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General Category => General Discussion => Topic started by: investmd on September 07, 2020, 07:40:41 AM

Title: Does Value Investing "still" work?
Post by: investmd 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
Title: Re: Does Value Investing "still" work?
Post by: Jurgis on September 07, 2020, 07:57:30 AM
So he basically says that indexing and growth investing works.  8)
Title: Re: Does Value Investing "still" work?
Post by: rranjan 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.


Title: Re: Does Value Investing "still" work?
Post by: investmd 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.
Title: Re: Does Value Investing "still" work?
Post by: rranjan 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.


Title: Re: Does Value Investing "still" work?
Post by: cherzeca 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.
Title: Re: Does Value Investing "still" work?
Post by: deadspace 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
Title: Re: Does Value Investing "still" work?
Post by: Vish_ram 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.
Title: Re: Does Value Investing "still" work?
Post by: rranjan 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.


Title: Re: Does Value Investing "still" work?
Post by: bilo 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. 



Title: Re: Does Value Investing "still" work?
Post by: deadspace 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.
[/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
Title: Re: Does Value Investing "still" work?
Post by: investmd 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

[/quote]

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".
Title: Re: Does Value Investing "still" work?
Post by: investmd 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.


[/quote]

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.
Title: Re: Does Value Investing "still" work?
Post by: cherzeca 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. 
Title: Re: Does Value Investing "still" work?
Post by: rranjan 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.
Title: Re: Does Value Investing "still" work?
Post by: rranjan 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.

-----------
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/
-------

Title: Re: Does Value Investing "still" work?
Post by: investmd 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/
-------

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.
Title: Re: Does Value Investing "still" work?
Post by: LC 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!

Title: Re: Does Value Investing "still" work?
Post by: BPCAP 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?"


Title: Re: Does Value Investing "still" work?
Post by: deadspace 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.
Title: Re: Does Value Investing "still" work?
Post by: Gregmal 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.
Title: Re: Does Value Investing "still" work?
Post by: deadspace 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.    It’s 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
Title: Re: Does Value Investing "still" work?
Post by: deadspace 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
Title: Re: Does Value Investing "still" work?
Post by: Gregmal 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.
Title: Re: Does Value Investing "still" work?
Post by: investmd 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??
Title: Re: Does Value Investing "still" work?
Post by: Spekulatius 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 that’s 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 doesn’t provide much of an edge, but being right about a tech moat ten years out does.
Title: Re: Does Value Investing "still" work?
Post by: BPCAP 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. 
Title: Re: Does Value Investing "still" work?
Post by: LC 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.

I’ll 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.
Title: Re: Does Value Investing "still" work?
Post by: mattee2264 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.
Title: Re: Does Value Investing "still" work?
Post by: cherzeca 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.

I’ll 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...
Title: Re: Does Value Investing "still" work?
Post by: LC on September 08, 2020, 08:42:39 AM
Quote
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..

And why not?

Answering that question is a big part of this thread's topic.
MSFT, AMZN is not a "value" company? It's like the one true scotsman.

These two companies have created some of the most value, globally, in the last decade.
If anything, they are two of the most "valu"-able companies to ever exist!

Title: Re: Does Value Investing "still" work?
Post by: writser on September 08, 2020, 08:57:04 AM
I think that's why this discussion always gets confusing. What is 'value investing'? I think that is up for discussion. My definition (I'm not saying it is the correct definition): buying a company for less than intrinsic value. That can be Facebook at 200x earnings, if you have done your homework and think it is worth more. It can also mean: buy some crap at a low multiple, if you have done your homework and think it is worth more. In both cases, the key is: doing your homework. Thinking about the business, stakeholders, incentives and valuation.. The rest is mostly a philosophical discussion as far as I am concerned.

If you buy stocks blindly because they trade at low multiples you have not done your homework. If you buy stocks blindly because of growth prospects you have not done your homework either. Maybe these strategies worked in the past, maybe they didn't. Maybe they work now, maybe they don't. Personally I don't care too much.
Title: Re: Does Value Investing "still" work?
Post by: cherzeca on September 08, 2020, 11:31:44 AM
"What is 'value investing'? I think that is up for discussion. My definition (I'm not saying it is the correct definition): buying a company for less than intrinsic value." 

well who wants to pay more than a company is worth? even growth bulls paying up for tsla think it is priced at less than "intrinsic value"...and so far they have been generally right...and I think we can all agree that tsla is not a value stock. 

for many investors who gravitate towards value, too much can go wrong with a growth story such as tsla.  I think some of what David Dreman said makes sense here...that value investing reduces risk of loss, and while at the risk also of giving up some upside, losses hurt more than gains feel good, and so weighting risk/reward to limit risk is an essential part of value investing...and it is fair to say that with the Fed so active (just read holds 14% of treasuries) and forecasting low rates as far as the eye can see, limiting downside is not as fashionable as it once was, generally speaking

Title: Re: Does Value Investing "still" work?
Post by: writser on September 08, 2020, 12:24:29 PM
well who wants to pay more than a company is worth?

