long run success of value portfolios

[ERICOPOLY]

Setting aside the actual compounding returns that their trading strategies have produced for their partners/investors, has anyone actually produced any results based on how the companies have performed in the years since purchased?

 

I remember for example some value investors made money trading Lear Corp common in 2007 but it was a bankrupt company soon after that.

 

There are numerous other examples of this sort of thing going on.

 

Some of these value investors have performed well for their partners.  Are they good volatility traders or are they good value investors?

 

I suppose if the investor has a long enough record one can look at the performance of the buys from ten years ago and determine how much intrinsic value those picks really had, versus the price paid.

 

It's relatively easy to know that Buffett is good because Berkshire has generally held his picks for a very long time with few mistakes.

 

You see the academics argue that value investing doesn't really work, but the answer to that would be that they are using data from purported "value investors" who aren't really doing value investing at all.

[NormR]

You see the academics argue that value investing doesn't really work, but the answer to that would be that they are using data from purported "value investors" who aren't really doing value investing at all.

 

Another trick is that they tend to use value indexes to measure value funds.  As a result, the value part is assumed.  Also, when looking at just the strategy, one should back out the fees.  A fund that charges 3% a year and underperforms by 1% after fees is on to a good strategy - it just charges too much for it. 

[ExpectedValue]

Companies that are cheap often have problems.

 

Warren Buffett's high quality version of value investing is just one flavor of investing.

 

Look at the distressed debt guys, they're value investors. They're good at sensing when the market overreacts and pounce on it. But I wouldn't be surprised if many of the companies they make profits off of eventually fall back down into bankruptcy and go away.

[ERICOPOLY]

Look at the distressed debt guys, they're value investors. They're good at sensing when the market overreacts and pounce on it. But I wouldn't be surprised if many of the companies they make profits off of eventually fall back down into bankruptcy and go away.

 

That's exactly what I'm talking about.  A guy can make a profit on it yet it might not be a value trade at all.  It might just be a trader under the grand delusion of seeing a future that is just completely made up.  But that grand delusion gives him the discipline to sell after a big rally because he believes it to now be close to intrinsic value.

 

So to see if an investor really has the talent to spot a large discount to intrinsic value with a high degree of accuracy you do this to him:

 

1) Ignore his actual track record

2) Look at what he purchased 10 or 15 years ago

3) Based on the actual underlying cash flows of the past 10 or 15 years, use that information to see whether the investor is actually talented at all in terms of assessing intrinsic value

 

This doesn't mean he can't make money as a good volatility trader.  But it might be good for a given investor to be handed a report card that is grounded in reality.  Some of them might actually be highly surprised because I doubt they audit their own results like this.

 

 

[twacowfca]

Setting aside the actual compounding returns that their trading strategies have produced for their partners/investors, has anyone actually produced any results based on how the companies have performed in the years since purchased?

 

I remember for example some value investors made money trading Lear Corp common in 2007 but it was a bankrupt company soon after that.

 

There are numerous other examples of this sort of thing going on.

 

Some of these value investors have performed well for their partners.  Are they good volatility traders or are they good value investors?

 

I suppose if the investor has a long enough record one can look at the performance of the buys from ten years ago and determine how much intrinsic value those picks really had, versus the price paid.

 

It's relatively easy to know that Buffett is good because Berkshire has generally held his picks for a very long time with few mistakes.

 

You see the academics argue that value investing doesn't really work, but the answer to that would be that they are using data from purported "value investors" who aren't really doing value investing at all.

 

LRE is up (including reinvested dividends) in our accounts that are non taxable about five times what we paid for it from the summer of 2006 through the fall of 2008 (actually more in some holdings that used some nonrecourse leverage. Most of that gain was real net asset value gain.  Remove the gain from P/B expansion and the current value of the holding would be about 62% of the recent price.

 

The tangible net asset value of our original purchases with reinvested dividends has increased about three times.  The company did that not through some fluky luck, but simply by blocking and tackling: good underwriting, nimbleness in exploiting opportunities when others are fearful or exiting mediocre lines, quick quotes to clients and brokers by a lean staff that works long hours, conservative investing and intelligent capital management in a tax favored domicile.  :)

 

:)

[giofranchi]

LRE is up (including reinvested dividends) in our accounts that are non taxable about five times what we paid for it from the summer of 2006 through the fall of 2008 (actually more in some holdings that used some nonrecourse leverage. Most of that gain was real net asset value gain.  Remove the gain from P/B expansion and the current value of the holding would be about 62% of the recent price.

