Value Investing, a Trading Strategy?

[Wildreamz]

Classical Value Investing* seems more akin to a trading strategy as opposed to a long-term investing strategy.

Let me back up, "buying companies below intrinsic value" and "my favorite holding period is forever" were both popularized by Warren Buffett, who is generally known as a Value Investor. Hence, the buy-and-hold strategy has long been associated with value investing.

However, if one focus solely on value of stock price, relative to historical earnings, or worse, book value, an investor may buy into companies with mediocre business attributes and overlook pricier, but outstanding businesses in secular growth. When invested in companies over long periods of time, the only thing that really matters to stock price performance, as eloquently put by Charlie Munger: 

"In the long term, it's hard for a stock to earn a much better return than the business which underlies it earns.  If the business earns six percent on capital over forty years and you hold it for that forty years, you're not going to make much different than a six percent return-even if you originally buy it at a huge discount.  Conversely, if a business earns eighteen percent on capital over twenty or thirty years, even if you pay an expensive price, you'll end up with one hell of a result."
-Charlie Munger, Poor Charlie's Almanack

This is not to say, buying mediocre companies trading at a discount to intrinsic value is always a bad strategy per se. Reversion to mean is entirely plausible, but the performance of such a strategy would be entirely dictated by the time taken for the stock price to "revert to the mean". If the stock price remains "undervalued" for extended periods of time, you are screwed. Hence, traditional value investing in companies growing slower than the market as a whole, is generally not a good long term strategy, but best used as a trading strategy. This is especially true for small retail investors who cannot influence management, or buy out the company, then unlock asset value by liquidating assets and return cash to shareholders.

Any thoughts?

*Disclaimer: Classical/traditional Value Investing here refers to strategies that focus on buying companies with low price-to-tangible-book or price-to-earnings ratio, with less regards to long term growth prospects of the company.

[Jacmar]

You have raised an interesting point and let me give my 2 cents worth.

Over the yrs I came to the same point as you have and achieved my "enlightenment" in value investing. Value investing is not only about buying at a discount to intrinsic value base on trailing/historical FA. It's also about the outlook. you could be buying at high PEs and still consider it cheap as the growth and earnings kicks in. This is why nowadays I have veered towards GARP strategy rather then pure discount to intrinsic value FA..traditional value investing. In fact 2 of my core investment has a PE of 30 and I still consider it inexpensive. I have pay my fair share of value traps to reinforce this lesson.

another example of learning that pure traditional value investing is not the only key is if you look at the 3 big sgp banks and compare it against public bank(PBB) in malaysia. PBB is selling at much higher price than sgp big 3 in terms of P/B by a wide margin. Any pure value investor would have bought the big 3 instead of PBB. If you have done that over the last couple of decades, your performance would have been dismal in comparison to PBB. drilling down the performance metrics, PBB outshines the big 3 in areas of NIM , ROE , yes growth etc. hence it is rewarded with the outperformance. Even today PBB is not considered cheap but yet investors are willing to pay the higher price against the big 3 with the expectation that it is going to outperformed the big 3.

[chialc88]

I'm not sure what's your definition of value investing.


By any chance, are you referring to this one by Graham:

First, you need to gather a crop of 30 stocks based on your MOS criteria.

If any one of them go up by 50%, sold and rotate to another crop which meet your MOS.

For each stock that you own, if after 2 (max 3) years, still did not go up by 50%, sold them and rotate to another.

---

If this is the one, then you can decide whether it's trading strategy or not.

To me? so long as it can earn $$$, it's a good strategy.


Growth and value investing are joined at the hip - WB.

[Wildreamz]

Yes, thanks Jacmar (oh is that a play on Jack Ma?) for sharing.

I have tried to look at the best performing stocks in history and they all shared a common attribute in that they always looked overvalued in the beginning (Amazon, Tencent, Google, Walmart, Facebook, Apple) but grew into their valuations fairly quickly and then some.

[karlmarx]

The biggest contributor of returns to my portfolio are growth stocks. The rest of the stocks that may be considered cheap according to traditional valuation metric (p/e, p/b, etc), don't usually pan out so well; unless there is a recovery of earnings. What really drives stock price after all -- from my personal observation -- is still growing earnings. Privatisations and analyst coverage of cheap stocks are infrequent. But of course, not all growth stocks pan out as you would expect them to as well. So I will still avoid paying more than 10x earnings in any case, since I do not have the foresight of WB or CM to predict the future like them. If my growth prediction turns out wrong, I shall be dearly punished by the market. Best if it is a growth stock paired with cheap valuations!

