I have given up value investing

[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.

[LC]

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.

 

I really agree with this - I think this is probably the closest one could get to defining "value investing".

 

And I think it's a really philosophical question. We all have the ability to buy or sell any publicly-traded company in their portfolio. So asking which businesses are maximizing the the intrinsic value of your portfolio, is really asking what businesses are providing the most value to society.

 

And then of course the price paid matters, but to me, this is a much broader and more complicated question - and more fun trying to answer.

[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.

 

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.

 

 

Theoretically, the stock can rerate against your favour too.

 

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.

 

That's the same case as myself, I believe that price is secondary to understanding the economics of a business. There are so so many examples, where purchasing a company with horrendous financials would've been the greatest investment ever.

 

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.

 

I really agree with this - I think this is probably the closest one could get to defining "value investing".

 

And I think it's a really philosophical question. We all have the ability to buy or sell any publicly-traded company in their portfolio. So asking which businesses are maximizing the intrinsic value of your portfolio, is really asking what businesses are providing the most value to society.

 

And then of course the price paid matters, but to me, this is a much broader and more complicated question - and more fun trying to answer.

 

Value investing is fun in the sense that you are able to own companies below their intrinsic value, whether the market agrees with you or not. However, as ludicrous as it sounds, if you're in it to make money, rather than enjoying the process of investing, then it may not be the right fit.

 

Also there's no one way to make money - look at Stanley Druckenmiller or any entrepreneur that hit it big with their one business.

[frommi]

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.  ::)

 

Maybe you fished in the wrong pond of companies? For me to be an investment the value of the business has to be stable. I wouldn`t buy a NCAV stock were the NCAV is shrinking fast (i can live with 10% deterioration), or a dividend growth stock were earnings are not stable (or were not stable through the last recessions). That leaves me with maybe 300 possible investments out of 100.000 stocks, but thats the pond where i know that value investing works really well. With cyclical businesses i`ve also come to realize that technical analysis is often better, because you can never be sure if the current earnings are not the peak earnings for the next decade.

What i found interesting was that analysts often are not that bad at figuring out next years earnings (at least if the sentiment on a stock is not totally rotten) so its worth looking at. The market is sometimes even ignoring consensus earnings and just runs on emotions.

[thelads]

Hi Muscleman,

 

I just wanted to give you a quick note of congratulations. It is incredibly difficult to come to a public forum and admit things didn't go as you might have pleased. My experience likely doesn't apply here, but I will relate from it anyhow. I have seen plenty succeed and many more fail. Universally, the failures related to a lack of alignment between the approach taken by the person and their emotional/psychological makeup and how that led them to respond to events. Temperament is no joke and you have to be honest with yourself. For whatever it is worth, I think realizing this is half the battle. As others have stated, there are many ways to approach markets. Indexing has worked very very well. Or look at Paul Singer at Elliot. He went down the route he took after some early failuers with styles that didn't fit him. Klarman uses a mix of private and public securities. This gives diversification but also reduces reported volatility. No doubt in my mind that will suit him. Then you look at other ends of the spectrum, with more Vol, say at Druckenmiller (though few losing periods) or a Pabrai who is fine with large swings. His friend, Mr. Spier appears to be less comfortable with such volatility and manages things differently.

 

I don't think there is a right or wrong answer. There is just the right and wrong fit for you. There is absolutely no harm in doing other things if investing has lost its appeal. I know many full-time folks who have quit the industry and are blissfully happy. I know many who have remained who are also happy. And both of those sets of people were pot committed.

 

Sorry - most of the above is probably stating the obvious and just repeats the same points made by others. But I really just wanted to say you deserve great credit for listening to yourself and realizing what does not work for you. I wish you the best for the future.