Value investing is struggling to remain relevant
economist.com
economist.com
Value investing is another name for allocating your resources to things which are minimally speculative. To things which presently have value. There is somehting deeply wrong with a society which is no longer interested in this.
Look at oil. It isn’t in a good spot. Some of the largest companies used to be oil companies. But not anymore by market cap. They are still paying dividends while losing money. How? They are taking loans out. At a certain point that stops and more investors wake up.
But my time horizon in 5 to 10 years when picking investments.
Oil companies are unsurprisingly going down because their bread and butter business is currently not in demand. In a few years things will look differently. The real problem is that a lot of companies don't have an obvious "bread and butter" that actually brings in enough cash to justify their valuations. They are mostly selling the dream of a monopoly to investors even when those future monopolies have no moat other than money.
One way to think about value and growth is to say that you need to discount speculative future incomes. Well it used to be that five or ten years out rates could be 8-15%, and then you had to compound. And that's just the cost of money, you need to think about how likely the income is in the first place.
So it shouldn't surprise us that when rates collapse, companies with mostly future unknown income gain in value compared to those with current certain income.
The big question is whether rates will ever come back to what we used to see.
I think Yahoo had some assets that it sold (like ~$40B worth of Alibaba shares) later on. Did the cash go into YHOO or into the shareholders account in some other way?
IIRC, as part of the merger with Verizon, the Alibaba and Yahoo Japan holdings were spun out into a separate holding company (Altaba?) which was publically traded. A YHOO stockholder would get some amount of Altaba stock, and whatever the Verizon part was (I don't remember if that was Verizon stock, cash, a choice, whatever); probably no fractional shares.
As the holdings were sold, there were large cash dividends, with holdbacks for taxes and contigencies. As the contigencies timed out, smaller dividends happened, and I think Altaba formally wound down with a final dividend earlier this year.
My scientific ctrl-f survey has the string "stock" appearing 48 times in 166 comments this year, three times in 84 comments last year, once in 163 comments in 2018, and 6 times in 90 comments in 2017.
And this year they were talking about leverage.
The only thing that has changed lately is that trading options become free. Options used to be prohibitively expensive. Oh yeah and a couple people killed themselves, the irony here being that people stop blaming the trader and blame the broker after the trader self harms? Convincing. But it definitely helped bring the attention from everyone that figured they had slightly better self preservation skills and could understand how settlement works.
I'm glad undercapitalized people stopped gravitating towards penny stocks.
Bonds and cash have negative real rates nowadays so the only thing they can do is pump up equities, real estate and alternative investments.
Keynes said it best:
"It is dangerous... To apply to the future inductive arguments based on past experience, unless one can distinguish the broad reasons why past experience was what it was."
Value investing was originally about valuing companies based on tangible assets. This doesn’t work very well for technology companies.
Say a company will live for 1 year, pay no dividend and perform no buybacks, but has some stock price. Say -X(X-1), so it starts at price=0 at t=0, ends at price=0 at t=1, and has positive but illogical/inefficient positive prices in between up to a maximum of p=0.25 at t=0.5.
Now, someone who bought then sold on the up-slope -- with price impact -- would make money but increase the difference between the price curve and "true value" (which is the equation p=0.) But if you iterated those buying and selling operations with time-travelling argitrageurs, the realised value would eventually be the true value. The price curve would be p=0.
So, in conclusion, maybe "all investing is value investing" is false under this interpretation, but true if there are time travellers involved. (There is almost certainly a more charitable phrasing.)
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The value investors who have done well are those that recognise growth as a factor, and put money into Apple when they were comparatively cheaper.
The value investors who have done poorly are those who buy low PE stocks, which are stocks of stagnant and declining companies.
Well, Wikipedia [0] seems to disagree.
>Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis.
By this logic investing into stocks with verifiable growth is the way to go. Apple is basically the poster child of value investing. It's a company that is making lots of money and keeps growing because it releases new profitable products year by year.
For some reason there is this belief that "value investing" = "boomer doesn't know stocks can grow". Yeah, one obviously has to think that those who engage in value investing are stupid, otherwise one would have to acknowledge that the stocks one is investing in have zero reason to grow as fast as they did, except that everyone else is also blindly buying them (which is dangerous circular reasoning and causes bubbles that pop once we run out of people who refuse to open their eyes).
So even if you invest in some pretty "safe bets" even those aren't necessarily very safe in the long term.
Also worth mentioning that market cap weighting means can be protective -- if a stock enters at the low end of the wighting spectrum, underperformance is less impactful. But also when a fraud like Enron comes along, it does commensurate damage to portfolios.
But the point was a lot of the companies on the Fortune 500 are considered good buys from a value investor perspective, yet chances are 1/2 of them won't be a good buy in 10 years by the same measure.
In contrast, VOO is SP500, which is entirely publicly traded and features weightings
That, I think, is a citation needed, since IIRC, F500 is derived from revenue not book value.
"In the past week or so, fortunes have reversed. Technology stocks have sold off. Value stocks have rallied, as prospects for a coronavirus vaccine raise hopes of a quick return to a normal economy. This might be the start of a long-heralded rotation from overpriced tech to far cheaper cyclicals—stocks that do well in a strong economy. Perhaps value is back."
Haha. No. It's not back.
Over the past YTD, AAPL has returned 70%. The article's publish date is 11/14/2020. Around that timeframe, AAPL moved less than 5%. This is not evidence for collective change in investing philosophy. Perhaps tech is over-bought, but you have to argue better than this. It took me all of 2 minutes to check.
Enormous gains. The article should really have more data to describe this pullback.
Tesla makes absolutely no sense to me. Etsy is just an online shop and it sells a lot of crap. Pton is probably just a corona fad.
AAPL is slightly encouraging because it obviously has some well justified growth left in it but it's not overhyped to the extreme extent as the other stocks.
All stocks are still growing way too quickly in my opinion though.
GP chimes in that it’s a ridiculous claim because Apple is still up big YTD and hasn’t moved much recently.
That’s not a refutation of the article’s statement. Last month still MAY be the turning point, which is why I pointed out the recent outperformance of value, in contrast with what just Apple has done, which is irrelevant.
Of course we can’t conclude anything by a month’s worth of market data by extrapolating to the future. That’s why OP answering
“value may be turning around”
with
“no it’s not back”,
is incorrect, as they’re concluding growth has and will keep outperforming value.
I'm willing to agree that determining the value of intangible assets is harder than it used to be.
But let's say you figure it out. Value investing is probably every bit as relevant as it was 50 years ago.
Hence the rise of Warren Buffett