Author Topic: Does Value Investing "still" work?  (Read 5773 times)

SharperDingaan

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Re: Does Value Investing "still" work?
« Reply #40 on: September 10, 2020, 02:52:51 PM »
Trying to do 'value investing' purely by formula is pretty meaningless.
Assume 12 month forward earnings of $1/share, market P/E of 25x, current price is $40. To the value investor, the stock is overpriced to the $25 it is worth (25 x $1/share), and he/she should walk away. But if you expect 60% growth in 12 month earnings (ie: $1.60) ... the stock is fairly valued (1.60 x 25 = $40).

At any one time, consensus 12 month forward earnings are just a market guess. But compare any forecast strip price against the subsequent actual, and you quickly see how inaccurate these guesses are. All that we really know that is that if a company is in the early stages of a growth cycle, an earnings miss will typically bias upwards. The nearer to the maturity stage, the more random the bias.

So what? if this company was a Tesla, and in its early growth stage, you would think $40/share dirt cheap. Simply because a SINGLE 5% positive earnings miss is worth $2/share, and relatively easy to obtain as economies of scale kick in. Do it every quarter, and the P/E multiple will also expand.

Value investing still works, you just need to apply it differently. Change.
Something a great many value investors have real difficulty with.

SD





« Last Edit: September 10, 2020, 06:43:51 PM by SharperDingaan »


John Hjorth

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Re: Does Value Investing "still" work?
« Reply #41 on: September 10, 2020, 04:13:26 PM »
Trying to do 'value investing' purely by formula is pretty meaningless. ...

... Value investing still works, you just need to apply it differently. Change.
Something a great many value investors have real difficulty with.

SD

I can't help quoting SharperDingaan here,

Screening the markets for cheap stocks can't hurt, until one engage. From a long perspective [, all kinds of financial instruments omitted here], losses are created by buying, gains are created by holding or selling.

It's not that hard to explain basically - a good deal harder to practice.
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Palantir

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Re: Does Value Investing "still" work?
« Reply #42 on: September 10, 2020, 04:39:52 PM »
You are laying out cash to buy a business to get more cash from business in future.
 

Not true. You are laying out cash to buy a business in the hopes that someone else will be willing to buy it from you at a much higher value. If the second part doesn’t happen then it didn’t work.


You do not actually get the cash a business produces...
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cherzeca

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Re: Does Value Investing "still" work?
« Reply #43 on: September 10, 2020, 04:42:50 PM »
"cherzeca - I would argue that noone actually knows the intrinsic value of TSLA and it is pure speculation they may be right now but for the wrong reasons."

intrinsic value is a squishy concept to be sure...akin to a platonic form...you can't see it but it is there.  I have come to believe that if developed economies make a big push to lower emissions, the low hanging fruit is cars and trucks, and TSLA has a huge advantage right now, though I am not sure how durable it is.  if you are young and want to stow away assets in an IRA for a 20 year holding period, I could see TSLA.  now is TSLA a value stock? of course not, but it may have a not readily apparent but still huge intrinsic value, since you are discounting the future at a very low interest rate...and btw, 10 year treasuries have a 140 P/E given their current yield.

coc

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Re: Does Value Investing "still" work?
« Reply #44 on: September 10, 2020, 04:56:38 PM »
Value investing hasn’t changed or been invalidated at all. The modern value investing deans have made a lot of mistakes. That’s it. Sears was a bad bet. GM spends almost all of it “earnings”, leaving no cash. Too many people are letting these guys fool them by arguing something “doesn’t work” just because they have made a lot of miscalculations.

Nothing has invalidated the idea of buying a business cheaply relative to its future distributable earning power. The whole net working capital stock thing worked because either:
(A) the company would liquidate (cash in your pocket)
(B) the company would develop real earning power (cash)
(C) the company would be acquired (presumably the new owner would liquidate or fix it like dempster mill )

There’s no difference between that and buying Apple at a $500B market cap which will produce $50-60B of free cash flow. Price, and cash flow. The opportunity can come in many forms. It’s strange that this is argued over so much.

Tesla is worth zero if it doesn’t develop distributable cash some day in excess of its losses. It’s called “speculative” because there hasn’t been any yet and the business they’re in is monstrously competitive.

rranjan

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Re: Does Value Investing "still" work?
« Reply #45 on: September 10, 2020, 06:07:08 PM »
You are laying out cash to buy a business to get more cash from business in future.
 

Not true. You are laying out cash to buy a business in the hopes that someone else will be willing to buy it from you at a much higher value. If the second part doesn’t happen then it didn’t work.


You do not actually get the cash a business produces...

Some one else will eventually buy it higher from you 100% of times if value of owner's earnings are higher than price you paid.



