Author Topic: Does Value Investing "still" work?  (Read 5186 times)

investmd

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Does Value Investing "still" work?
« on: September 07, 2020, 07:40:41 AM »
Much discussion as to why results from Value Investing have been poor for > a decade. Covid and 2020 has further highlighted the gap between value & growth investing (mostly tech).

In Francis Chou's 2020 semi-annual letter, he argues that value investing works but he his valuations have been wrong - gave too much emphasis to assets and not enough to operating side of business for companies in trouble - mistakes of commission.

On the other hand, mistakes of omission were undervaluing profitable companies and potential for growth. Not sure how he would change the valuation for growing companies - accept a different P/E?

The following is Francis' write up on Does Value Investing Work? :
"With the lackluster returns by value funds in recent years compared to growth and index funds, there is some doubt as to whether value investing can still work in the current market. We hold the view that value investing certainly works, but only when executed properly. Sometimes it is easier to blame the market environment than to admit our own faults. Although factors such as low interest rates, the popularity of passive investing and elevated market valuations played a role in blunting returns for value investors, we also accentuated the problem. The key to value investing is appraisal. If that is not precise enough, everything falls apart. We tend to fish in troubled waters, and what caused the biggest problem in recent years was that our appraisal of troubled companies was off the mark.
When we thought a company was worth 100 cents, it was actually worth closer to 60 cents. We tended to give much higher weight to asset values and not enough weight to the value of the operating company. We used the asset value as a huge security blanket and became blind to the deterioration of the worth of the operating company.
That was a mistake of commission. We also made a bundle of mistakes of omission.
Over the last 30 years, roughly half our portfolio was in troubled companies and the other half was in good companies. So, we are well acquainted with investing in both types of companies. But what happened over the last few years was that we spent most of the time undervaluing the good companies. When our assessment showed that the investments were worth 100 cents, they were more accurately close to 150 cents, thus causing us to miss most of those opportunities. These “omissions”, though they are unseen mistakes, are nevertheless as real as mistakes of commission. In summary, although the markets have been less kind to value investing, we exacerbated the problem as practitioners."


The full letter is publicly available at http://choufunds.com/pdf/SEMI-AR%202020%20%28English%29.pdf


Jurgis

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Re: Does Value Investing "still" work?
« Reply #1 on: September 07, 2020, 07:57:30 AM »
So he basically says that indexing and growth investing works.  8)
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rranjan

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Re: Does Value Investing "still" work?
« Reply #2 on: September 07, 2020, 08:36:00 AM »
You are laying out cash to buy a business to get more cash from business in future.

If you get  the second part right and buy at a decent discount, I don't see how investment( or call it value investment) won't work. 

Trying to assign value based on P/B or P/E can be indication of value sometime, but not really a value other times. But if you can figure out owners earning with high degree of certainty and buy at a discount, it's extremely hard to not make money over time.



investmd

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Re: Does Value Investing "still" work?
« Reply #3 on: September 07, 2020, 08:56:21 AM »
You are laying out cash to buy a business to get more cash from business in future.

If you get  the second part right and buy at a decent discount, I don't see how investment( or call it value investment) won't work. 

Trying to assign value based on P/B or P/E can be indication of value sometime, but not really a value other times. But if you can figure out owners earning with high degree of certainty and buy at a discount, it's extremely hard to not make money over time.

rranjan, Yes makes sense. How then do you explain Chou Associates 15 yr compound return of 1.6%? Are you saying that value investing community is not able to fairly assess how much cash the business will generate in future.

rranjan

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Re: Does Value Investing "still" work?
« Reply #4 on: September 07, 2020, 09:30:50 AM »
You are laying out cash to buy a business to get more cash from business in future.

If you get  the second part right and buy at a decent discount, I don't see how investment( or call it value investment) won't work. 

Trying to assign value based on P/B or P/E can be indication of value sometime, but not really a value other times. But if you can figure out owners earning with high degree of certainty and buy at a discount, it's extremely hard to not make money over time.

rranjan, Yes makes sense. How then do you explain Chou Associates 15 yr compound return of 1.6%? Are you saying that value investing community is not able to fairly assess how much cash the business will generate in future.

I have not followed Chou to really comment on what he is doing. Market may not price properly for couple of years, but in most instances market will push asset price closer to true worth in 4-5 years. Often it will overshoot as well.

In general, if you do poorly for 15 years then it means simply one thing, you are making mistakes in figuring out how much cash business will produce for owners.

