12-11-2020, 09:10 AM (This post was last modified: 12-11-2020, 09:11 AM by gzbkel.)
A good article with commentary on value's historical performance from "The LT3000 Blog" (no affiliation)
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In a recent (generally excellent) podcast with Inside the Rope with David Clark (#78), John Hempton discussed (amongst other things) value's past decade of underperformance, and opined that the primary driver was the fact that the pace of technological change had accelerated, such that we have seen an unprecedented level of disruption to traditional business models. Value investors have apparently spent a decade naively riding doomed low-multiple companies like the Myers of this world into oblivion.
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To me value investing is simply buy what's undervalued; much of the evaluation part comes from the estimation of future business. Further, "value" can be extended beyond figures such as EPS. Aligning investment thesis to investment objective is important. Example: how much do you value dividend-paying policy?
Published PE, PB, net-net are always backwards looking. Not so suitable for some sectors or situation but doesn't mean historical earnings records has no value. More than just numerical figures, one can also see how a company did during crisis etc. The track records should be adjusted to fit this question: how much does the track record mean to evaluation?
Below is one of my share screenings back in 2013. () are purchase prices in 2013.
Screen criteria: PE <15; PB <2; PE*PB <22.5; debt equity <20%; ROA >5%. Ranked based on various CAGR and median. I probably limit it to VB33 lists too.
Looking back I should just buy from that screen list for +7.3% p.a even if some of those bombed. If purchased I would have gotten +7.3% p.a. to-date excluding dividends and other corporate actions. Instead, I took profit, cut lose... got busy and what I bought in 2013 yields 69.68% or 7.8% p.a to-date excluding dividend. For reference, STI was at 3000 level back in 2013.
The premise that value investing has underperformed is debatable. IMO, value investing is far more nuanced than simply buying low PE, or low PB stocks (on that terms, some "value" indexes has certainly underperformed the broader index).
“If you buy a business just because it’s undervalued, then you have to worry about selling it when it reaches its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing.” - Charlie Munger
Agree.
I think the last page (pg 12) of his third lesson implied what you mean.
I had a chance to watch his first lesson when it just released and I'm very grate to see the rest of his lesson.
My take away:
1. Value vs Growth company
Many people think that it's either a value or growth company. However, we need to be mindful that value and growth are actually conjoined at the hip.
2. PB/PE vs Intrinsic value
Older VB might use PB/PE or something out of the AR to filter a value stock.
Younger VB might use the AR as raw materials to calculate Intrinsic value of a company.
Both are just trying to estimate the value of a company.
Both methods could be use to determine the MOS before buying starts.
However, I felt that these are just a rough gauge/gate.
I would rather to be roughly right than absolutely wrong.
What I meant is these MOS is just another indicator/signal to buy a undervalue company. Whether you spend a lot of time calculating or just spend minimum amount of time to do back of envelope calculation, both are acceptable practice.
In another word, it does not means that one who do complex and input more parameters to the calculation will turn out/up with more success.
Own view.
3. Area of competence
To me, this is actually the main gist of all value investor.
A lot of value investor (here in VB.com) works with/in IT.
Me too.
The awakening moment for me is when I read the AR of a particular listed IT company in Singapore, wow, it's like reading my own company AR.
I would immediately know why they revenue is increasing and whether this is sustainable. I would also know what are the area that they do well and what other area they could do better too.
That's mind-boggling experience.
For the record, I din't invest in the company because it's sub-par.
Being an insider helps and I could imagine that if I'm a banker and I'm reading those AR of Singapore Bank....
Anyway, I think having an area of competency would be the minimum requirement before anyone put in a serious amount of money in stock market.
1) Value investing is implemented differently depending on whether you are a quant or a discretionary investor, which causes some confusion.
