Does Value Investing Have a Marketing Problem?

[RVP]

We all know the performance divergence between "growth" and "value" investing has been pretty wide for a while now, and that's only been exacerbated in 2020.

 

There have been so many explanations for this, just to list a few:

- Growth stocks have fundamentally and consistently blown past expectations, allowing them to work through initially "high" multiples

- The internet has brought down many barriers to entry, allowing growth to scale faster and cheaper

- Low interest rates benefit cash flows that may be far out in the future

- Huge amounts of capital printed globally create a very robust and excessive funding environment for all sorts of ventures

 

While all these explanations are sound, I don't see any reason why value investing can't benefit from the same trends. What's stopping your [boring business name here] from communicating like how [exciting startup business name here] does, and potentially also obtaining high multiples/ generous funding?

 

I'm not talking about businesses in secular decline. I'm talking about the many businesses around you that are quietly chugging along just fine (and that value investors love to swarm around), but maybe not exhibiting hyper top-line growth (because they choose to grow profitably/ responsibly).

 

If a startup can raise unfathomable amounts of capital at sky high valuations by promising super growth and future dominance, why can't an already dominant established player (whose lunch the startup may be eyeing) point to what they've built, while also planting seeds of exciting promise to come in the minds of potential investors?

 

A lot of people attribute Buffett's early success to his incredible capital allocation (completely agree) and much easier environment (somewhat agree). But if memory serves me correctly, wasn't Buffett also a master at creating an incredible image for himself and his companies? Was value investing truly the greatest during Buffett's time because of the opportunity set, or was value investing's incredible stretch also aided by a young, hungry Buffett able to captivate the minds of so many (just like how Bezos/ Musk was able to do in more recent times)?

 

Long story short: is the divergence between value and growth investing largely a symptom of the group of growth investors knowing how to tap the mainstream psyche way better than the current group of traditional value investors?   

 

[mattee2264]

 

  There has always been a divide between "glamour" stocks and "value" stocks and that hasn't prevented value outperforming over successive market cycles. And during rare times when companies in mature industries such as telecoms and energy suddenly become high tech and attract a lot of capital things don't end well e.g. dot com boom and bust and shale boom and bust. Reason being that too much capital results in too much competition and overcapacity.

 

When value investing works it is because it exploits negative sentiment towards industries and individual companies that usually reverses because the problems are either cyclical or temporary or have little impact on earnings power. These days unfortunately negative sentiment is usually justified because there are a lot of industries facing disruption and other secular challenges.

 

This market cycle where I think you are seeing the outperformance is because of the unprecedented quality of a lot of the dominant growth companies and the extent of their runways. Their moats are massive and their addressable markets are huge and they enjoy increasing returns. And they are disrupting a lot of the traditional industries where value companies reside so people scooping up low P/B and low P/E stocks rather than seeing reversion to the mean are seeing earnings and book values evaporate!

 

Buffett has never been promotional in the sense of talking his book. Certainly in his early days he often took an activist approach to realize value when the market didn't cooperate. But he wouldn't even tell his own partners what he was invested in! And there are stories about how his friends would want to know what he was buying but he never told them because he didn't want the price to go up in case he wanted to buy more! He only became a household name much later on and while he helped to popularize value investing we can see from the records of people like Graham and Schloss it worked perfectly well before Buffett became a media darling.

 

 

[RVP]

Completely agree with the above comments 100%. If I were to explain value investing to someone, it'd be along the same lines. Temporary impairment, mean reversion, buying $1 for less than that, etc. And I think that's the problem.

 

At least for me, whenever I share the merits of value investing to non Graham and Doddsville folks, I usually get very bored stares (emphasis very). These are people who work on wall street, who own businesses, finance students. Basically a group that tends to know their way around numbers. Yet when they hear about "cutting-edge" developments (new online marketplaces, robots, modern medicine, etc.), their eyes light up.

 

I recognize that value investing's generally "unexciting" nature is an age old issue, but I really do think the divergence has been exacerbated far longer than most are accustomed. And I do think its inability to capture today's mainstream attention (even for a medium moment) is a problem, especially in a world where we have more things than ever vying for our attention. Value works, but after long stretches of time passes... something about markets staying irrational longer than you can stay solvent. 