Recently, we have seen articles like value investment being dead or value investors not doing well. Some time it could the case of growing companies getting higher multiple due to very low interest rates. I meant, cash coming after 10-15 years becomes a lot more valuable for investors if they think that interest rate(proxy for inflation) will remain low for entire time. It may create a situation where investors starts overpaying for such companies and underpaying for decent cash but not growing that much. But even if you own second group, it's hard to only make 1.6% for 15 years unless you are making mistakes in evaluating what cash business will generate over time for owners.

But when all said and one, investment is all about how much cash you get in future, how quickly you get it and how certain you are about getting it.  Growth is simply  a component in figuring out how much cash will come to owners in future. These tags about value investment, growth investment etc does not make too much sense to me.



cherzeca

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Re: Does Value Investing "still" work?
« Reply #5 on: September 07, 2020, 10:13:54 AM »
how many "filters" do you want to apply? like Buffett, you can first find a great business. then you try to buy right (cheap). if you can't buy right, you don't buy.  if your holding horizon is long (as Buffett) then you might focus on the former rather than the latter, since over time what looks like an expensive entry point may look cheap down the road.  you can over think all of this, but usually a long investment horizon smooths out a lot of entry indiscretion as long as you buy into a great business.
« Last Edit: September 07, 2020, 10:38:23 AM by cherzeca »

deadspace

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Re: Does Value Investing "still" work?
« Reply #6 on: September 07, 2020, 11:11:44 AM »
I don’t know if one can have a proper discussion about this issue without drilling down to specific investments    Otherwise we are just speaking in generalities and it’s not useful.

So too answer does value investing work we should break down the companies he invested in that lead to the 1.5% returns over 15 years......

Why did sears not work ??   Massive Real estate assets   But poor operating business.....   but isn’t this the typical value investment playbook.   The concept that assets are safer than operations is a critical value investment concept.   Throwing out this idea is just admitting that value investing does NOT work.

So why did sears not turn out to be a great investment?   I think if you can do a post mortem on Sears you can answer the question

One issue that will come up is are you really the owner as a equity investor in the same way you were 30 years ago.  The concept of stakeholders is stronger now than it was 30 years ago.   You can’t go in and wack management and close down all these sears stores overnight.   You would be attacked by politicians and the media and brought before Congress.    So this is just one issue that has changed.   You are no longer the “owner “ in the same way you were 30 years ago.  I think there are more lessons to be learned in such an exercise and if done well we may discover that at least in the way it was practiced by Ben Graham and early Warren Buffett value investing does not work - maybe
« Last Edit: September 07, 2020, 11:13:16 AM by deadspace »

Vish_ram

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Re: Does Value Investing "still" work?
« Reply #7 on: September 07, 2020, 11:16:54 AM »
Yes value investing beautifully works - for the owners of the value funds.

Chou associates USD returned 0.9% compounded for last 15 years. Yet investors have $133MM in assets in this fund.
The fund collected $1,345,763 in fees.
Who are these dumb people?

Quit being a value investor, become a owner of a value themed fund. That’s where the money is.

rranjan

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Re: Does Value Investing "still" work?
« Reply #8 on: September 07, 2020, 11:43:43 AM »
So why did sears not turn out to be a great investment?   

35% gross margins in retailer won't work when other retailer can operate at 11% gross margin. Department stores fell behind and it's very hard to make math work for customers if your gross margin is drastically higher than others. Department stores needed high gross margin to operate because they had much higher expense. Old customers kept going for a while due to habit , but you can not attract new customers. Eventually you die if you are not providing value to your customers.s

Now there was hypothetical value in asset, but it could not be converted to cash. If you can not take out cash then investment will not work.


« Last Edit: September 07, 2020, 11:48:03 AM by rranjan »

bilo

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Re: Does Value Investing "still" work?
« Reply #9 on: September 07, 2020, 11:47:22 AM »
I believe that Value Investing Still works.  Very well in fact.  The problem i see for many value investors is:

1.  Many are formulaic thinkers who never advance beyond a simple desire to repeat what worked in the past without realizing the market is a dynamic competition that requires adaptation
2.  Many value investors, particularly sophisticated ones, shoot themselves in the foot over and over and fail to learn from their own mistakes, as well as the mistakes of others.  This is particularly true for long/short managers who keep impailing themselves on bubble stocks for no reason
3.  Many value investors take pride in having zero market or trading acumen
4. Many talented analysts are put into portfolio management roles with little to any knowledge on how to run a portfolio, manage risk, and "step on the gas" at the right time.   They are like the guy who studied boxing for years in books, then step in the ring expecting to be competent. 

All of these issues are encapsulated by the lazy desire to blame "value investing not working" for crummy results.   And if one wants to define "value investing" as some statistical factor (or collection of them) you have been made obsolete, indeed quite a few years ago.