Ice77

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Re: Does Value Investing "still" work?
« Reply #46 on: September 10, 2020, 08:05:06 PM »
Traditional value investing usually focuses on businesses with hard assets and/or conventional distribution models. These businesses are being disrupted and losing market share with historic moats no longer easy to sustain. It is not so much that value investing is struggling but the geiger counter has not been adjusted properly to this changed landscape. Tech enabled or tech oriented businesses rely much more on deep qualitative insight than quantitative number crunching and that's less a domain of traditional value investing. To invest in an era dominated by a) near zero rates, b) low cost of acquiring/servicing marginal customers/deep network effects, c) asset light businesses, d) heavy index flows, one needs to make some adjustments to their geiger counters. Forget value investing, look at the amount of idea generation on this board now adays? It's miniscule. It used to be phenomenal. It's not like ideas are not being discussed anymore - just that the avenues have moved around (chat platforms/discord servers/dedicated fin social media/podcasts etc). The pace of change needs us to make adjustments to our geiger counters every now and then. 


« Last Edit: September 10, 2020, 10:24:24 PM by Ice77 »

Palantir

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Re: Does Value Investing "still" work?
« Reply #47 on: September 10, 2020, 09:36:24 PM »
You are laying out cash to buy a business to get more cash from business in future.
 

Not true. You are laying out cash to buy a business in the hopes that someone else will be willing to buy it from you at a much higher value. If the second part doesn’t happen then it didn’t work.


You do not actually get the cash a business produces...

Some one else will eventually buy it higher from you 100% of times if value of owner's earnings are higher than price you paid.

Not necessarily, stocks can remain undervalued and under appreciated for a long time.

 If your stock reprices to IV in 6 months or 6 years makes a big difference.

There are multiple variables at play
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thowed

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Re: Does Value Investing "still" work?
« Reply #48 on: September 11, 2020, 03:25:05 AM »
Trying to do 'value investing' purely by formula is pretty meaningless.
Assume 12 month forward earnings of $1/share, market P/E of 25x, current price is $40. To the value investor, the stock is overpriced to the $25 it is worth (25 x $1/share), and he/she should walk away. But if you expect 60% growth in 12 month earnings (ie: $1.60) ... the stock is fairly valued (1.60 x 25 = $40).

At any one time, consensus 12 month forward earnings are just a market guess. But compare any forecast strip price against the subsequent actual, and you quickly see how inaccurate these guesses are. All that we really know that is that if a company is in the early stages of a growth cycle, an earnings miss will typically bias upwards. The nearer to the maturity stage, the more random the bias.

So what? if this company was a Tesla, and in its early growth stage, you would think $40/share dirt cheap. Simply because a SINGLE 5% positive earnings miss is worth $2/share, and relatively easy to obtain as economies of scale kick in. Do it every quarter, and the P/E multiple will also expand.

Value investing still works, you just need to apply it differently. Change.
Something a great many value investors have real difficulty with.

SD

Great explanation.

This is effectively why I am more 'Fisher' than 'Graham'.  I go for 'Quality' because I like to be able to rely on a great Founder and Management Team to create the Growth that will make it good Value when I buy it.


SharperDingaan

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Re: Does Value Investing "still" work?
« Reply #49 on: September 11, 2020, 07:31:21 AM »
Just to tie it into the behavioural thread on social norm bias ...

The 'formula' value investor looks to the price today, versus the price one-year ago - per mean reversion, if today's price is 70% less than it was last year, the shares are cheap! But the investor then measures performance, on a 1-yr TWR basis - 'cause that's the industry standard! Social norm.

Problem is that the 'formula' then fails miserably if mean reversion takes more than a year - O/G, airlines, Covid-19, etc.
Assume year-0 return was -70%, year-1 return is -20%, year-2 return is 3%, year-3 return is 250%.
  • The 'formula' investor would buy at the beginning of year-1 - cheap at 70% off! End of year-1 ? the investor sells, takes the tax loss, and tells the world what a rancid POS this was! End of year-2 ? the investor looks back and congratulates him/herself on their great decision!, they made more than the 3%.

    The reality is that the investor is actually dumb as a brick. He/she never saw the year-3 return, and lost 20% of their dollar when they exited. Had he/she stayed they would have made 200% (1X30%x80%x250%=0.60/original investment=1x30%=.30). And more multiples still, had they simply stayed for year-4 - when mean reversion actually takes place (assumed timing).
It wasn't the approach that was wrong - it was the performance measure being used. Following the norm.
Severely cripples a value investor using OPM. But if you're private money, with a more relevant performance measure, it's help yourself time :D

SD



« Last Edit: September 16, 2020, 06:07:33 PM by SharperDingaan »