Well, that's a good question. Frankly I think a ton of people don't give a shit about valuation. They either don't do it at all and just try to sell to the next fool or they do it in such a preconceived way that they might as well not have done it. Tesla is probably a case in point. But if you study and model the company carefully and you get to a valuation of $10k / share, sure, I guess you can call that value investing (though I personally think you should work on your business valuation skills). But others would probably not consider this value investing because they define it as:

- taking care of the downside, like you suggested.
- buying a bunch of companies in the lowest percentile with regards to a certain multiple.
- buying stocks that everybody else hates.
- buying a stock that's cheap according to a spreadsheet.
- jerking off while spouting Benjamin Graham quotes.

So, does it still work? Depends on who you ask and what their definition is. The self-proclaimed Tesla value investor with a price target of $10k certainly thinks value investing is working this year .. That's why I think the question is kind of pointless and the key to investing is to get the modelling right in specific situations. If Chou is losing money the interesting question is not: "is value investing still working" but: "why did Chou buy X, Y and Z, what did he think at the time and why didn't these ideas work out?" Of course those are hard questions that require actual work to answer so we don't do that and dabble around a bit here about whether Tesla is a value stock or not.

As an aside, I think a lot of value investors are nerds and so they gravitate to the 'mathy' situations, i.e. low multiples, tangible book value. So do I. However, if you studied Amazon carefully in 2002 and came to the conclusion that it was a superb company with enormous growth prospects and that it was way too cheap, I'd consider that value investing too. I guess that requires more business acumen, risk tolerance and self-confidence and less math so it attracts a different crowd. I think there is not a lot of cross-over between these two groups. The business guys piss on the valuation spreadsheets, the math nerds piss on the 500x PE multiple. In both cases that's a weakness though, not a strength.
Title: Re: Does Value Investing "still" work?
Post by: cherzeca on September 08, 2020, 12:59:13 PM
@writser

well put, and your reference to AMZN leads me to another point.  Bezos is a genius. you may like him or not, but he is a genius. sometimes you have to invest in the jockey. but of course, contra, Neumann (WeWork) was and is not a genius.  great model, stupid execution...plus morality manque.  now where Musk fits into this spectrum is still up for grabs, but it seems he is trending to the Bezos pole (though still morality manque imo).  value investing does NOT like to invest in geniuses on the make.  but contrast Ms Barra and Mr Ford to Musk, and one has to wonder whether some exposure to the genius spectrum might do value investors some benefit...
Title: Re: Does Value Investing "still" work?
Post by: thepupil on September 08, 2020, 01:19:46 PM
To help make some of these distinctions, I use the terms

“Value factor investing” (Low P/B, high earnings/divvy yield, cheapest quartile)

“Intrinsic value based investing” (underwriting an asset/company’s value and buying below that, it’s PE / boom multiple whatever may be low or high)
Title: Re: Does Value Investing "still" work?
Post by: investmd on September 09, 2020, 02:30:01 PM
excellent points above by LC, Cherecza and Writser questioning why Amazon could not be a "value company". I like the comment also about value investing being "nerdy" and gravitating to "mathy" situations and missing out on the potential growth prospect.

Maybe what should be dead is the topic of "value" vs. "growth".  Maybe the markets have come to a new way of  "investing well" which blends assessing BOTH intrinsic valuation of assets and multiple of yesterday's earnings but also giving important consideration to earnings growth.
Title: Re: Does Value Investing "still" work?
Post by: writser on September 09, 2020, 02:38:43 PM
To help make some of these distinctions, I use the terms

“Value factor investing” (Low P/B, high earnings/divvy yield, cheapest quartile)

“Intrinsic value based investing” (underwriting an asset/company’s value and buying below that, it’s PE / boom multiple whatever may be low or high)

Yeah, that’s a sensible distinction.
Title: Re: Does Value Investing "still" work?
Post by: Gregmal on September 09, 2020, 03:20:20 PM
Posted in another thread...but figured this works here too. Seems to be a different year but the same story.

https://valuewalkposts.tumblr.com/post/138102275370/2015-letter-klarman-tell-investors-he-is

The “FANG” stocks (Facebook, Amazon, Netflix, and Google)
gained $415 billion of market cap through the end of the year, a 55% jump. Netflix stock surged 134% in 2015; Amazon 118%. Their average price-to-earnings ratio soared from 49 to 120 times, according to Bloomberg. As in the Nifty Fifty era, money managers seem to have decided they’d rather be seen failing conventionally than risk trying to succeed unconventionally. Last year, the 10 largest stocks by market cap in the S&P 500 gained nearly 23%, while the other 490 stocks were down about 3.5% on average.