 

Buffett may not have talked his book, but I think the veil/ mystique he created was just as effective a method (if not more) of putting value investing right there in the psyche of the masses. Everyone wanted to know how he did it, and much energies and resources were mustered to try to pierce the veil. You can argue that that's made value investing much less attractive (too much competition/ overcapacity), but you could also make the case that the marketing for the strategy was superb and therefore any divergence was shorter and performance fantastic.

 

I just don't see an equivalent energetic, consistent, larger than life value person today. Today it just seems like the growth group (and their captivating icons) trounces the value group in regards to marketing, which I'm convinced has had a meaningful impact on extended performance divergence.

[scorpioncapital]

Just make sure it's not a value trap..overly complex, management that doesn't know what it's doing. If you can't understand their presentations that's always a bad sign.

[D33pV4lue]

 

When value investing works it is because it exploits negative sentiment towards industries and individual companies that usually reverses because the problems are either cyclical or temporary or have little impact on earnings power. These days unfortunately negative sentiment is usually justified because there are a lot of industries facing disruption and other secular challenges.

 

This market cycle where I think you are seeing the outperformance is because of the unprecedented quality of a lot of the dominant growth companies and the extent of their runways. Their moats are massive and their addressable markets are huge and they enjoy increasing returns. And they are disrupting a lot of the traditional industries where value companies reside so people scooping up low P/B and low P/E stocks rather than seeing reversion to the mean are seeing earnings and book values evaporate!

 

 

I don't think value has a marketing problem it has a performance problem. This comment above perfectly illustrates the challenges value investing has. Typically companies were left for dead and value investors would come in and scoop them up.  They tended to skew towards more capital intensive businesses thus P/B was a good indicator of value. There is so much wrong with GAAP accounting that we know book is never really a good estimate of the actual value of the assets/liabilities on the balance sheet. Businesses have shifted to more asset light models and thus carry high P/B and old school investors can't seem to get past this. To me the securitization of markets through ETFs has made this more profound. When companies get cheap it seems to be all at once. You have a very short amount of time to find value and react. The research has to already be done and then pounce when the value is there. I also think value investing needs to evolve most value managers that have been performing well in the last 10 years are buying companies with strong cash flows at discounts to intrinsic value. The media paints value investing as low P/B or P/E and I think this classification is just flat out wrong. I would call that low P/B investing or low P/E investing. Value investing is an ideology of buying an asset for less than it is worth how you get to that value can be done many different ways. Like buffet said growth and value are attached at the hip and I think that there can be certain spots where value investors who do the work can pinpoint which later stage "growth" stocks will have competitive advantages, pricing power and strong cash flows.

[RVP]

Yes value has a performance problem, I recognize that. I'm trying to better understand the cause, not the result. And I'd like to repeat that I'm not talking about businesses in secular decline; those usually deserve to underperform.

 

Perhaps I should've clarified that I'm thinking about value stocks that truly are value (let's call them "true value" for convenience) regardless of whether they are asset-heavy or asset-light (i.e. buying growing cash flow streams at a discount, buying productive/ unique assets with staying power at a discount, etc.). So assume we are talking about companies that are not value traps.

 

Based on my observations, the fastest performers/ the ones that don't have such long periods of divergence among true value stocks exhibit some or all of these traits:

1. Healthy top line growth

2. Company IR effectively communicates with the street (i.e. we are SaaS, TaaS; we have huge TAM)

3. Company's shareholder base/ hedge funds have a good following and communicate the story to the world in a compelling way 

4. Publicly traded float largely controlled by a fund/ a few funds

 

#1 is straightforward, but I wonder whether a true value stock/ true value investing will languish for long periods of time without the other factors. I will be the first to defend that fundamentals matter and eventually plays out. But instinctively I suspect the cadence of the returns are heavily tied to marketing, especially as more and more capital get sopped up by the companies in the largest ETFs.

 

 

[bilo]

A big issue with pure "value" names is that their is an implied sell point.  In other words, it is a longer term trading strategy - you sell when it gets to fair value.  The way big funds work is this. ++ performance leads to fund flows -> that money his put to work in the basket of stocks that are owned, which further juices them -> this "juicing" creates more fund flows, etc.  Untill they cycle ends.

