I have given up value investing

[Parsad]

Spekulatius,

 

Please also see my post #8 in this topic which sheds some light on muscleman's new investment approach.

Yeah, I highly doubt that that's a good decision. Giving up on value investing sure, most people can't beat the market, and the sooner you realize you aren't one of them the better. But I think the conclusion of Muscleman that "value investing" doesn't work, but perhaps something else does, is 100% the wrong conclusion. If you can't handle value investing, arguable one of the easiest ways of active investing!, I doubt an alternative active approach is a wise step. Especially since all the point why his value investing doesn't work also apply at basically anything else. Some of them even at passive investing! If you can't psychologically handle the risk and the losses that are inherent to stocks it doesn't matter what your strategy is, your problem isn't going away.

 

Everyone should do what is best for them, but I fully agree with the above comment.  Cheers!

[scorpioncapital]

Dumb investing doesn't work. Sometimes value investing is dumb investing, so yes give that up. I guarantee you, value is not all about price. Cheap price maybe very not value and high price very much value. Growth is always part of value. The split by most pundits is ridiculous. So educate yourself. I guarantee you if you have to give up on value investing, as it is deeply understood, you're doing something wrong. So don't give up !

[LC]

Different strokes for different folks.

 

I'm with the posters who said 1) value investing has so many meanings, two "value" investors can be on both sides of a trade, and 2) "value" investing is just "investing"

 

So really, do whatever you think is best. Which is usually what we're all doing anyways.

[havingheart]

Muscleman, kudos for the honesty/independence.  As long as you iterate/brutally evaluate yourself like you have done, I have no doubt that you'll succeed.  Exploring different methods will only help you to detach from the process I think and there are many tools one can pick to survive in an ecosystem.  See BNF/Takashi Kotegawa although supposedly his methods don't work anymore, but I doubt people could say with 100% what his methods truly were.

 

Although, I kind of feel that for ordinary mortals, the drive to hit it rich impedes investment results because it makes us emotional.  If you want to make serious money, I would look into starting a side business instead as the odds of starting a successful one > odds of beating the market consecutively by huge margins :P and having drive only helps you there.

 

If you want to impress people here though, you have to do it in the "value investing" way.  Of course people here are going to say value investing is the best way lol.  Do you go a tesla forum to ask if if there's a better car company than tesla?  Their cars do look pretty cool though.

[SHDL]

BNF/Takashi Kotegawa

 

Well, what a surprise to see this name come up here.  If I were to associate a human face to the enigmatic Japanese stock market, his would be my pick.

[havingheart]

Not an endorsement either :P. Just another example of what works for some doesn’t work for others.

[muscleman]

Muscleman, kudos for the honesty/independence.  As long as you iterate/brutally evaluate yourself like you have done, I have no doubt that you'll succeed.  Exploring different methods will only help you to detach from the process I think and there are many tools one can pick to survive in an ecosystem.  See BNF/Takashi Kotegawa although supposedly his methods don't work anymore, but I doubt people could say with 100% what his methods truly were.

 

Although, I kind of feel that for ordinary mortals, the drive to hit it rich impedes investment results because it makes us emotional.  If you want to make serious money, I would look into starting a side business instead as the odds of starting a successful one > odds of beating the market consecutively by huge margins :P and having drive only helps you there.

 

If you want to impress people here though, you have to do it in the "value investing" way.  Of course people here are going to say value investing is the best way lol.  Do you go a tesla forum to ask if if there's a better car company than tesla?  Their cars do look pretty cool though.

 

I totally agree. I have spent 9 years on value investing and read over 100 books. I gave it a hard try and it wasn't for me.

After I switch the method, i no longer feel distressed and compelled to check the stock price every few minutes. That's why I made this post to alert people that there are more methods than value investing, and one can only have superior performance if he finds the method that suits him. Regardless of what method one picks, I believe one has to be open minded in order to succeed. I see a number of folks asserting adamantly value investing is the best, without even having in depth knowledge of other methods. I doubt any of these people are open minded. Being open minded is the first criteria before one can succeed in stocks. Good luck!

[Cardboard]

What is your new method?

 

Sorry if I make you repeat.

 

Cardboard

[sshr]

After I switch the method, i no longer feel distressed and compelled to check the stock price every few minutes.

 

Why were you checking stock prices every few minutes? Perhaps, that was the source of your distress?

[frommi]

I totally agree. I have spent 9 years on value investing and read over 100 books. I gave it a hard try and it wasn't for me.