“Value investors must be strong and resilient, as well as independent-minded and sometimes contrary. You don’t become a value investor for the group hugs. Indeed, one can go long stretches of time with no positive reinforcement whatsoever. Unlike some other fields of endeavor, in investing you can do the same thing as yesterday but achieve completely different reported results. In the long run, the research and analysis you perform should overcome market forces; the fundamentals ultimately matter. But in the short run, markets can trump effort and insight.”
Title: Re: Does Value Investing "still" work?
Post by: D33pV4lue on September 10, 2020, 11:31:02 AM
I think that's why this discussion always gets confusing. What is 'value investing'? I think that is up for discussion. My definition (I'm not saying it is the correct definition): buying a company for less than intrinsic value. That can be Facebook at 200x earnings, if you have done your homework and think it is worth more. It can also mean: buy some crap at a low multiple, if you have done your homework and think it is worth more. In both cases, the key is: doing your homework. Thinking about the business, stakeholders, incentives and valuation.. The rest is mostly a philosophical discussion as far as I am concerned.

If you buy stocks blindly because they trade at low multiples you have not done your homework. If you buy stocks blindly because of growth prospects you have not done your homework either. Maybe these strategies worked in the past, maybe they didn't. Maybe they work now, maybe they don't. Personally I don't care too much.

Exactly how I would summarize it. Value investing is a philosophy centered around research and ultimately intrinsic value. It doesn't matter how you go from point A to point B (Low P/B, P/E, FCF). Whereas low P/B investing is a strategy the same way momentum is. I've commented this same theme before, traditional value investors haven't been able to adapt to more asset light business models. I am younger raised on traditional value investing but my personal philosphy skews more towards Joel Greenblatt value than Ben Graham. Markets change there are not many opportunities available to buy net cash companies. GAAP Accounting is a crappy indicator of "value" and hence P/B is rarely meaningful (exception insurance, etc.).   The only way to know what a company is worth is to do your homework.

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.
Title: Re: Does Value Investing "still" work?
Post by: SharperDingaan 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





Title: Re: Does Value Investing "still" work?
Post by: John Hjorth 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.
Title: Re: Does Value Investing "still" work?
Post by: Palantir 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...
Title: Re: Does Value Investing "still" work?
Post by: cherzeca 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.
Title: Re: Does Value Investing "still" work?
Post by: coc 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.
Title: Re: Does Value Investing "still" work?
Post by: rranjan 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.


Title: Re: Does Value Investing "still" work?
Post by: Ice77 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. 


Title: Re: Does Value Investing "still" work?
Post by: Palantir 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
Title: Re: Does Value Investing "still" work?
Post by: thowed 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.

Title: Re: Does Value Investing "still" work?
Post by: SharperDingaan 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%.
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



Title: Re: Does Value Investing "still" work?
Post by: investmd on September 13, 2020, 07:07:47 AM
Going through the posts on this thread, my summary is that consensus is that 1) basic underlying principle of identifying a business that will return your money and more to you in future is just good investing & 2) perhaps there has been some evolution in "value investing" to not only focus on P/E, P/B, assets and debt but also place emphasis on potential to grow earnings. Does that make sense?
Title: Re: Does Value Investing "still" work?
Post by: cherzeca on September 13, 2020, 02:15:35 PM
Going through the posts on this thread, my summary is that consensus is that 1) basic underlying principle of identifying a business that will return your money and more to you in future is just good investing & 2) perhaps there has been some evolution in "value investing" to not only focus on P/E, P/B, assets and debt but also place emphasis on potential to grow earnings. Does that make sense?

