Is pure Value Investing a gamble?

[Musicwhiz]

Hi MW, I used the word "pure" to differentiate investments that are value+dividends and those that are only value.
I understand it's a little hard to separate dividend from value since most of the time it's part of the value equation.
But for e.g would you invest in a stock that is below it's intrinsic value, even if it's not paying any dividends?

Hi yyt,

I would think that all investments should carry some proportion of yield + capital gains; if not why should investors buy part of the business? It is to enjoy the growth of the business and also enjoy some cash flows from the dividends which it pays out. Hence, "value" itself cannot be so strictly defined as just capital gains separate from dividends. Though there are some who would call companies which are growing fast and not paying a dividend "growth" companies, I think it's more a case of the industry characteristics or company itself having poor fundamentals which requires huge capex and thus does not generate FCF.

Well, my new philosophy will not encourage me to invest in companies which are NOT paying dividends, even though their market price is supposedly lower than their intrinsic value. Then again, when I assess a company, I take the dividend yield into account to see if it is a worthwhile investment, so it's almost impossible to divorce the two (intrinsic value with dividends).

[Blackjack]

My view's that all payments in anticipation of future appreciation are considered gambles. That naturally includes all forms of investment.

It is hard to qualify a value investment, assuming it is at all possible in the first place. How can one be sure any investment is considered a value proposition? An internalised checklist simply helps us to be convinced we are more right than wrong, it doesn't ensure we are entirely right.

In the same way, by terming "value" to any investment, are we not betting on the company continuing to do the rights things (or seemingly doing so), for some intrinsic value to be "recognised" at some near foreseeable future, that we are ahead of the curve by being able to identify value where others fail, that a fund manager is capable of outperforming his/her peers, etc etc?

For this same reason I have always stayed out of non-dividend paying companies as well, for it ensures that even if I may end up being more wrong than right, I am still able to enjoy some peace of mind knowing cash is indeed being generated (Or again, seems to be generated) and returned to me, with my original cost of investment being written down slowly. If I do invest in them though, I tend to keep my stakes really small.

[yyt]

Thanks all for sharing! Really appreciate all the contributions.
In retrospect, it was kinda naive to try and split div and returns into 2 entities with a fine a line, when they are in fact joined at the hip.
Thanks for everyone for pointing this out.

Thanks Kazukirai and freedom-san for bring up that sse ETF is more of a ETN than ETF. It's a very enlightening point which I frankly didn't know.

egghead - my bad, I did an over-generalised statement. I think even the Subject is too generalised haha.

Kazukirai, MW and Blackjack, thanks for sharing a little of your philosophy in investing and providing the reasons behind them.

I must say though, this forum is full of constructive feedback. Thumbs up for the mods and forummers.

[kazukirai]

Thanks all for sharing! Really appreciate all the contributions.

No problem YYT-san, I may not be entirely right anyway.

In fact, it is through your questions that prompted me to re-think and crystalise my answer. More than that, I got to read through and understand the views of other forummers as well. So in fact, thank you for questions.

[SLC81]

One of the points that he said was that Value Investing is like a gamble, a speculation that a stock will revert back to it's intrinsic value. Nobody knows when, one can only buy a value stock and hope in some day it'll be recognized by the market.
Thinking through, this seems very logical.

If you put it in that way, almost everything in life that requires a decision with uncertain outcomes is a gamble.

The key here is what is the "odds" of winning.

Net asset can be greatly depreciated/written off , Business condition can change for worst, Management move on and so on... Investing decision requires to make a "calculated risk" where we can estimate the risk and outcome thus give us much higher odds of winning , Value Investing has been proven a winning and conservative method through time.

Other form of gamble, for instance, playing Blackjack in Casino (one of the best odds game available in Casino) with house edge of 0.5% to 2%) you will lose money in the long run.

[Big Toe]

Big toe here and here's my 2 cents worth.

SLC81 is right by highlighting the word "odds" and odds is the key to differentiate what is a gamble and a good bet(value investing).

If you go to a casino, the odds are stacked against you.
The house will always win in the long run. Odds are not favorable.

If you flip a coin, the odds are 50:50 Odds are even.

If you invest prudently, history(in most of the major stock markets) suggest that there is a very high chance that you will win. Odds are favorable.