After I switch the method, i no longer feel distressed and compelled to check the stock price every few minutes. That's why I made this post to alert people that there are more methods than value investing, and one can only have superior performance if he finds the method that suits him. Regardless of what method one picks, I believe one has to be open minded in order to succeed. I see a number of folks asserting adamantly value investing is the best, without even having in depth knowledge of other methods. I doubt any of these people are open minded. Being open minded is the first criteria before one can succeed in stocks. Good luck!

 

I am always curious to learn something new, can you point to resources that prove the validity of your approach? (luck vs. skill??) Or is it "just" a momentum approach? How do you find your stocks, how do you determine when to enter/exit?

 

Since value investing is such a broad concept ("pay less than something is worth") i can hardly see how that is not working for anyone. The hard part is figuring out what something is worth, and maybe you were just not that good at it because you probably looked in the wrong places and tried the hard stuff first. If you ever give value investing another try I would focus on NCAV and dividend growth stocks because they are the easiest to value.

 

Regardless, i am bored right now, so please give me something to read regarding your new approach. :)

[muscleman]

After I switch the method, i no longer feel distressed and compelled to check the stock price every few minutes.

 

Why were you checking stock prices every few minutes? Perhaps, that was the source of your distress?

 

 

That is part of my distress for sure. However The biggest problem/myth I have is that a lot of times the stock goes down first before negative news came out, and by the time the negative news came out, I’m already down 50%. Therefore I really don’t think value investors or anyone could say the market is stupid and I am right, or say if I buy with sufficient margin of safety, I don’t care to be down 50%. A lot of times the margin of safety is just imagination. SHDL for example. After trying really hard for 9 years, I gave up.

[muscleman]

What is your new method?

 

Sorry if I make you repeat.

 

Cardboard

 

 

I now use a technical based method. I am a momo trader now.

[SHDL]

SHDL for example.

 

Surely you mean SHLD.  ;)

[muscleman]

I totally agree. I have spent 9 years on value investing and read over 100 books. I gave it a hard try and it wasn't for me.

After I switch the method, i no longer feel distressed and compelled to check the stock price every few minutes. That's why I made this post to alert people that there are more methods than value investing, and one can only have superior performance if he finds the method that suits him. Regardless of what method one picks, I believe one has to be open minded in order to succeed. I see a number of folks asserting adamantly value investing is the best, without even having in depth knowledge of other methods. I doubt any of these people are open minded. Being open minded is the first criteria before one can succeed in stocks. Good luck!

 

I am always curious to learn something new, can you point to resources that prove the validity of your approach? (luck vs. skill??) Or is it "just" a momentum approach? How do you find your stocks, how do you determine when to enter/exit?

 

Since value investing is such a broad concept ("pay less than something is worth") i can hardly see how that is not working for anyone. The hard part is figuring out what something is worth, and maybe you were just not that good at it because you probably looked in the wrong places and tried the hard stuff first. If you ever give value investing another try I would focus on NCAV and dividend growth stocks because they are the easiest to value.

 

Regardless, i am bored right now, so please give me something to read regarding your new approach. :)

 

 

 

I use portfolio123.com to build my quantitative value model and find the best 50 stocks before doing further research. What I find interesting is that ideas that are either not discussed in any forums, or have only short discussions tend to outperform by a lot.

I have stopped discussing stock ideas with anyone, including in this forum, because the moment I start to do that, I am following the crowd, and crowd behavior will inevitably lead to underperformance, including the CoBF crowd.

[muscleman]

SHDL for example.

 

Surely you mean SHLD.  ;)

 

Yes. I owned that name that quickly went underwater, then Baker Street bought a ton and sent out a bullish thesis that bailed me out for a profit. Later Baker Street went totally bankrupt, and I personally know an analyst from Baker Street who had to leave and changed his career and joined MSFT as a program manager.

[frommi]

I use portfolio123.com to build my quantitative value model and find the best 50 stocks before doing further research. What I find interesting is that ideas that are either not discussed in any forums, or have only short discussions tend to outperform by a lot.

I have stopped discussing stock ideas with anyone, including in this forum, because the moment I start to do that, I am following the crowd, and crowd behavior will inevitably lead to underperformance, including the CoBF crowd.

 

Thats great! I`ve built a lot of models on portfolio123, too. But i haven`t found one that beat my NCAV model consistently. I tried to incorporate some of Olikea`s ranking/models with >30% annual returns, but i was not able to trade it profitably, because as soon as the model has a drawdown i questioned the whole model`s approach. That`s probably my own handycap.