I would just add that from my reading of value investing literature, there is an emphasis on limiting the downside.  growth investing looks with more emphasis on exposure to upside. now, how does a value investor limit the downside? you can look to all of the metrics discussed, such as low P/E, low P/B etc, look for a moat to limit competition, etc...all of these metrics can be debated as to how effective they are, but they simply are filters that value investors use to try to achieve some modicum of safety.  probably the best filter is to invest in a great business, but this is in the eye of the beholder.  Buffett once said that he thought Sees Candies was a great business since whenever some guy bought the product, he got a kiss from his wife/GF etc.  so I suppose there are many paths....
Title: Re: Does Value Investing "still" work?
Post by: Gregmal on September 13, 2020, 02:28:18 PM
Going through the posts on this thread, my summary is that consensus is that 1) basic underlying principle of identifying a business that will return your money and more to you in future is just good investing & 2) perhaps there has been some evolution in "value investing" to not only focus on P/E, P/B, assets and debt but also place emphasis on potential to grow earnings. Does that make sense?

I would just add that from my reading of value investing literature, there is an emphasis on limiting the downside.  growth investing looks with more emphasis on exposure to upside. now, how does a value investor limit the downside? you can look to all of the metrics discussed, such as low P/E, low P/B etc, look for a moat to limit competition, etc...all of these metrics can be debated as to how effective they are, but they simply are filters that value investors use to try to achieve some modicum of safety.  probably the best filter is to invest in a great business, but this is in the eye of the beholder.  Buffett once said that he thought Sees Candies was a great business since whenever some guy bought the product, he got a kiss from his wife/GF etc.  so I suppose there are many paths....

Personally, I've noticed that it seems the way in which most people apply "value investing" philosophies, encourages continuing to stick with things that dont work. If you've held something for 3+ years and haven't made money, in a crazy blow out bull market like we've seen where almost everything under the sun is making money, you are just flat out wrong and should move on. Sure, it may "eventually" come around, but why wait for a perpetual disappointment to change its behavior, when pretty much everything else is going to reward you today? Blackberry is one that comes to mind in this category. You could have literally held anything else in that space and done well instead of sitting around, hoping and waiting for the tide to turn on a reclamation project.....
Title: Re: Does Value Investing "still" work?
Post by: Spekulatius on September 13, 2020, 02:41:46 PM
Going through the posts on this thread, my summary is that consensus is that 1) basic underlying principle of identifying a business that will return your money and more to you in future is just good investing & 2) perhaps there has been some evolution in "value investing" to not only focus on P/E, P/B, assets and debt but also place emphasis on potential to grow earnings. Does that make sense?

I would just add that from my reading of value investing literature, there is an emphasis on limiting the downside.  growth investing looks with more emphasis on exposure to upside. now, how does a value investor limit the downside? you can look to all of the metrics discussed, such as low P/E, low P/B etc, look for a moat to limit competition, etc...all of these metrics can be debated as to how effective they are, but they simply are filters that value investors use to try to achieve some modicum of safety.  probably the best filter is to invest in a great business, but this is in the eye of the beholder.  Buffett once said that he thought Sees Candies was a great business since whenever some guy bought the product, he got a kiss from his wife/GF etc.  so I suppose there are many paths....

Personally, I've noticed that it seems the way in which most people apply "value investing" philosophies, encourages continuing to stick with things that dont work. If you've held something for 3+ years and haven't made money, in a crazy blow out bull market like we've seen where almost everything under the sun is making money, you are just flat out wrong and should move on. Sure, it may "eventually" come around, but why wait for a perpetual disappointment to change its behavior, when pretty much everything else is going to reward you today? Blackberry is one that comes to mind in this category. You could have literally held anything else in that space and done well instead of sitting around, hoping and waiting for the tide to turn on a reclamation project.....

Don’t all your REIT holdings fit this bill perfectly?
Title: Re: Does Value Investing "still" work?
Post by: Gregmal on September 13, 2020, 03:07:09 PM
Going through the posts on this thread, my summary is that consensus is that 1) basic underlying principle of identifying a business that will return your money and more to you in future is just good investing & 2) perhaps there has been some evolution in "value investing" to not only focus on P/E, P/B, assets and debt but also place emphasis on potential to grow earnings. Does that make sense?

I would just add that from my reading of value investing literature, there is an emphasis on limiting the downside.  growth investing looks with more emphasis on exposure to upside. now, how does a value investor limit the downside? you can look to all of the metrics discussed, such as low P/E, low P/B etc, look for a moat to limit competition, etc...all of these metrics can be debated as to how effective they are, but they simply are filters that value investors use to try to achieve some modicum of safety.  probably the best filter is to invest in a great business, but this is in the eye of the beholder.  Buffett once said that he thought Sees Candies was a great business since whenever some guy bought the product, he got a kiss from his wife/GF etc.  so I suppose there are many paths....

