeys? 

 

wabuffo

 

 

 

 

 

 

* as per the Wilshire 5000 Equal-Weighted Index for the month ending on Jan 31st.

[investmd]

Interesting (& worrisome !) that this thread has so much traction on a board with a value investing bend

 

 

 

A propos of this subject -- the median stock rose 14.5%*... in January!  How's your portfolio return doing so far in 2019 vs a bunch of dart-throwing monkeys? 

 

wabuffo

 

 

 

 

 

 

* as per the Wilshire 5000 Equal-Weighted Index for the month ending on Jan 31st.

[DRValue]

Interesting (& worrisome !) that this thread has so much traction on a board with a value investing bend

 

 

 

A propos of this subject -- the median stock rose 14.5%*... in January!  How's your portfolio return doing so far in 2019 vs a bunch of dart-throwing monkeys? 

 

wabuffo

 

 

 

 

 

 

* as per the Wilshire 5000 Equal-Weighted Index for the month ending on Jan 31st.

 

Lol, we should probably start an Index Tracker Haven.

[muscleman]

Adam Robinson - thinker, master chess player, founder of Princeton Review (cracked the SAT) & hedge fund advisor would agree with you that value investing does not work. I am heavily invested in the philosophy of value investing and not in a position to pivot yet. As much as I can hope that there are caveats where it does work, the following are some quotes from Adam Robinson's conversation with Shane Parrish on The Knowledge Project podcast ( link to full podcast : https://fs.blog/adam-robinson-pt1/) that support argument against value investing:

 

And I believe, as the fundamental analyst: A, that I can determine that true value; B, that I will have good reason to know that I’ve determined that true value and it’s not a guess; C, that everyone else is one day going to wake up and realize what the true value is in a reasonable time frame...

 

...Buffett and Charlie Munger—are pretty unique in their investment results. I mean, there may be a handful of other investors in the world who have beaten the market to that degree by that length of time. So if fundamental analysis works the question is, why is Buffett the only person who can do it? Clearly he’s doing something else. I don’t know what the something else is. So here’s the other problem with fundamental analysis, it’s one of hubris. Every fundamental analyst believes he or she, using exactly the same tools that every other—and information that every other MBA, former MBA student has acquired reading security analysis, is going to discover something no one else has discovered

 

...Right the fundamental view of investing is that you can figure out something about the world that no one else has figured out. It’s a bit like prospecting, right, gold prospecting. You can go out with your pan and find something that no one else has found. Well, the difference between investing and gold prospecting is that gold prospecting, you actually find gold that you can actually go sell, right? If you find

a value that no one else has found, what makes you think.... If people are irrational enough to believe that the price of gold is different from what you think it is or should be, what makes you think they’re going to become rational tomorrow? There’s that great quote by John Maynard Keynes, “Markets can stay irrational longer than you can stay solvent.” Good luck with that.

 

I partially agree and partially disagree.

I do have the exact same doubt that while the DCF excel sheet, sum of parts analysis and all those tools are fascinating, everyone else have the same tools, so how could it be possible that only Buffet has beaten the game so far?

On the other hand, for technical analysis, don't we have the same problem? All these technical analysis tools are wildly known and there were superstars who talked about how they use these tools in a wide variety of interviews. How come we only have a handful of superstar traders who is pure technical based?

What is missing?

[muscleman]

A propos of this subject -- the median stock rose 14.5%*... in January!  How's your portfolio return doing so far in 2019 vs a bunch of dart-throwing monkeys? 

 

wabuffo

 

 

 

 

 

 

* as per the Wilshire 5000 Equal-Weighted Index for the month ending on Jan 31st.

 

I am only up 3% so far, with 70% cash.

As I said earlier in this thread, I fully understand the trade offs. By value investing and actively bargain hunting, I'll capture big upside when the market goes up, but I'll also likely get hit big, maybe 50% draw down when I aggressively buy in and the market continues to go down. My personality can't tolerate that.

I am totally cool if I am only up 5% while the index and everyone else is up 40%. This won't affect my emotional one iota.

 

Choosing the style of investing is all about trade offs and finding one that fits you. If you want to discredit a method, and cherry-pick the period that doesn't work well, and say, look at this period only, then you can find the argument against any method.

 

[Gregmal]

Interesting (& worrisome !) that this thread has so much traction on a board with a value investing bend

 

 

 

A propos of this subject -- the median stock rose 14.5%*... in January!  How's your portfolio return doing so far in 2019 vs a bunch of dart-throwing monkeys? 

 

wabuffo

 

 

 

 

 

 

* as per the Wilshire 5000 Equal-Weighted Index for the month ending on Jan 31st.