 

The tangible net asset value of our original purchases with reinvested dividends has increased about three times.  The company did that not through some fluky luck, but simply by blocking and tackling: good underwriting, nimbleness in exploiting opportunities when others are fearful or exiting mediocre lines, quick quotes to clients and brokers by a lean staff that works long hours, conservative investing and intelligent capital management in a tax favored domicile.  :)

 

:)

 

twacowfca,

I am intrigued by your description of LRE's very skilled operations. Maybe, this is not the right place, but please would you explain a little more in depth what you mean by “conservative investing and intelligent capital management”? Could you also share with us why you think that LRE is good value right now?

Thank you!

 

giofranchi

[txitxo]

This is a paper on the Finnish stock market but they mention references for other markets as well. Even dumb selection based on just P/B benefits from relatively long holding periods:

 

http://www.eurojournals.com/jmib_8_05.pdf

 

This blog also shows a well know effect among value investors: every time you buy something it immediately goes down:

 

http://www.blogvesting.com/2010/09/29/on-the-optimum-holding-period-for-value-stocks-2/

[Uccmal]

David Dreman covers this in a generic sense in his fattest book I think it is called contrarian investment stategies. 

 

I made a bundle on Sino Forest years before it became a fraud.  I think its holdings then may have actually been legit.  Well never know.

 

BB bought WFC in 1992. 

 

FFH has held Arbor Memorial for 10 years. Russell Metals was also an FFh turnaround, and is now a premier metal broker.  I held and still hold some Rus for 9 years now.  FFH is long gone.  H&r reit is another former FFH funding.  There are probably others in the FFH fold. 

 

Is this what your looking at?

[alwaysinvert]

Isn't selling also a skill? Just because a company goes bankrupt later doesn't necessarily mean the initial buy was a mistake. We're not trading on insider information so there could be real surprises that change the story in a way that would make selling be a value skill and not a trader skill.

[bmichaud]

I'll repeat my example of Greenlight buying Patriot Coal and seeing it go up ten times, but now four years later is bankrupt. Good purchase or just lucky?

[LC]

Look at the distressed debt guys, they're value investors. They're good at sensing when the market overreacts and pounce on it. But I wouldn't be surprised if many of the companies they make profits off of eventually fall back down into bankruptcy and go away.

 

That's exactly what I'm talking about.  A guy can make a profit on it yet it might not be a value trade at all.  It might just be a trader under the grand delusion of seeing a future that is just completely made up.  But that grand delusion gives him the discipline to sell after a big rally because he believes it to now be close to intrinsic value.

I think for each investor it comes down to having an "inner scorecard", or essentially shining the light of truth on your decisions. The numbers don't lie- if a business is undervalued it will show it in the numbers. IMHO that's the true "proof" of whether a decision was based on getting a good "value" or not.

[matjone]

This would be interesting to see but I've never seen it done and don't have time to do it myself.  I imagine it would probably be a good practice to get into for your own picks.

 

This is one area where you can see that Ben Graham thought differently than Buffett.  Buffett says to always look at what the business will earn 10 years out.  But Graham seemed to be of the opinion that no one knew the future and that the way to invest was to buy with a MOS to guard against this uncertainty.  I think that Buffett's way has less risk in it, but the trouble is that hardly anyone is smart enough to do it.

 

What if you went back and found that Ben Graham's results would have been poor if he had held his picks for 10 years?  Does that mean he wasn't a good investor?

[Guest]

I posted the following in another thread. But it's something to think about. A couple of updates to throw out there.  Now, SEQUX, too is trailing the S&P 500.  Third Avenue Value (Marty Whitman's fund) has only beaten it's bogie (MSCI EAFE) by about .14%, annualized, over the past 10 years.  Rich Pzena at John Hancock Classic Value has also trailed by about 2.4% annualized over the past decade. He's actually trailing since inception (1996).

 

"Even good value managers haven't beaten the market (S&P 500) over the past 10 years.. Berkshire has trailed, Bill Nygren at OAKLX, the guys at Longleaf LLPFX,  Bill Miller at LMVTX, even the guys at Sequoia have barely squeaked past (SEQUX). Yeah, there are exceptions, but I'd think most people would think these guys would beat the market over 10 years or so. "

 

 

[vinod1]

I think there are basic differences in what value investing means to academics and to practitioners.

 

To academics it means low P/B and/or low P/E. Any stock that fits the lower 30% of P/B is categorized as value and upper 30% is categorized as growth. The middle 40% is core. Academics hold that the higher returns from these low P/B stocks is due to the fact that they are more risky companies and they are much more likely to go bankrupt and to lead to bad outcomes during periods of economic turbulence. Thus they see the higher returns as just compensation for the greater risk.