To simplify, quants use a valuation multiple to proxy for value (e.g. PB, PE, Div yield), and go long/short the cheapest/most expensive bucket. This style has breadth (you don't have to study each business individually), and relies on law of large numbers to kick in (which is why they have large number of holdings), and the intent is to extract the well-known "value premium". Of course quants know that value and quality/growth are joined at the hip - high ROIC businesses that can grow rapidly with minimal capex definitely deserves a higher valuation. Quants do not argue against that, instead they are betting that humans tend to wrongly extrapolate past trends (believing that high margins/growth will continue perpetually), which causes low PB/PE stocks to be undervalued, and vice versa. Downside of this style: you are essentially doing relative valuation, buying stocks that are "relatively" cheaper, and this could be dangerous if overall markets are expensive - you can win in relative terms, but still lose in absolute terms. Quant value investors have generally suffered over the past 10 years.
Discretionary investors (at least the real ones) is all about understanding the difference between intrinsic value and price. Intrinsic value is simple but difficult, it's just sum of future discounted free cash flows, an easy concept that's difficult to implement. Within this camp, you have the very conservative ones (focus on liquidation value), the normal ones (focus on stable, cash generative ones), and the dreamers (focus on companies that are EXPECTED to generate a lot of FCF in the future, but has yet to generate much now). The dreamers have done well in recent years, but I always felt that it's more luck than skill when you are doing value investing that way.
2) Damodaran is a great academic - I've read all of his books for his frameworks/mental models when it comes to valuation. But as I alluded to earlier, intrinsic value is easy conceptually, but hard to implement practically. I might be arrogant to say this, but Damodaran IMO is pretty bad at actually valuing a business correctly (by correct, I mean you beat the market). When I had lots of spare time a few years back, I went through all his valuations on his blog, and calculated his stock picking performance, and it was pretty bad. So my view has always been: read his materials to obtain the tool, but figure out how to use the tool yourself.
3) Finally, as I said, value investing takes on different forms, and each form resonates with a particular personality/skill set. But fundamentally, the essence of value investing (regardless of which form) is all about
- Margin of safety: you get margin of safety by valuing the businesses honestly and rigorously, understanding what are the drivers that actually affect intrinsic value (free cash flows, discount rates, and growth of FCF, and everything that affects the above 3). Valuing Ho Bee is easier than valuing Tesla (which has most of its intrinsic value, if any, tied up in future cashflow streams). So it's hard for me to believe that someone can invest in Tesla with a reasonable MOS, when there's so much uncertainty over its future CFs.
- Controlling your emotions: the usual stuff - be patient, be disciplined, be arrogant (because you are essentially saying that you have an edge against the rest of the world when you decide on becoming an active investor), be humble (because you will be wrong very often, and learning from mistakes are more important than successes), be extremely rational, be independent-minded, be honest etc. Good investors are masters of their own emotions.
As the title suggest:
RE: Unravelling value's decade-long underperformance (and imminent resurgence)
Most people wanted to find these type of (under)value counter and profit from it.
Unfortunately, when I look around, there seems to be quite a lot of value traps around us with MOS but little chance of unlocking.
The most obvious one among valuebuddies would be SL.
Personally, I'm also very keen on APO which was written in great length by one of our respectable valuebuddy.
However, the thought of holding on to a valuetrap for a decade is not nice at all.
So, I dare says that finding MOS is easy.
Avoiding a valuetrap will depends on your luck?
As the title suggest:
RE: Unravelling value's decade-long underperformance (and imminent resurgence)
Most people wanted to find these type of (under)value counter and profit from it.
Unfortunately, when I look around, there seems to be quite a lot of value traps around us with MOS but little chance of unlocking.
The most obvious one among valuebuddies would be SL.
Personally, I'm also very keen on APO which was written in great length by one of our respectable valuebuddy.
However, the thought of holding on to a valuetrap for a decade is not nice at all.
So, I dare says that finding MOS is easy.
Avoiding a valuetrap will depends on your luck?
Stay home and stay safe, everyone.
1) We need to define what's a value trap. For me, it's either one of two situations.
One: You thought the business is undervalued, but it turns out to be overvalued. You bought it because it's below 0.5x book, but turns out that the book value is overstated and due for significant impairment. You bought it because it's below liquidation value, but the business continues to burn cash and eventually there's no value left. You bought it because it has 20% FCF yield, but the business was under-investing (therefore propping up its FCF), which led to eventual decline in FCF. You bought it because it has a high dividend yield, but the business was leveraging up to support dividends, and underlying operating performance eventually can no longer support the dividends. You bought it because you thought the owners will do something to unlock the value, but turns out that they couldn't care less. Many other examples of value traps in these categories that relate to a fundamental deterioration of the business.