 

The only thing resembling value investing here is the name of the site. The majority just follow consensus. The "daring" ones, when courageous enough to go out on a limb, deviate from just buying Berkshire(or what IMO are index fund proxies), to buying an individual name Berkshire owns....

 

There is so much value and opportunity in the markets these days. Its not all in one place or another but hidden under various rocks and part of what makes investing truly what I've heard called a "global treasure hunt".

[jgyetzer]

I partially agree and partially disagree.

I do have the exact same doubt that while the DCF excel sheet, sum of parts analysis and all those tools are fascinating, everyone else have the same tools, so how could it be possible that only Buffet has beaten the game so far?

On the other hand, for technical analysis, don't we have the same problem? All these technical analysis tools are wildly known and there were superstars who talked about how they use these tools in a wide variety of interviews. How come we only have a handful of superstar traders who is pure technical based?

What is missing?

 

All those tools and analyses focus on strictly informational advantage.  What about advantages of time horizon and emotional stability?  I think it's John Huber that wrote a nice blog post along those lines...

[james22]

What about advantages of time horizon and emotional stability? 

 

DIng, ding, ding.

[valueinvestor]

What about advantages of time horizon and emotional stability? 

 

DIng, ding, ding.

 

It's surprising that this was not mentioned throughout this whole thread, because the only time I was able to outperform the S&P over the long-term is by (ironically) under-performing in the short-term. My timing is not impeccable and investments that I've thought were cheap become cheaper by more than 15%. In order to compensate for the bad timing and mistakes that the business one's invested in makes, I double down, as long as those mistakes did not affect the intrinsic value of the business. Not that it is a foolproof strategy, as sometimes what you thought was cheap was actually expensive, which was Valeant and HBC for me. However if one is right one out of three times, one will do well over the long-term. I remember in 2008, when purchased BAC @ $7 and it was more than 50% of my portfolio, and even then the stock went to $3, even after news that the US Government was purchasing shares. I reviewed my investment thesis and doubled down, and even though on paper I was underwater for more than a year, it was one of my most profitable investments. In fact, the most profitable investment was when I was underwater for two-to-three years, but kept on doubling down because prices went down on issues where the company made moves that made sense for the long-term, but meant accepting short-term pains.

 

All these years I've learned that outperformance for me is more psychological than analytical, in fact, I do not check my performance every day, much less every year. As weird as it sounds, my mind is focused on owning as many shares in a company as possible, and I am more happy when a stock goes down, rather then up. I realize that this does not align with everyone's investment/retirement goals, but I think it is one of the reasons why value investing is hard. As one has to bet against the consensus, and believe that the stock price is not the per share value of the company. In fact be happy when a stock price goes against you because you are increasing your percentage ownership at a faster rate, then before. Again not foolproof, for example, I've been invested in Hudson's Bay for almost six years, and still underwater, but have not sold because it is a company that I am more than happy to own under $15/share.

[muscleman]

I partially agree and partially disagree.

I do have the exact same doubt that while the DCF excel sheet, sum of parts analysis and all those tools are fascinating, everyone else have the same tools, so how could it be possible that only Buffet has beaten the game so far?

On the other hand, for technical analysis, don't we have the same problem? All these technical analysis tools are wildly known and there were superstars who talked about how they use these tools in a wide variety of interviews. How come we only have a handful of superstar traders who is pure technical based?

What is missing?

 

All those tools and analyses focus on strictly informational advantage.  What about advantages of time horizon and emotional stability?  I think it's John Huber that wrote a nice blog post along those lines...

 

There you go! I think time horizon and emotional stability are one of the key factors that make the difference. I realized this since 2017 and was actively working on it. Eventually this made me to gave up value investing to switch to other methods that make me emotional stable. It is all about finding a method that make you do it naturally, instead of having to force yourself to do things.

[muscleman]

What about advantages of time horizon and emotional stability? 

 

DIng, ding, ding.

 

It's surprising that this was not mentioned throughout this whole thread, because the only time I was able to outperform the S&P over the long-term is by (ironically) under-performing in the short-term. My timing is not impeccable and investments that I've thought were cheap become cheaper by more than 15%. In order to compensate for the bad timing and mistakes that the business one's invested in makes, I double down, as long as those mistakes did not affect the intrinsic value of the business. Not that it is a foolproof strategy, as sometimes what you thought was cheap was actually expensive, which was Valeant and HBC for me. However if one is right one out of three times, one will do well over the long-term. I remember in 2008, when purchased BAC @ $7 and it was more than 50% of my portfolio, and even then the stock went to $3, even after news that the US Government was purchasing shares. I reviewed my investment thesis and doubled down, and even though on paper I was underwater for more than a year, it was one of my most profitable investments. In fact, the most profitable investment was when I was underwater for two-to-three years, but kept on doubling down because prices went down on issues where the company made moves that made sense for the long-term, but meant accepting short-term pains.