 

Behavioral academics point out that the low P/B stocks have lower volatility and lower beta and suggest that at least some of the higher returns is behavioural based and thus irrational. I tend to agree with this view.

 

Value Investing as practiced by Buffett and Graham is also quite different

 

1. Bufffett emphasizes concentration, very deep indepth knowledge of the company/management and ability to see how the company would be like several years into the future. Almost all the companies that Buffett invests increase IV at a pretty good clip and that provides the margin of safety even as the companies price rises.

 

2. Graham emphasizes trying to find a basket of securities that are very likely to be undervalued due to behavioral reasons, economic cycle or mean reversion. While individual securities could go bankrupt it is very unlikely that the basket itself would all go broke. This necessarily leads to some turnover. Once securities in the portfolio go up in price the margin of safety is lost.

 

So I do not think we can look at just the portfolio from the past to evaluate their “value investing” credentials. I think their strategy has to be taken into account. Graham himself may fail this test if ignore their approach.

 

Vinod

 

[vinod1]

I posted the following in another thread. But it's something to think about. A couple of updates to throw out there.  Now, SEQUX, too is trailing the S&P 500.  Third Avenue Value (Marty Whitman's fund) has only beaten it's bogie (MSCI EAFE) by about .14%, annualized, over the past 10 years.  Rich Pzena at John Hancock Classic Value has also trailed by about 2.4% annualized over the past decade. He's actually trailing since inception (1996).

 

"Even good value managers haven't beaten the market (S&P 500) over the past 10 years.. Berkshire has trailed, Bill Nygren at OAKLX, the guys at Longleaf LLPFX,  Bill Miller at LMVTX, even the guys at Sequoia have barely squeaked past (SEQUX). Yeah, there are exceptions, but I'd think most people would think these guys would beat the market over 10 years or so. "

 

As Berkowitz might say, 10 cycles around the sun might not be a good way to measure performance of a fund manager. Two complete market cycles might be a better way to weed out the non performers.

 

Vinod

[Guest]

I posted the following in another thread. But it's something to think about. A couple of updates to throw out there.  Now, SEQUX, too is trailing the S&P 500.  Third Avenue Value (Marty Whitman's fund) has only beaten it's bogie (MSCI EAFE) by about .14%, annualized, over the past 10 years.  Rich Pzena at John Hancock Classic Value has also trailed by about 2.4% annualized over the past decade. He's actually trailing since inception (1996).

 

"Even good value managers haven't beaten the market (S&P 500) over the past 10 years.. Berkshire has trailed, Bill Nygren at OAKLX, the guys at Longleaf LLPFX,  Bill Miller at LMVTX, even the guys at Sequoia have barely squeaked past (SEQUX). Yeah, there are exceptions, but I'd think most people would think these guys would beat the market over 10 years or so. "

 

As Berkowitz might say, 10 cycles around the sun might not be a good way to measure performance of a fund manager. Two complete market cycles might be a better way to weed out the non performers.

 

Vinod

 

That's a good point, too. The "value" category has underperformed, in general, the past 10 years. I wonder how much Regulation FD has played in on this though. Before, companies had selective disclosure and that helped some funds gain an advantage on things. Now everything has to be released at the same time.

[Martian]

Look at the distressed debt guys, they're value investors. They're good at sensing when the market overreacts and pounce on it. But I wouldn't be surprised if many of the companies they make profits off of eventually fall back down into bankruptcy and go away.

 

That's exactly what I'm talking about.  A guy can make a profit on it yet it might not be a value trade at all.  It might just be a trader under the grand delusion of seeing a future that is just completely made up.  But that grand delusion gives him the discipline to sell after a big rally because he believes it to now be close to intrinsic value.

 

So to see if an investor really has the talent to spot a large discount to intrinsic value with a high degree of accuracy you do this to him:

 

1) Ignore his actual track record

2) Look at what he purchased 10 or 15 years ago

3) Based on the actual underlying cash flows of the past 10 or 15 years, use that information to see whether the investor is actually talented at all in terms of assessing intrinsic value

 

This doesn't mean he can't make money as a good volatility trader.  But it might be good for a given investor to be handed a report card that is grounded in reality.  Some of them might actually be highly surprised because I doubt they audit their own results like this.

 

Except Buffett most of Graham's disciples did not go for the growth or holding it for a long term. It was mostly buy at a discount and sell when reaches intrinsic value. Each one had a different style. But that does not mean it is not value investing. In the superinvestors of Graham and Doddsville, Buffett showed their results and said each one had a different process but the concept is the same.