The issue with value stocks is the cycle gets short-circuted by the "sale" logic.  The float squeeze can't really gather steam.  Value can work again, of course, in a big sense, but it is likely to be tied to a larger macro or investment theme.  In the past, we have seen, "housing" drive cheap stock to insane valuations.  We have seen "energy infrastructure" have a big run.  We have seen "commodities" have a big run.  In each case value stocks became glamor stocks.  Issue at the moment, it has been a long time since we have had a secular trend that favored "value" names.  That is what is needed, IMO.

[Spekulatius]

For value to work (low price/ book, low PE etc) you need someone else to flip your shares too, for a higher multiple than you paid for. Right now, the counter party for this doesn’t exist.

 

There are folks who are willing to pay higher and higher multiples for compounders not tech stocks, but there is no one, who is willing to pay higher multiples for “average” stocks.

 

That’s the problem with value stocks, the clock starts ticking the moment you buy them and if nothing happens, it’s dead money or worse a loss.

[5xEBITDA]

Value investing does not have a problem. Value factor, which most "value investors" unknowingly (or knowingly?) traffic in, has performed horribly for good reasons.

[RVP]

So it sounds like there is often a lack of external stimulus to nudge value investments (the average ones) to re-rate to a reasonable multiple in a timely manner (i.e. from 6x to 10x earnings or whatever relevant denominator).

 

Absent broader macro forces, does this not imply a marketing problem?

[LC]

Absent broader macro forces, does this not imply a marketing problem?

 

No, in my opinion it implies an interest rate problem.

 

Lower rates means near-term cash flows are simply less valuable. Yes, you may be earning 4x EBIT, 10x earnings, whatever metric you want to use. But those CFs are simply not as valued by the market. Compared to firms who have stronger long-term prospects, but all that value is locked up far in the future. Low interest rates means the carrying value to hold all that future value is much less expensive.

[RVP]

Agree that lower interest rates benefit cash flows further out in the future.

 

But long-term prospects are just that, "prospects". Isn't the notion that companies (outside more obvious cases like Amazon) are able to convince investors of their long term prospects a form a good marketing? And if a value company is not in secular decline, shouldn't they be able to do similar? Is the investment community focused primarily on said value company's near term robust cash flows (instead of future), because value investors/ management put it front and center, and is that a marketing problem?   

[D33pV4lue]

Idk look at Ackman usually when he is out in the media touting XYZ position it usually doesn't end up to well for him. Last two years he has performed well and he hasn't been out at Sohn's giving presentations about why he is right. Personally I wouldn't want to invest in a company that is extremely promotional trying to convince people why their stock should be valued at XYZ. I'd prefer a good capital allocator vs a car salesman.  Part of why value investing works is because these stocks are overlooked. If you do good valuation work eventually the market will agree with you (to paraphrase Joel Greenblatt) sometimes that will take a few years and you may become impatient but if every stock was as widely followed as Mega Cap Tech the opportunities for value would be few and far between.

[RVP]

I would argue that on balance, Pershing Square has benefited from being promotional (plus being large shareholders). And whether their picks were right or wrong, the market has been rather quick to agree/ disagree.

 

I would also argue that PS's holdings for the past two years skewed towards compounder-type businesses (that were never really "value" on an absolute basis even when taking into consideration their asset-light nature), and for the most part already had considerable marketing heft within the enterprise. And because they benefited largely from the large-cap/ compounder trend, there really was no need to go out to the media touting XYZ position.

 

Were the inverse true, I would wager they would not be sitting quietly. 

 

 

[DooDiligence]

Idk look at Ackman usually when he is out in the media touting XYZ position it usually doesn't end up to well for him. Last two years he has performed well and he hasn't been out at Sohn's giving presentations about why he is right. Personally I wouldn't want to invest in a company that is extremely promotional trying to convince people why their stock should be valued at XYZ. I'd prefer a good capital allocator vs a car salesman.  Part of why value investing works is because these stocks are overlooked. If you do good valuation work eventually the market will agree with you (to paraphrase Joel Greenblatt) sometimes that will take a few years and you may become impatient but if every stock was as widely followed as Mega Cap Tech the opportunities for value would be few and far between.

 

Preach  ;)