So let's go back to value investing and how do we improve our odds.
Value investing means to buy something at a discount to its intrinsic value.
The bigger the difference in current value and intrinsic value, the better the odds are.
So how do we calculate intrinsic value?

And so here lies the crux of the matter. Determining the future earnings power of your investment.
It maybe a business, a piece of property or shares of a listed company.

We need to study the details in each case and draw out the merits and pitfalls.

If it's a small retail business you are acquiring...you have to ask
For the business it is in, is it a growing market?
What are the barriers to prevent others from entering?
What are the costs?
Will the profit be able to keep up with the costs increases?
... ...

If it's property
What's the net yield?
How will increases in interest rate affect the return?
What will the supply and demand situation be like in the years to come?
... ...

Many questions to be answered and a lot of work to be done before a person can improve the odds.

[koh_52]

Welcome Big Toe san,

Great, another ex-wallstraits season forummer is back.
Hope to see more like, teobaypiao, weihan, funchua, danielxx, hybridvestor, ah pong, angmathew, LT Bull...of cos last but not least larry livingston & lark.......these folks are the experience contributors.

[Bored in Melbourne]

I am late to the party here, however my thoughts on Value Investment in terms of the risk is that the most valueable trait we need as an effective value investor is patience. Buffett once said the stockmarket is a very efficient means through which to transfer wealth from the impatient to the patient.
So just as we need to be patient enough for the market to overvalue our shares so that we can either temporarily or permanently exit with our profits (after all if Mr Market overvalues the shares and the likelihood of a move down the price then comes (as price will eventually follow value) we are safer in the bank, why risk capital if their is not adequate reason to predict a rise?) We also need to be patient to time the right entry with a satisfactory Margin Of Safety. In this sense we do want to time the market or ride a trend, as you may have digested the data better than most of the market but you are still in the market.

So value investing is a risk, but not truly a gamble, as time has shown the outcome if you invest with a Margin of Safety below the current and future IV, it is not really a random outcome at all.

To the 2nd issue regarding dividends or not? I am happy to buy a company that never pays dividends (as in this case is what happens with Berkshire Hathaway), as long as the business is generating as increased ROE with the profits. If the ROE is poor I am unlikely to invest at all, but I would also prefer to take my dividend if the business was going to make poor use of the retained capital.

[Big Toe]

Nice to be here Koh_52.

For dividends, I would want the company I am vested in to pay me dividends.
It is the surest signal that a company can send to its investors that it is generating free cash flow
and is willing to return it to the shareholders. This is especially so in this part of the world,
where shareholders do not get much say and the board of directors are asleep most of the time.

Berkshire hathaway is an exception rather than the norm.

First, it is headed by buffett, probably the best in the world in terms of capital allocation/re-investment.
Second, rules for disclosures in the US are much better than this part of the world.
(but that doesnt mean that there is no funny business going on, just that we know more of what is going on)
Third, when given excess capital, we have seen many companies trying to pursue investments such as mergers
that are meaningless and often do not bring any value to the existing business or for the shareholders.

[koh_52]

I am late to the party here, however my thoughts on Value Investment in terms of the risk is that the most valueable trait we need as an effective value investor is patience. Buffett once said the stockmarket is a very efficient means through which to transfer wealth from the impatient to the patient.
So just as we need to be patient enough for the market to overvalue our shares so that we can either temporarily or permanently exit with our profits (after all if Mr Market overvalues the shares and the likelihood of a move down the price then comes (as price will eventually follow value) we are safer in the bank, why risk capital if their is not adequate reason to predict a rise?) We also need to be patient to time the right entry with a satisfactory Margin Of Safety. In this sense we do want to time the market or ride a trend, as you may have digested the data better than most of the market but you are still in the market.

So value investing is a risk, but not truly a gamble, as time has shown the outcome if you invest with a Margin of Safety below the current and future IV, it is not really a random outcome at all.

Well said Melbourne san,
Patient is gold, a person who know how to control his emotion will be the winner at the end of the day.

As for your 2nd part, i have differ view...for me i will only buy company that give dividend.

Last year property market has a good year it surged up 17.5% whereas stock only up aro 10%, But this year i think equities will have a good run.
If you got spare cash can consider to put some in this market...buy SGX...monopoly (no competition) its pricing is co-related with volume...once vol hit 2 billion market hot liao....my 2 cts view