 

for ex, Walter Schloss bought companies with discount to their intrinsic value. He ususally waited for at 3 years to come back in value. He also held a lot of stocks and was not concentrated. He did not go for growth.

 

Until Munger came along and influenced him Buffett was also in that camp eventhough he was a fan of Fisher.

 

Buying a stock with no moat which is worth a dollar for 70c and selling it when it reaches $1 in 3 months is value investing (Graham). Buying it again when it reaches and 70c the next day is not volatility trading as long as IV story stays intact. The volatility is just in price, but not in the intrinsic value. If we disregard IV and just buy it again for 70c when the IV is not longer $1 is volatility trading.

 

Buying a company which has a moat which is worth $1 for a $1 and selling it for $10 years down the line is also value investing (Fisher)

 

Buffett buys Fisher stocks at Graham prices. Thats why it is so effective and successful.

 

I think the time a stock is held does not matter usually.  A portfolio can contain some of Graham, some of Fisher and some of Buffett stocks at the same time. They dont have to be all the same.

[ERICOPOLY]

What if you went back and found that Ben Graham's results would have been poor if he had held his picks for 10 years?  Does that mean he wasn't a good investor?

 

The actually time held has nothing to do with it. 

 

My interest is to know whether or not he (and others) really picked stocks at a price that represented a discount to intrinsic value.

 

Enough time has passed since his last purchase where a graduate student could look at each and every one of his purchases, the price paid, and see whether he indeed bought at a discount to intrinsic value.  He has been dead more than thirty years -- surely the long term business results are known well enough to say if any one of his picks was actually purchased as a 50 cent dollar, or as a 90 cent dollar, or a 120 cent dollar, etc....  Then you can see how he did "on balance", by looking at all of them and then taking the average.

 

What if on average he merely bought stocks near their intrinsic value and made money on volatility swings?  Okay, that doesn't mean it's a losing strategy at all, but it would be interesting to know if the guy that wrote The Intelligent Investor was really able to accurately determine intrinsic value himself.  We know that Warren Buffett can because Berkshire has grown mostly from keeping the holdings "forever" -- the long term weighing machine is producing results, not the volatility and skillful trading.

 

[ERICOPOLY]

Tweedy Browne for example has been around long enough to just release their historical results relative to actual intrinsic value.

 

They should be able to factually state, without any doubt, whether or not their picks are consistently below intrinsic value by a wide margin, whether or not they sell near intrinsic value...

 

And then shove it down the throats of the "efficient markets" academics.

[Guest]

Tweedy Browne for example has been around long enough to just release their historical results relative to actual intrinsic value.

 

They should be able to factually state, without any doubt, whether or not their picks are consistently below intrinsic value by a wide margin, whether or not they sell near intrinsic value...

 

And then shove it down the throats of the "efficient markets" academics.

 

Well, I'm sure they could come up with longer term numbers than what their funds show, but here is that data.

 

TWEBX kinda sucks.  Can't really compare it to an index since it's US and foreign stocks, so I'm looking how it did against its peers. Results don't look so hot.

 

For the past 10 years it has ranked in the bottom 85% of its peers. 15 years - bottom 55%. Hey, they beat 15% and 45%, respectively. Better than....some! :P

 

TBGVX is good.  10 years - top 19%; 15 years - top 1%.

 

[ERICOPOLY]

Tweedy Browne for example has been around long enough to just release their historical results relative to actual intrinsic value.

 

They should be able to factually state, without any doubt, whether or not their picks are consistently below intrinsic value by a wide margin, whether or not they sell near intrinsic value...

 

And then shove it down the throats of the "efficient markets" academics.

 

Well, I'm sure they could come up with longer term numbers than what their funds show, but here is that data.

 

TWEBX kinda sucks.  Can't really compare it to an index since it's US and foreign stocks, so I'm looking how it did against its peers. Results don't look so hot.

 

For the past 10 years it has ranked in the bottom 85% of its peers. 15 years - bottom 55%. Hey, they beat 15% and 45%, respectively. Better than....some! :P

 

TBGVX is good.  10 years - top 19%; 15 years - top 1%.

 

That's not what I mean by their historical results.

 

I mean whether or not they are actually purchasing at a significant discount to intrinsic value and selling near intrinsic value, as they profess to be able to do.

 

They surely have a record somewhere of what they bought in 1965, for example, and they can then see the price paid per share and how much intrinsic value those shares turned out to be worth (in hindsight).

 

Then they could release that information to their fundholders saying "look, we are really capable of doing what we claim to be able to do".

