Author Topic: Does Value Investing "still" work?  (Read 5155 times)

deadspace

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Re: Does Value Investing "still" work?
« Reply #10 on: September 07, 2020, 12:54:39 PM »


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.
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Yes but WHY can you not convert this to cash.
 The thesis for all the value guys in sears wasn’t based on the operating business.  It was based on the assets


investmd

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Re: Does Value Investing "still" work?
« Reply #11 on: September 07, 2020, 01:31:25 PM »


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.



Yes but WHY can you not convert this to cash.
 The thesis for all the value guys in sears wasn’t based on the operating business.  It was based on the assets

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Deadspace, you may have struck a chord when you say that traditional value investing focused on assets but not possibility of generating cash from the assets. Some of the error was in expecting that assets to be re-valued but not understanding the inflection point that will cause the re-valuation. Some have simply believed that over time "value will out".

investmd

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Re: Does Value Investing "still" work?
« Reply #12 on: September 07, 2020, 01:35:57 PM »


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.


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Agree. However, plethora of value investors have not done as well as expected for past 10-15 years including Prem Watsa and FFH whom this board is v. familiar with. Thus, there have been a group of v. intelligent, astute and respected deep value managers that have not performed as well as expected over a relatively long time frame of 10-15 years. Changing understanding of future cash flow generation likely required to change outcomes going forward.

cherzeca

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Re: Does Value Investing "still" work?
« Reply #13 on: September 07, 2020, 01:43:14 PM »
have you ever bought a cheap device on sale? and found out you get what you pay for? similar with value investing. you might minimize your downside by buying cheap, but perhaps also your upside.  it's a fine balance. buy quality, try not to pay up too much, hold on to it. 

rranjan

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Re: Does Value Investing "still" work?
« Reply #14 on: September 07, 2020, 01:54:14 PM »


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.

Quote

Yes but WHY can you not convert this to cash.
 The thesis for all the value guys in sears wasn’t based on the operating business.  It was based on the assets

Ceratainly of asset getting converted to cash was not too high. When you have to fire  people to liquidate asset, it's not easy to do so quickly.

There is time value of money when liquidating. Liquidating within a year is totally different than liquidating within 20 years. Illiquid real estate assets are not worth the claims made by many investors. If assets are liquid and can be converted to cash quickly then situation will be different.

I personally put these cases in too hard pile.
« Last Edit: September 07, 2020, 02:01:20 PM by rranjan »

rranjan

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Re: Does Value Investing "still" work?
« Reply #15 on: September 07, 2020, 02:13:25 PM »
If I can find a business throwing 10% of FCF with very little growth and FCF is not wasted then by owning it I can expect to make 10%.

If my investment returns depends on liquidating to produce cash then time line for liquidation matters a lot.

If you buy 1 dollar of asset by paying 50 cents then you will do fine if asset can be liquidated quickly. If it takes 10 years and meanwhile business also requires more cash to keep running then it's not going to work nicely.

I find it too hard. Even lampert admitted it that it was not a one foot hurdle.

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Lampert. "We'd rather jump over a one-foot hurdle too. But it's difficult to find the opportunity. So I'm willing to engage more in underperforming companies."

https://money.cnn.com/2006/02/03/news/companies/investorsguide_lampert_stockpicking/
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investmd

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Re: Does Value Investing "still" work?
« Reply #16 on: September 07, 2020, 02:15:27 PM »
If I can find a business throwing 10% of FCF with very little growth and FCF is not wasted then by owning it I can expect to make 10%.

If my investment returns depends on liquidating to produce cash then time line for liquidation matters a lot.

If you buy 1 dollar of asset by paying 50 cents then you will do fine if asset can be liquidated quickly. If it takes 10 years and meanwhile business also requires more cash to keep running then it's not going to work nicely.

I find it too hard. Even lampert admitted it that it was not a one foot hurdle.

-----------
Lampert. "We'd rather jump over a one-foot hurdle too. But it's difficult to find the opportunity. So I'm willing to engage more in underperforming companies."

https://money.cnn.com/2006/02/03/news/companies/investorsguide_lampert_stockpicking/
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Agree. What I'm learning is that perhaps driver for value inflection point should be clear at time of purchase. Concept of "value will out over time" is not good enough.

LC

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Re: Does Value Investing "still" work?
« Reply #17 on: September 07, 2020, 02:19:50 PM »
The big question with Sears was, "who the hell wants these crap properties? And they were mostly crap. So who is going to pay 100% on the dollar for them? Are you??

In terms of value investing in general; of course it works - but you need to adjust to the world around you at some point, and stop waiting for the world to adjust to you (it's a balance). Low interest rates have made things difficult - we have boosted terminal values at the expense of near-term cash flows. Much harder to estimate at time zero.

If your definition of value investing is buying under 5x ebitda or 10x PE or 1x book, well unfortunately you are fishing in a cesspool of mediocrity.

So I definitely agree it is harder. Life is easy when you only need to estimate a few years of cash flows to earn your keep. 

With rates so low, now you have to estimate out 7, 10, or more years. This is a much more difficult task!

"Lethargy bordering on sloth remains the cornerstone of our investment style."
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BPCAP

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Re: Does Value Investing "still" work?
« Reply #18 on: September 07, 2020, 02:32:37 PM »
Value investing is maligned because of the many "value investors" who do it wrong and poorly.

A major of self-identified "value investors" either think it means buying turnarounds, low quality businesses (at perceived low prices), and/or extremely contrarian stocks. This leads to portfolios with companies with tons of debt where management must truly thread a needle to stem the tide or avoid bankruptcy. Moreover, these folks significantly underestimate (1) what they don't know, or (2) the numerous contingencies that could appear and derail things. This leads to positions in Sears, JC Penneys, GM, Howard Hughes, etc.without even the acknowledgement that there is a good chance each can (or deserve) to trade lower or even go bust.

Just as many dumb businesses justify folly with spreadsheets, value investors often do with specious fundamentals and stats: low P/E, P/B, etc. Or my favorite: EV to adjusted Ebitda.

I'm a value investor, but in most conversations with other value investors, I find myself first challenging their "It's only 8x earnings" assertions. I almost never get a good answer when I ask someone "Why does this business deserve to thrive or exist?"


« Last Edit: September 07, 2020, 02:37:52 PM by BPCAP »

deadspace

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Re: Does Value Investing "still" work?
« Reply #19 on: September 07, 2020, 03:27:34 PM »
have you ever bought a cheap device on sale? and found out you get what you pay for? similar with value investing. you might minimize your downside by buying cheap, but perhaps also your upside.  it's a fine balance. buy quality, try not to pay up too much, hold on to it.

Agree.   And one way to think about this is that the market has become more efficient and hence value investing does not work because you get what you pay for whereas in the past you could more easily find valuable assets that were simply being ignored but in the last 15 years these assets that seemed just out of favour were being properly valued in the market.  It was the value investor that was missing the boat and falling into a value trap without knowing it.