Is pure Value Investing a gamble?

[Contrarian]

> Last year property market has a good year it surged up 17.5% whereas stock only up aro 10%

If you picked the right stocks, the returns are > 50%. But property overall return shd be higher, because it is using leverage. A 20% increase in condo value can result > 150% gain using 80% bank loan.

[redcorolla95]

Finance, investing & gambling have a long & intertwined history.

Probability theory is said to have originated at the roulette table, and today use of odds is done by: the IRs in Singapore, Rubin when doing his merger arbritrage, Thorpe who first publicized how to beat blackjack almost came up with the Black-Scholes Theory and started one of the first hedge funds, Jain at Berkshire who figures out how to price insurance for earthquakes and takes odds for soccer matches.

So the original idea of value investing is find situations where the odds of success are high, like Graham's net-nets - if a firm is valued below working capital, a buyer should do well. And the more recent studies that show cheap PS PB outperforming the market over a time horizon. Then of course people now look at yields, NAV, ROE etc etc - take your pick.


Munger puts it very well here:
Any damn fool can see that a horse carrying a light weight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it's not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it's very hard to beat the system.

And then the track is taking 17% off the top. So not only do you have to outwit all the other betters, but you've got to outwit them by such a big margin that on average, you can afford to take 17% of your gross bets off the top and give it to the house before the rest of your money can be put to work.
...

...
The stock market is the same way—except that the house handle is so much lower. If you take transaction costs—the spread between the bid and the ask plus the commissions—and if you don't trade too actively, you're talking about fairly low transaction costs. So that with enough fanaticism and enough discipline, some of the shrewd people are going to get way better results than average in the nature of things.
http://ycombinator.com/munger.html

[Musicwhiz]

Thanks for the Munger quote.

But even for some wh undertake the hard work, it may not yield desirable results. I, for one, am not finding it easy to obtain even decent results. It would seem most people now (who post their performance on their own blogs) are doing way better than me.

But I will perservere and continue to grow and learn. Hopefully, I can become better over time.

[kazukirai]

Thanks for the Munger quote.

I'd thank Red corolla-san for the whole article! It's a good read and if anybody can get their hands on Poor Charlie's Almanack, it is a fantastic book to own. Highlight will be his speech on the Psychology of Human Misjudgment.

[yyt]

Thanks Bored in Melbourne for reminding that Berkshire is an example of non-div paying stocks that actually outperform the market. Guess non-value paying stocks still exist. However, I tend to agree with big toe on Berkshire is really special and truly an exception. I doubt in sg there's any company that is confident enough to reinvest all earnings on behalf of share holders.

Interesting point by koh_52, on how SGX price correlates with vol. It reminds me of what a poly lecturer said...
In a good market, SGX earns from pple buying into the market... In a bad market, SGX still earns from pple selling out of the market.
What's a better business model?
It's of course a simplified view of SGX, but it does captures the essence of SGX services which is playing the house.

Great article redcorolla. Thank you!

[edragon]

I would think that there do exist an investment which is NOT a gamble IMO and that is to invest in Singapore Government Bonds. Isn't it a sure win but many would say that the returns may not beat inflation even though we can use the compounding factor through a long term strategy. Please comment.

[newborn1000]

Inflation is also compounded..........

[Musicwhiz]

I would think that there do exist an investment which is NOT a gamble IMO and that is to invest in Singapore Government Bonds. Isn't it a sure win but many would say that the returns may not beat inflation even though we can use the compounding factor through a long term strategy. Please comment.

Inflation is at 3.8% and Mr. Shanmugaratnam has mentioned it will rise more in 1Q 2011. Since Govt Bonds pay <3% interest, I'd say it will probably lag inflation pretty badly....

Still makes better sense to invest in solid companies with dividend yields ranging from 4-5%.

[edragon]

Inflation is not a one way traffic. It can go down as proven during the Oct 2008 period. Remember COE was $1K only. Used apartments were going at $400/ft2 and some of my buddies made a windfall of $200K from an investment of $600+ in a period of 1 year. Many other examples of deflation. Even in some European countries, deflation is going on not to mention the U.S., I think.

[Musicwhiz]

Inflation is not a one way traffic. It can go down as proven during the Oct 2008 period. Remember COE was $1K only. Used apartments were going at $400/ft2 and some of my buddies made a windfall of $200K from an investment of $600+ in a period of 1 year. Many other examples of deflation. Even in some European countries, deflation is going on not to mention the U.S., I think.

You've got a point, but most economic texts will state that (mild) inflation over the long-run is beneficial to a country as compared to deflation. Japan's deflationary spiral over the last decade and more resulted in the country suffering from the worst property slump in the world, and consumption is still anaemic.

As for Singapore, deflation did not really occur during the Great Recession - housing and food prices were propped by the large influx of immigrants and PR into Singapore. So what you were describing (of your friends making a tidy profit) was a result of this inflow, I feel. While property did dip, it was far too little considering the recession was supposed to be sharp, and the rebound was a little too fast for comfort.

Just my views.