Author Topic: Does Value Investing "still" work?  (Read 5156 times)

Gregmal

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Re: Does Value Investing "still" work?
« Reply #20 on: September 07, 2020, 03:34:06 PM »
Feel like this topic comes up every 3 months or so. Value investing works if you do it correctly. Nothing in investing is stationary. You need to be flexible in thought and disciplined in application. Buying a textile company at 4x just because Buffett did doesnt mean you'll become rich.

Also worth pointing out that with money to be had this cheap, your 5x FCF isn't as valuable as you think it is. And if time isn't on your side, its even less so. Myself Ive gotten into trouble buying on the "discount to assets" strategy, as its easy to ignore the operational side because of "half NAV" or whatever. Where will your business be in 5-10 years is probably the most important question an investor can ask themselves. Sears didnt work for this reason. The properties weren't crap. They just had to continuously liquidate assets to keep burning all that cash on the biz...in which case the longer it goes on the higher the likelihood you are left with nothing. Trading at 50% of a $10B NAV with a $2B annual burn leaves you with nil after 4-5 years. Which is what happened.


deadspace

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Re: Does Value Investing "still" work?
« Reply #21 on: September 07, 2020, 03:51:07 PM »
Feel like this topic comes up every 3 months or so. Value investing works if you do it correctly. Nothing in investing is stationary. You need to be flexible in thought and disciplined in application. Buying a textile company at 4x just because Buffett did doesnt mean you'll become rich.

Also worth pointing out that with money to be had this cheap, your 5x FCF isn't as valuable as you think it is. And if time isn't on your side, its even less so. Myself Ive gotten into trouble buying on the "discount to assets" strategy, as its easy to ignore the operational side because of "half NAV" or whatever. Where will your business be in 5-10 years is probably the most important question an investor can ask themselves. Sears didnt work for this reason. The properties weren't crap. They just had to continuously liquidate assets to keep burning all that cash on the biz...in which case the longer it goes on the higher the likelihood you are left with nothing. Trading at 50% of a $10B NAV with a $2B annual burn leaves you with nil after 4-5 years. Which is what happened.


Agree.  That is a good encapsulated summary of what happened.    But to the investors that purchased the equity what was supposed to happen was that the cash burn would be stopped by quickly closing and selling poorly performing stores.   The famous line by Bruce Berkowitz one of the value investors involved at the time was that sears losses were optional.    Itís easy in retrospect to summarize what happened here as obvious but this gets to the heart of a common value thesis that there is safety in the assets and that assets like real estate that have knowable market values and are fungible need to be given greater weight than unknowable cash flows at year 6 etc.   These assets were not safe because in essence they belonged to society NOT to the investors.   The concept of multiple stake holders makes it impossible to liquidate large assets and shut down large poorly operating businesses.    This is just one of the perhaps many lessons new age value investors need to learn to avoid the value traps that lead to these brutal results

deadspace

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Re: Does Value Investing "still" work?
« Reply #22 on: September 07, 2020, 04:08:52 PM »
https://www.institutionalinvestor.com/article/b1n5nhk92q3g62/I-Can-t-Believe-I-m-Saying-This-But-I-m-Passing-on-Seth-Klarman


If value investing is merely being poorly practiced by some poor practitioners someone better tell this guy called Seth Klarman that he is just a poor practitioner of the art

Gregmal

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Re: Does Value Investing "still" work?
« Reply #23 on: September 07, 2020, 04:22:31 PM »
https://www.institutionalinvestor.com/article/b1n5nhk92q3g62/I-Can-t-Believe-I-m-Saying-This-But-I-m-Passing-on-Seth-Klarman


If value investing is merely being poorly practiced by some poor practitioners someone better tell this guy called Seth Klarman that he is just a poor practitioner of the art

I think part of the problem with guys like Klarman is that they are already rich, and did it their way. Type A, especially, forgive the language, nerdy intellects, are some of the most stubborn people on Earth. So yea, for a decade nothing some of these guys has done has worked...but they got rich doing it their way and they'll be damned if they ever listen to someone else who knows better. This is part of what is so admirable about David Tepper. He just kind of goes with what is working and is mentally able to change strategies on a dime.

investmd

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Re: Does Value Investing "still" work?
« Reply #24 on: September 07, 2020, 05:03:22 PM »

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.

To double click on the idea of "adjust to the world around you" and metric of value, I've been thinking of this idea that in tech with proven earnings a P/E of 30 might be the equivalent of P/E of 10 in traditional industries. Reason: In proven tech companies with earnings, the total addressable market (TAM) is unknown because they open new markets. This does not happen with traditional commodities & industries - ie a pulp producer is unlike to evolve to clothing apparel retailer. With tech, a computer company (like Aapl) can become a music company and then a services company and then may become a health company. 