 

 

[Guest]

Yeah, I knew the data that I posted wasn't exactly what you were looking for.

 

 

I'd be really interested in seeing what you're talking about, too. I think that would be pretty fascinating and would eliminate a lot of the "luck" factor. 

[twacowfca]

What if you went back and found that Ben Graham's results would have been poor if he had held his picks for 10 years?  Does that mean he wasn't a good investor?

 

The actually time held has nothing to do with it. 

 

My interest is to know whether or not he (and others) really picked stocks at a price that represented a discount to intrinsic value.

 

Enough time has passed since his last purchase where a graduate student could look at each and every one of his purchases, the price paid, and see whether he indeed bought at a discount to intrinsic value.  He has been dead more than thirty years -- surely the long term business results are known well enough to say if any one of his picks was actually purchased as a 50 cent dollar, or as a 90 cent dollar, or a 120 cent dollar, etc....  Then you can see how he did "on balance", by looking at all of them and then taking the average.

 

What if on average he merely bought stocks near their intrinsic value and made money on volatility swings?  Okay, that doesn't mean it's a losing strategy at all, but it would be interesting to know if the guy that wrote The Intelligent Investor was really able to accurately determine intrinsic value himself.  We know that Warren Buffett can because Berkshire has grown mostly from keeping the holdings "forever" -- the long term weighing machine is producing results, not the volatility and skillful trading.

 

Graham was aware that balance sheet bargains that were good companies were higher conviction purchases than ones that were not.  He preferred solid companies, even if he flipped them after they went up 50% or so. 

 

When he was 18, he  dropped out of Columbia and worked with a company that had a big analytical project that necessitated using Holerith Machines (punch card sorters and counters that were the forerunner of computers). 

 

When his boss quit, Ben was put in charge of managing that project as he was the only one who understood it.  He developed some of the basic sorting routines that eventually morphed into computer sorts when the manufacturer of those machines changed its name to IBM and moved to electronic computing.

 

Ben recommended Computer Tabulating Corp. to his managing partner in his first job on Wall Street as he knew their competitive strength, but his boss set him straight and put the kabosh on that idea.

 

Ben continued to follow IBM all his life, but it never got cheap enough for him to buy because his fund was set up to generate regular profits that were distributed yearly to his investors.  Holding a great company for many years was not part of his operation.

 

However, he was eager to put 25% of the assets of his closely held other fund in Geico when it became available for outright purchase of a controlling interest.  He recognized that it was an extraordinary company with great advantages, and he was willing to pay a little more than book for it.

 

He retained his interest after Geico's IPO a few months later.  26 years later, his stock was worth more than 100 times what he paid for it.  :)

 

 

 

[ExpectedValue]

Look at the distressed debt guys, they're value investors. They're good at sensing when the market overreacts and pounce on it. But I wouldn't be surprised if many of the companies they make profits off of eventually fall back down into bankruptcy and go away.

 

That's exactly what I'm talking about.  A guy can make a profit on it yet it might not be a value trade at all.  It might just be a trader under the grand delusion of seeing a future that is just completely made up.  But that grand delusion gives him the discipline to sell after a big rally because he believes it to now be close to intrinsic value.

 

So to see if an investor really has the talent to spot a large discount to intrinsic value with a high degree of accuracy you do this to him:

 

1) Ignore his actual track record

2) Look at what he purchased 10 or 15 years ago

3) Based on the actual underlying cash flows of the past 10 or 15 years, use that information to see whether the investor is actually talented at all in terms of assessing intrinsic value

 

This doesn't mean he can't make money as a good volatility trader.  But it might be good for a given investor to be handed a report card that is grounded in reality.  Some of them might actually be highly surprised because I doubt they audit their own results like this.

 

Why does this matter? I still don't understand what you're getting at here.

 

There seems to be this belief that value investing is all about buying something and holding it forever -- like Buffett has sometimes done. I think that's not correct. Value investing is pretty broad and practiced in different ways. Ben Graham's approach and Buffett's partnership days were more short term oriented, where you bought things at a low price and sold them when they hit fair value. That's all it was back then. Now people seem to think you have to hold forever which I believe just one flavor of value investing.

 

Intrinsic value is not static, it fluctuates with time. It doesn't seem particularly insightful to think about "long term performance" of companies, because most companies die.

[ERICOPOLY]

He retained his interest after Geico's IPO a few months later.  26 years later, his stock was worth more than 100 times what he paid for it.  :)

 

Was he still holding it when it became nearly worthless?  I remember seeing an interview of Prem and somebody asked Prem if Ben still held the bag and Prem didn't know.  Is there a public record of this?