Two: More simplistically, a value trap is something that underperformed the market, period. This definition is less grey, and more outcome-focused. Not much to be said about this.
Back to SL (I don't own this for full disclosure). I briefly looked at its past 14 years of financials, and I don't think there's fundamental deterioration - it's just a boring, little-growth, stable business. Not much improvement, but not much regression either. So I probably wouldn't put it in category 1 of value trap. As for category 2, I've attached a chart of SL vs STI since 2000 (caveat: these are price returns, not total returns, more diligent forumers can pull out total return charts if they wish). It's been pretty much performing in line with STI, until very recently, when COVID hit. Given SL's business, it's understandable that it will be more affected by COVID than STI. So I can cut them some slack there. All in all, I personally wouldn't consider SL a value trap TBH - there's no significant fundamental deterioration over the years, and while your returns might have been low, it's been somewhat in line with the broader market.
2) So can we avoid a value trap? I personally think there's two approaches worth considering:
1. Accept that value traps are part and parcel of value investing: just like the cost of doing business, maybe the occasional purchase of value traps simply represents the cost of achieving outperformance. The best way to avoid value traps is to not invest at all, but that is also the worst decision. To me, as long as your averages are still good (whether is it because your % of value traps is low, or because you lose a little in value traps but win big when you are correct), I won't be too bothered by the occasional value traps. This school of thought is more akin to saying that avoiding value traps is more about luck, and value traps will always be there.
2. Figure out a way to increase your odds of identifying value traps ex-ante: Of course, this is the holy grail. Can it be done? I believe so. But people who can do this won't be sharing how they've done it, because it's such a valuable skill/experience. This school of thought is more akin to saying that there's a skill component to improving your odds of avoiding value traps.
Overall, I don't think it matters which camp you are in. I've seen investors from either camps that still beat the market handily over the long run. The former takes less effort and talent, while the latter takes more.
17-11-2020, 11:19 AM (This post was last modified: 17-11-2020, 11:28 AM by weijian.)
@Corgitator, SL isnt a value trap? I do think SL is a value trap and you had adequately stated it under 1 of the many descriptions in the first situation
@¯|_(ツ)_/¯, i had also taken a closer look at APO previously. Value investing (the portion of buying pennies for a dollar) to an extent works with the law of large numbers and probably APO might be a candidate in a diversified portfolio using similar parameters to shortlist. For me personally, my portfolio is more concentrated and hence it wasnt my piece of cake.
IMO the intelligent investors have "intelligence" aka information.
An investor may get "value trapped" if he doesn't understand the business. There are too many granular sectorial or even company-specific challenges that affect PB or PE.
Eg. 1: the cyclical price of raw materials. Good luck if one decides to buy, say, palm oil plantation companies based on PE alone. CPO price high means higher earnings, hence low P/E (x standard deviation from Y years average etc).
Eg. 2: Working capital requirement. Huge working capital could be a reason why a company reserve cash. Such monies are no different from PPE. Such companies may perpetually be selling at 0.7 P/B until there's a change in working capital. They will not fold and share money with OPMI. If GO the investors will not get 1x PB offer.
"Value trap" @ low PE/ PB is on the opposite site of cutting off good investment opportunity based on high PE or PB in "value" investing.
The alternative would be as Weijian mentioned get a diversified portfolio shortlisted with similar parameters.
If the shortlisted portfolio appears to contain companies from the same sector, probably best to figure out why before putting serious money in it.
Judging from the opinion given on SL and APO, I still think that there is a big element of luck for a valuebuddies to avoid a valuetrap.
I find that a likely candidate of valuetrap will pay their executive handsomely vs shareholders.
Eg. APO pay it's executive $2-4m whereas only $823k to all shareholders.
Similar story could be heard on SL too.
Having a valuetrap that perform on par or a bit sub-par to market is not a concern.
The real concern is the owner will make a mandatory offer and delist the company when it's share price at it's lowest point.
That's really sad.
And, hence the questions on how to avoid these valuetrap.
Luck, again?
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