So if Aapl, Goog, FB are ever trading at a PE of <30, could be the equivalent of traditionally buying at PE of 10. Does that make some sense??

Spekulatius

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Re: Does Value Investing "still" work?
« Reply #25 on: September 07, 2020, 05:13:04 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!

I think thatís one of the core things nowadays more so than before. Most of the money is made being correct about duration of the business, not the multiple now. You have to look further out. Being right about tanker spot rates in 3-6 month doesnít provide much of an edge, but being right about a tech moat ten years out does.
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BPCAP

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Re: Does Value Investing "still" work?
« Reply #26 on: September 07, 2020, 05:42:08 PM »
https://www.institutionalinvestor.com/article/b1n5nhk92q3g62/I-Can-t-Believe-I-m-Saying-This-But-I-m-Passing-on-Seth-Klarman


If value investing is merely being poorly practiced by some poor practitioners someone better tell this guy called Seth Klarman that he is just a poor practitioner of the art

I admire Klarman a lot, but rarely do I think much of his equity holdings. But that doesn't matter. Stocks didn't make Seth Klarman; shrewdly finding distressed bonds and loans, workouts, and bespoke or one-off deals have been his thing.

He has been value investing--and successfully over time--but he hasn't done it in the securities most value investors operate in. 

LC

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Re: Does Value Investing "still" work?
« Reply #27 on: September 07, 2020, 05:51:12 PM »

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.

To double click on the idea of "adjust to the world around you" and metric of value, I've been thinking of this idea that in tech with proven earnings a P/E of 30 might be the equivalent of P/E of 10 in traditional industries. Reason: In proven tech companies with earnings, the total addressable market (TAM) is unknown because they open new markets. This does not happen with traditional commodities & industries - ie a pulp producer is unlike to evolve to clothing apparel retailer. With tech, a computer company (like Aapl) can become a music company and then a services company and then may become a health company. 

So if Aapl, Goog, FB are ever trading at a PE of <30, could be the equivalent of traditionally buying at PE of 10. Does that make some sense??

I think of it similarly, not in terms of TAM but longevity.
MSFT for example I think has good odds of being around for the next 10-20 years, with reinvestment opportunity.

Long time horizon plus reinvestment opportunity is a winning formula.
Unknown time horizon (short) plus lack of reinvestment opportunity is the opposite.

Iíll also play in the middle, the broadband providers I think have a long runway but not the best reinvestment opportunities. So here the initial investment price is a determining factor of final returns.
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mattee2264

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Re: Does Value Investing "still" work?
« Reply #28 on: September 08, 2020, 02:43:42 AM »

 I think asset-based investments have always been quite suspect. Even for those with industry expertise it can be very difficult to estimate replacement cost or liquidation values. That is why Graham used to prefer buying liquid assets at a discount (i.e. net nets). But even liquid assets can disappear very quickly in a failing business eroding your margin of safety. So wide diversification is still required. And your upside is capped so your losers dominate your portfolio and becauase so many things can go wrong you really need a lot of diversification which makes it a lot of hard work and the scarcity of opportunities creates the temptation to dilute selection standards.

cherzeca

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Re: Does Value Investing "still" work?
« Reply #29 on: September 08, 2020, 08:35:41 AM »

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.

To double click on the idea of "adjust to the world around you" and metric of value, I've been thinking of this idea that in tech with proven earnings a P/E of 30 might be the equivalent of P/E of 10 in traditional industries. Reason: In proven tech companies with earnings, the total addressable market (TAM) is unknown because they open new markets. This does not happen with traditional commodities & industries - ie a pulp producer is unlike to evolve to clothing apparel retailer. With tech, a computer company (like Aapl) can become a music company and then a services company and then may become a health company. 

So if Aapl, Goog, FB are ever trading at a PE of <30, could be the equivalent of traditionally buying at PE of 10. Does that make some sense??

I think of it similarly, not in terms of TAM but longevity.
MSFT for example I think has good odds of being around for the next 10-20 years, with reinvestment opportunity.

Long time horizon plus reinvestment opportunity is a winning formula.
Unknown time horizon (short) plus lack of reinvestment opportunity is the opposite.

Iíll also play in the middle, the broadband providers I think have a long runway but not the best reinvestment opportunities. So here the initial investment price is a determining factor of final returns.

it used to be that you created a moat (longevity) through brand development/equity.  now things are much more fluid and brands have less staying power.  platforms have replaced brands as moat creators.  msft has not been the most innovative company imo over last decade, but its platform is persistent.  of course, FB AMZN etc as well.  not value companies btw...