Do you trade the model directly with the trade interface or do you manually enter trades?

[muscleman]

I use portfolio123.com to build my quantitative value model and find the best 50 stocks before doing further research. What I find interesting is that ideas that are either not discussed in any forums, or have only short discussions tend to outperform by a lot.

I have stopped discussing stock ideas with anyone, including in this forum, because the moment I start to do that, I am following the crowd, and crowd behavior will inevitably lead to underperformance, including the CoBF crowd.

 

Thats great! I`ve built a lot of models on portfolio123, too. But i haven`t found one that beat my NCAV model consistently. I tried to incorporate some of Olikea`s ranking/models with >30% annual returns, but i was not able to trade it profitably, because as soon as the model has a drawdown i questioned the whole model`s approach. That`s probably my own handycap.

Do you trade the model directly with the trade interface or do you manually enter trades?

 

I have had the same problem as you. I manually enter trades.

The biggest lesson I learned after struggling for a while is that no models can consistently work. It is important to deep dive and understand when your model fails to work, and then stop using it.

Switching models is just like switching strategy from value to momo. No single strategy works all the time, and switching after it stopped working for a while is a deadly mistake. The most important thing is to know what suits me, and stick to it, deep dive to understand its strength/weakness, especially when it is likely not going to work well for the next few months, and stop using it and just relax in life.

[Guest cherzeca]

I had never been to portfolio123, so I took a look around.  went to look at the models posted:  https://www.portfolio123.com/app/r2g. don't see anything that outperforms a blend of index funds (s/p500, russ 2000, others) that I use for 80% of my portfolio.  I do reserve 20% of my portfolio for bets where I think I have an edge, but that is highly focused and researched.  I just think index investing has gotten to point where you are essentially fooling yourself if you think you can build a better model yourself....and if you can, then you should definitely keep it to yourself! (lol)

[muscleman]

I had never been to portfolio123, so I took a look around.  went to look at the models posted:  https://www.portfolio123.com/app/r2g. don't see anything that outperforms a blend of index funds (s/p500, russ 2000, others) that I use for 80% of my portfolio.  I do reserve 20% of my portfolio for bets where I think I have an edge, but that is highly focused and researched.  I just think index investing has gotten to point where you are essentially fooling yourself if you think you can build a better model yourself....and if you can, then you should definitely keep it to yourself! (lol)

 

 

 

That’s true. I am not blindly taking bets from everything it shows me though. It is only an idea source, as step one, not last step. I’d also guess these models over weighted fundamental numbers, which only reflex the past.

On top of that, I focus on technical analysis.

I’ll give you two examples.

IHC: Tender offer at 20. After the price was locked in around 19.9-20 for a few weeks, one day it went to 20.30 and news that not many shares were tendered. Why does that happen? If informed players are not willing to sell at 20, what’s the right price for it? I immediately started buying, and a few months later it was 40.

 

 

BXC: Cerberus Capital had a huge 2nd offering to sell all of its 49% stake at 7. Stock plummeted from 10 to 8, but never reached 7. Usually when a 2nd offering came out, the stock would be trading at that price, but this time is unusual. I immediately bought at 8+. A few months later I sold at 35.

 

[Cardboard]

Thanks for sharing Muscleman. Very interesting.

 

Would you mind sharing one example where the technique failed and why you think it did?

[muscleman]

Thanks for sharing Muscleman. Very interesting.

 

Would you mind sharing one example where the technique failed and why you think it did?

 

I fail all the time, to be honest. I have a mandatory 10% stop loss, so if that is hit, I am automatically sold out by my broker. With this rule, I no longer feel depressed and compelled to check stop quotes every few minutes. The flip side is that often stop goes down to this level, hits my stop, and then goes back up. However, there is no good solution for that. I researched various loss cutting points but I found that no matter what % it is, there will always be stocks that I could have given it 5% more leeway, and it would turn back and go up 100%. Since my personality can't handle it without a hard stop, I just make it simple by the 10% rule.

 

I am aiming for 50% winning ratio, which is very hard. But with a quick loss cutting plan, and aiming for multi-beggars, I can afford to fail a lot of times.

 

When I fail, there are usually two possibilities.

