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I have given up value investing


muscleman

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UNF2007, I don’t buy index funds. I could have easily bought at the 1929 peak and have a 90% drawdown and couldn’t recover for decades.

 

As I said above, 10% is good for reasons I explained above. No matter what % I choose, there are always examples like you choose here that doesn’t work.

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One can always consider valuation when investing with index funds, you know.

 

People who point to indexing after reading my post didn't get my points. Indexing does not avoid the problem of buying and seeing the portfolio tanking 50%. Considering valuation when buying the index or whatever stock does not solve this problem either.

Countless times, I've seen examples like the P/E collapse from 15 to 10, and value guys buy, saying it is a bargain, and then it collapses to 5, more value guys buy in or adding, and then it collapses to 2, and more value guys buy/add. Then the company starts to report massive losses, and now there is no longer a P/E. In other times, the company keeps reporting stronger earnings and stock price quickly rebounded. But it is very hard to tell in real time which one will happen.

Hope this clarifies all my points. I don't have anything additional to say.

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Muscleman, kudos for knowing yourself and adapting to something you feel will work for you.

 

To me, elements of your tender offer situations sound quite a lot like approaches to merger arbitrage and other special situations like work-outs that can be considered part of the spectrum of Value Investing, and I think there's a good chance that these sorts of situations can often end up providing a reliable return in a fairly market-neutral way without suffering so much from the ups and downs of the general market. It sounds like you're using indicators that might have some real predictive power (such as percentage take up of a tender offer) with some success and not purely relying on chart-reading.

 

Knowing your own psychology is important, and I hope you'll find success.

 

I started out with a buy and hold portfolio I barely touched for about a decade, but I've kept the bulk of my portfolio in companies within a very narrow circle of very high stability and certainty, not the sorts to have earnings collapses. I made one mistake where that did happen and I lost a lot before finally getting out, but more than compensated in other positions that have compounded well and were mostly bought at prices that suggested they'd barely grow at all.

 

I now trade a little more actively and I'm very concentrated in a very few positions about which I have developed a good degree of certainty for the fundamentals and a reasonable feel for how the market prices tend to relate to fundamentals over time. As I'm well ahead of schedule for my goals, I do feel comfortable and sleep well when my positions decline substantially and/or quite suddenly on relatively minor news (or no news), particularly as this tends to be the times when I make most of my purchases and obtain most of my margin of safety and my out-performance, but I recognise the feeling of uncertainty and potentially panic and the feeling of the need to take action that sudden market swings can generate. These feeling start to bubble up in me on occasions but I usually manage to suppress them.

 

I don`t think that there is a perfect answer nor tool that will work all the time. I have used trading value (sell cheap for cheaper stocks) as a mean to avoid getting paralyzed in a downturn with some success. I think it does help mentally as well to deal with what you mentioned.

 

This Value Trade approach (as I have been calling it) works for me too and keeps me interested while I try to remain strategically idle by pondering from time to time whether the disparity is wide enough to overcome my hysteresis and make the switch when I feel there's a sufficient margin of safety in obtaining more value than I'm giving up.

 

I rarely if ever have held a stock at prices where I think the stock is actually overvalued (unless the story has changed for the worse), but I've traded a modestly undervalued stock for a more deeply undervalued stock more often than any other kind of selling activity I've undertaken so far. It appears from the relatively few times I've done so, that subsequent price action of both stocks has validated my decisions the majority of the time, but it's probably too few times to be sure its not luck.

 

The other approach I've taken is what I'd probably call Quality Trading: selling lower quality stocks to buy higher quality or higher certainty stocks, often those with a better valuation floor at fairly similar price-to-intrinsic-value ratios. Sometimes this is when the story has changed for the worse, but sometimes I feel the story hasn't changed and it's just that now the better stock is available at a comparable price-to-intrinsic-value ratio to the worse stock.

 

Sometimes I've had a somewhat better price-to-value, but maybe not so clear, combined with better downside protection, so I get a kind of combination Value-Quality Trade.

 

That works for me and makes sense for me in my main positions, but I'm also habitually mentally anchoring myself to lower prices than typical market prices by tracking a "Low Valuation" for my positions and my portfolio, based on what I imagine might be their typical multiples at times of pessimism, so this tends to remain a lot more stable than the market price and to increase gradually over time if I do my job right. It's this Low Valuation that I am aiming to increase until the target value we can retire on and become entirely financially independent.

 

It is certainly possible that in the drawdown phase, I may adopt of more diversified approach to the portfolio, but I don't think I'll be able to resist a few relatively big positions when those high conviction ideas come along.

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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.

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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

 

 

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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

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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.

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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).

 

 

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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.

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  • 2 weeks later...

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.

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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.

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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.

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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.

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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?

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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.

 

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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".

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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...

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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.

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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.

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