 

All these years I've learned that outperformance for me is more psychological than analytical, in fact, I do not check my performance every day, much less every year. As weird as it sounds, my mind is focused on owning as many shares in a company as possible, and I am more happy when a stock goes down, rather then up. I realize that this does not align with everyone's investment/retirement goals, but I think it is one of the reasons why value investing is hard. As one has to bet against the consensus, and believe that the stock price is not the per share value of the company. In fact be happy when a stock price goes against you because you are increasing your percentage ownership at a faster rate, then before. Again not foolproof, for example, I've been invested in Hudson's Bay for almost six years, and still underwater, but have not sold because it is a company that I am more than happy to own under $15/share.

 

I am surprised that you said this is  mentioned throughout this whole thread, because I've said over and over the whole reason that I gave up value investing is because I simply can't stay emotionally stable with it. I am finally able to after I switch to a technical method. I think there are lots of misunderstandings of why I made this thread and people were just criticizing me for what I said without understanding what I said. One of my major point of this thread is to help people understand that they need to find a method that they can work with naturally and keep emotions stable.

[Cigarbutt]

I am surprised that you said this is  mentioned throughout this whole thread, because I've said over and over the whole reason that I gave up value investing is because I simply can't stay emotionally stable with it. I am finally able to after I switch to a technical method. I think there are lots of misunderstandings of why I made this thread and people were just criticizing me for what I said without understanding what I said. One of my major point of this thread is to help people understand that they need to find a method that they can work with naturally and keep emotions stable.

Hi muscleman,

The surprise may be related to the two-level discussion that your thread initiated:

1-the notion of feeling good about a "method"

2-the method being technical vs value (whatever that means)

 

FWIW, your thread triggered me to go back to The Intelligent Investor (presently re-reading the revised edition by Jason Zweig). I guess it's like when people marry a second time with the same person, to make sure they are still on the same page.

 

[valueinvestor]

Also I’m not saying that ones not emotionally stable specifically, but rather the the misunderstanding that value investing is more about increasing the value of your portfolio on paper, rather than increasing the intrinsic value of one’s portfolio. In fact, most case, I agree with muscleman. Which is why results come after a long time of instability or may never come at all, which was my main point, just because you bought a security cheaply, the market does not have to recognize it.

[Spekulatius]

Also I’m not saying that ones not emotionally stable specifically, but rather the the misunderstanding that value investing is more about increasing the value of your portfolio on paper, rather than increasing the intrinsic value of one’s portfolio. In fact, most case, I agree with muscleman. Which is why results come after a long time of instability or may never come at all, which was my main point, just because you bought a security cheaply, the market does not have to recognize it.

 

Theoretically, if you bought a stock cheaply, it should not matter if the market agrees with you or not. A good stock should work even without rerating.

[muscleman]

Theoretically, if you bought a stock cheaply, it should not matter if the market agrees with you or not. A good stock should work even without rerating.

 

But that's in theory. In practice, I've experienced countless times when I bought a low P/E stock, and stock kept declining, and a few months later the company reports shit earning and suddenly, my P/E is much higher. Company blames it for some one timer events, so I held on, and then another quarter later, the earning is even worse--- It was negative now! So there isn't event a P/E that I could value on, and now management continues to blame some one timer events. Now I am down 50%, with no margin of safety with me.  ::)

 

[Gregmal]

A current, or TTM PE is irrelevant and IMO shouldn't even factor into one's analysis. Forward PE can be important but again, I've never found it useful buying just on next year's earnings. Essentially one needs to be able to objectively analyze the business prospects going forward in order to get comfortable with an investment. So in the event that I expect a NTM PE of 10, and the following few earnings are off, there's only two culprits; 1) ME. I misjudged the business or environment, or 2) Management is either dishonest or incompetent. And even in the event of number 2, it is the investors job to make sure you are comfortable investing with the current management. So if you do the work, there are safeguards.

[Spekulatius]

Theoretically, if you bought a stock cheaply, it should not matter if the market agrees with you or not. A good stock should work even without rerating.

 

But that's in theory. In practice, I've experienced countless times when I bought a low P/E stock, and stock kept declining, and a few months later the company reports shit earning and suddenly, my P/E is much higher. Company blames it for some one timer events, so I held on, and then another quarter later, the earning is even worse--- It was negative now! So there isn't event a P/E that I could value on, and now management continues to blame some one timer events. Now I am down 50%, with no margin of safety with me.  ::)

 

Well then it wasn’t a “good” stock. It was a stock that looked better than the fundamentals actually were when bought. You are correct, that this happens and Mr Market should not be underestimated. Not every contrarian buy is a good one. However, often Mr Market knows nothing and stocks go down for no reason or the decline is in no relation to the fundamental issue causing it.