1. I am out of luck. In this case, I'll just find the next bet.

2. The general market is in the 2008-2009 type of nose dive. In that case I would just stay in cash. The flaw of this approach is that I will very likely miss the whole bottom during March 2009, watch the market go up for months while I am holding cash. I know most value guys will not be able to tolerate this, which is why they are value guys. However with my personality, I would totally be able to withstand this type of distress than the type of "buying now and be ok if the stock goes down another 50%" distress that value guys usually endure.

 

To sum up, there are no perfect approach. It is basically an honest conversation with yourself of what the pros and cons each style has, and what you can tolerate.

Can you tolerate a lot of realized small losses and still be able to start betting again?

Can you tolerate seeing October 2008 to July 2009 when SPX went from 900 to 600 to 900 and be totally fine holding cash in this entire move?

 

If the answers are both no, then value investing may be the style for you. But that means you have to be able to answer yes to the following questions:

Can you tolerate large unrealized losses? If some really bad news came out after you already have a 80% unrealized loss, are you able to sell out or are you going to freak out and freeze?

Can you watch SPX crash from 1500 to 900, thinking it is already the bottom, go all in 100% invested, and then see SPX going down from 900 to 600 and possibly taking your fully invested portfolio down by 40%, and stay cool?

 

If the answers are not yes for both of the above questions, then value investing may not be right for you either. Then you'll have to find another approach. Keep in mind that no matter what approach you choose, there will ALWAYS be some flaws and your personality has to be cut out to naturally be able to tolerate those flaws EFFORTLESSLY.

 

Also keep in mind that a lot of times, our minds are fooling us when we were just talking instead of playing meaningful amounts of real money. I always thought I could handle 50% unrealized losses on my stocks and be cool, until I actually start to have names that are down 30% and couldn't sleep. So the only way to find out is to try it out with real money.

 

This is the whole reason I opened this thread for discussion. A lot of newbies warship Buffet and took his methods for granted that it has to work and it has to be the best method in the world. I want to bring people to realize that investors can only succeed when they use the methods that naturally suits their DNA.

[Spekulatius]

I believe it’s a worthwhile discussion. Many value investors do use a mix of technical analysis with a value approach. Mike Burry was an example. Mike sold a stock when it made new lows - his rationale was that new lows are often followed by lower stock prices from experience and he could always get back in cheaper, if he wanted to.

 

Nothing is perfect for example, but it seems to me that these rules may work.

[DRValue]

I believe it’s a worthwhile discussion. Many value investors do use a mix of technical analysis with a value approach. Mike Burry was an example. Mike sold a stock when it made new lows - his rationale was that new lows are often followed by lower stock prices from experience and he could always get back in cheaper, if he wanted to.

 

Nothing is perfect for example, but it seems to me that these rules may work.

 

I use TA for entry/exit points, I don't trade. Definitely has a place in my toolkit, especially with so called "psychological" levels, i.e. round number prices.

[Cardboard]

Thanks again Muscleman.

 

Yes, value investing has a lot of flaws. It is a method trying to use logic and math in a world where supply and demand for securites are not entirely driven by such factors. At least in the short term.

 

Moreover value investing is trying to find and buy securities for less than they are worth. So you have to be right on defining that value which is pretty hard (dynamic world for companies and their prospects, interest rates, etc.) and if the market is truly wrong then what is going to prompt that revaluation?

 

In some ways, when you are looking for these hidden gems, they are either in a dark alley where very few go or you are hunting into a trash can. So in essence, most of these things are better left alone or they are the definition of a good short: have problems and no buyers for them.

 

Graham tried to solve part of that problem with 100 net-nets or buying at 2/3 of such a low ridiculous level that technically sellers were pretty much exhausted and holding so many allowed for some miracle to arise in many of them (catalyst) for value to be realized.

 

Buffett has modified the strategy over time, mainly because he got too large and the strategy was found by others, to quality companies trading for less than they should be. This makes it much more difficult IMO because you need to be right at predicting the future while Graham didn`t have to.

 

However, the largest difficulty IMO is to overcome one factor: greed combined with over-confidence. We are afraid to miss. We do our analysis, buy, then can`t figure out why others do not see the same mouth-watering easy money?

 

Then the stock falls or continue dropping and we go back to check our math and assumptions and think that we are still right even if some new "little" issues have come up (sometimes nothing has come up) and hold on or average down.

 

A stop-loss? Heck no! Why?

 

Once again, it is this fear to miss out on gains that we forecasted. And truly, the only way for these gains to appear (other than a take-over which is rare) is for people to have a larger desire to buy than to sell and this should be visible on the chart with the stock going up vs going down.