Personally, I've noticed that it seems the way in which most people apply "value investing" philosophies, encourages continuing to stick with things that dont work. If you've held something for 3+ years and haven't made money, in a crazy blow out bull market like we've seen where almost everything under the sun is making money, you are just flat out wrong and should move on. Sure, it may "eventually" come around, but why wait for a perpetual disappointment to change its behavior, when pretty much everything else is going to reward you today? Blackberry is one that comes to mind in this category. You could have literally held anything else in that space and done well instead of sitting around, hoping and waiting for the tide to turn on a reclamation project.....

Don’t all your REIT holdings fit this bill perfectly?

Comparing this after a major reset is silly. SPG and ESRT I just started buying this year; ESRT I am still buying. If in 3 years or so I haven't made money, then yea, I'd probably consider my investments a failure and a waste of time. I have a hard time doing so after a quarter or two. A better example, although not purely RE/REIT would be MSG(as in the CVC spinoff). Even with the COVID decline, thats printed money for shareholders over the past 3-5-10 yr or whatever timeframe. Same with ARE.

Blackberry stuck out to me because it's a cultish value stock, in a sector where everything is going bonkers. Different than someone investing in real estate or energy right now...in those respects, you know what you're getting into as it's sector wide headwinds in classically cyclical business/asset classes.

The post above probably came off as supportive of a "buy whats popular" strategy, which is not what I was trying to convey. Better said, dont go buying into problems you dont need to because you are a cheapskate. It would be like going after PEI or CBL instead of SPG. There is a quality component to things and often people look past quality in search of value. If something is working, the top notch companies will do well. When you get into reclamation projects, many of the ingredients for underperformance are glaring yet overlooked frequently.

EDIT: I'd add that a better example in terms of what I own would probably be MSG Networks.
Title: Re: Does Value Investing "still" work?
Post by: mattee2264 on September 14, 2020, 05:25:14 AM
In the past a typical value investment had the attractive combination of a cheap price and average quality and long term prospects usually as a result of temporary company or industry problems that were likely to resolve themselves in due course. And you would be able to diversify to a sufficient extent that you wouldn't need every situation to work out and you could still beat the market.

These days to get a cheap price you either have to accept poor quality and/or poor or very uncertain long term prospects often involving some kind of existential threat. And often you have to embrace cyclicality with all the attendant timing risks. So the average result is less favourable and selectivity is required but a lot of this stuff is too hard and even experienced professional value investors often get it wrong. And the problem with value investing is there is limited potential upside so losers dominate your results and therefore mistakes can be incredibly costly.

And of course interest rates are a factor. The spread in P/E multiples for growth stocks in low and high interest rate environments is much wider than for value stocks. If there is a proper tightening cycle then multiple compression will be far less damaging to value stocks than it will be for growth stocks. And then the limitations of growth investing will become more obvious i.e. growth doesn't last forever and multiple compression as growth slows and interest rates rise can punish returns. But while that would reduce returns from growth investing for returns to value investing to improve I think you still need prices to get cheap enough that you can get back to that old combination of cheap price average quality/prospects.

Title: Re: Does Value Investing "still" work?
Post by: D33pV4lue on September 16, 2020, 12:45:06 PM
Going through the posts on this thread, my summary is that consensus is that 1) basic underlying principle of identifying a business that will return your money and more to you in future is just good investing & 2) perhaps there has been some evolution in "value investing" to not only focus on P/E, P/B, assets and debt but also place emphasis on potential to grow earnings. Does that make sense?

I would just add that from my reading of value investing literature, there is an emphasis on limiting the downside.  growth investing looks with more emphasis on exposure to upside. now, how does a value investor limit the downside? you can look to all of the metrics discussed, such as low P/E, low P/B etc, look for a moat to limit competition, etc...all of these metrics can be debated as to how effective they are, but they simply are filters that value investors use to try to achieve some modicum of safety.  probably the best filter is to invest in a great business, but this is in the eye of the beholder.  Buffett once said that he thought Sees Candies was a great business since whenever some guy bought the product, he got a kiss from his wife/GF etc.  so I suppose there are many paths....

Being disciplined. Everything is about Odds (Against the Odds by Peter Bernstein is  one of my favorite books). Shifting the odds into your favor long term will help limit downside. I.e. investing in stocks with 2:1 upside vs downside not 1:1. People make mistakes identifying mistakes and cut losses quickly is an extremely important skill IMO not sitting and waiting or doubling down. Do a post-mortem identify what what wrong and don't make the mistake again.