[Wildreamz]

@chialc88 Yes, that is what I'm talking about. That is one way to apply "traditional value investing". That specific method seems more like a trading strategy to be honest, and I'm not sure it would be as effective today (especially for small retail investor) now that the market is much more efficient.

It is also better as a quant strategy as it needs large diversification (to diversify away uncertainty about time to revert to mean, and uncertainty with underlying business outlook) and high turnover in order for it to work. In my humble opinion.

[Wildreamz]

The biggest contributor of returns to my portfolio are growth stocks. The rest of the stocks that may be considered cheap according to traditional valuation metric (p/e, p/b, etc), don't usually pan out so well; unless there is a recovery of earnings. What really drives stock price after all -- from my personal observation -- is still growing earnings. Privatisations and analyst coverage of cheap stocks are infrequent. But of course, not all growth stocks pan out as you would expect them to as well. So I will still avoid paying more than 10x earnings in any case, since I do not have the foresight of WB or CM to predict the future like them. If my growth prediction turns out wrong, I shall be dearly punished by the market. Best if it is a growth stock paired with cheap valuations!

Yes. Regarding low P/B, there are many cheap stocks on SGX that would have instantly earn shareholders money if they liquidate their assets and return all the cash to shareholders (some small caps and S-Chips immediately comes to mind). But how often do we see that. Most of the time, small OPMIs that fallen for such value traps get our exit when there is an offer by an acquirer. And then sometimes we get low balled, and have to suck it up.

[chialc88]

value investing without S-Chip

First thing first, in order for all the back testing to make sense, remove all S-Chip from your investment universe.

Once done, you apply the back test and everything will make sense again.

Graham method is very simple but not easy to apply.

If you do it diligently, I'm very sure it will works.

Unfortunately, most of the time, being human, 
we are over taken by our emotions such as greed, fear, envy, ego, temperament that failed us.

Meanwhile, hope you have a fantastic weekend

[Jacmar]

Yes, thanks Jacmar (oh is that a play on Jack Ma?) for sharing.

I have tried to look at the best performing stocks in history and they all shared a common attribute in that they always looked overvalued in the beginning (Amazon, Tencent, Google, Walmart, Facebook, Apple) but grew into their valuations fairly quickly and then some.

No, my nic is not a play on jack ma. I have been using this nic since WS forum days which alibaba is still unheard of. For me, i will never buy alibaba at whatever price. In my eyes alibaba is just a giant s-chip. having said that I am watching tencent(just darn too high. pe 70. I would invest if it goes down to more like 30-35). I am impressed with the ceo and his down to earth personailty; yes biz strategy too. I invest in people who I feel comfortable with and respect.

[weijian]

Yes, thanks Jacmar (oh is that a play on Jack Ma?) for sharing.

I have tried to look at the best performing stocks in history and they all shared a common attribute in that they always looked overvalued in the beginning (Amazon, Tencent, Google, Walmart, Facebook, Apple) but grew into their valuations fairly quickly and then some.

No, my nic is not a play on jack ma. I have been using this nic since WS forum days which alibaba is still unheard of. For me, i will never buy alibaba at whatever price. In my eyes alibaba is just a giant s-chip. having said that I am watching tencent(just darn too high. pe 70. I would invest if it goes down to more like 30-35). I am impressed with the ceo and his down to earth personailty; yes biz strategy too. I invest in people who I feel comfortable with and respect.

I guess your reluctance to Alibaba comes from the days when Jack Ma kinda of "double crossed" his foreign partners (Yahoo/Softbank) in the transfer of Alipay.

A summary of the issue is found in Prof Mak's CG case studies volume 2 (pg67 onwards): http://governanceforstakeholders.com/wp-...2-0410.pdf

I guess so far, TENCENT doesn't have such issues? In addition, even John Huber of Saber Capital is investing in TENCENT with the incredible "the world's widest moat"

http://basehitinvesting.com/one-of-the-w...est-moats/