 

So using technical analysis to avoid a falling knife does have merit and using a stop-loss as a 2nd layer of security also seems to make sense since even technical tools will fail sometimes.

 

I would also say that waiting for the inevitable market pull backs which tend to happen at least once a year make for great entry points. Tax loss selling is another factor depressing further beaten up securities every year.

 

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.

 

Cardboard

 

[UNF2007]

No criticism here, investing is super challenging. Just curious but why did you pick 10% as the stop loss? With a recent personal example, I have been holding a fairly concentrated position , (for me 50% of active portfolio), in NWL. Initial entry was around 21/share (I think it's worth about 35), drop to 15 within a month of purchase, I avg down to 17/share. Next it's back to 25/share in a month, hold. Next month back to 17, buy some more. Now back to 21. No fundamental reasons for those moves in my opinion, thesis has not changed. But in my experience that scenario is more the norm, when it comes to value stocks. A 10% stop loss would have immediately kicked me out of the stock within the first month of ownership, based only on the share price change. When in fact the lower share price is a boon, since the company was preparing to deploy about 5b, about half the market cap in stock buy backs, and another 5b in debt paydown. (still waiting for this, they have just retired some debt so far as I know). I actually can't remember very many investments I have made that have had anything less then 10% drawdowns at some point in the holding period, I almost expect it at this point.

 

I should also mention, as a hedge against blowing myself up, with the concentrated style I prefer. I put about 50% of my net worth into passive indexing. I sleep much better with that arrangement, and when things go against me, it's easier to know that my retirement is never on the line, I take the whole Buffett aphorism about not risking what you need for what you don't need to heart.

 

 

Thanks for sharing Muscleman. Very interesting.

 

Would you mind sharing one example where the technique failed and why you think it did?

 

I fail all the time, to be honest. I have a mandatory 10% stop loss, so if that is hit, I am automatically sold out by my broker. With this rule, I no longer feel depressed and compelled to check stop quotes every few minutes. The flip side is that often stop goes down to this level, hits my stop, and then goes back up. However, there is no good solution for that. I researched various loss cutting points but I found that no matter what % it is, there will always be stocks that I could have given it 5% more leeway, and it would turn back and go up 100%. Since my personality can't handle it without a hard stop, I just make it simple by the 10% rule.

 

I am aiming for 50% winning ratio, which is very hard. But with a quick loss cutting plan, and aiming for multi-beggars, I can afford to fail a lot of times.

 

When I fail, there are usually two possibilities.

1. I am out of luck. In this case, I'll just find the next bet.

2. The general market is in the 2008-2009 type of nose dive. In that case I would just stay in cash. The flaw of this approach is that I will very likely miss the whole bottom during March 2009, watch the market go up for months while I am holding cash. I know most value guys will not be able to tolerate this, which is why they are value guys. However with my personality, I would totally be able to withstand this type of distress than the type of "buying now and be ok if the stock goes down another 50%" distress that value guys usually endure.

 

To sum up, there are no perfect approach. It is basically an honest conversation with yourself of what the pros and cons each style has, and what you can tolerate.

Can you tolerate a lot of realized small losses and still be able to start betting again?

Can you tolerate seeing October 2008 to July 2009 when SPX went from 900 to 600 to 900 and be totally fine holding cash in this entire move?

 

If the answers are both no, then value investing may be the style for you. But that means you have to be able to answer yes to the following questions:

Can you tolerate large unrealized losses? If some really bad news came out after you already have a 80% unrealized loss, are you able to sell out or are you going to freak out and freeze?

Can you watch SPX crash from 1500 to 900, thinking it is already the bottom, go all in 100% invested, and then see SPX going down from 900 to 600 and possibly taking your fully invested portfolio down by 40%, and stay cool?

 

If the answers are not yes for both of the above questions, then value investing may not be right for you either. Then you'll have to find another approach. Keep in mind that no matter what approach you choose, there will ALWAYS be some flaws and your personality has to be cut out to naturally be able to tolerate those flaws EFFORTLESSLY.

 

Also keep in mind that a lot of times, our minds are fooling us when we were just talking instead of playing meaningful amounts of real money. I always thought I could handle 50% unrealized losses on my stocks and be cool, until I actually start to have names that are down 30% and couldn't sleep. So the only way to find out is to try it out with real money.

 

This is the whole reason I opened this thread for discussion. A lot of newbies warship Buffet and took his methods for granted that it has to work and it has to be the best method in the world. I want to bring people to realize that investors can only succeed when they use the methods that naturally suits their DNA.