Value Investing, a Trading Strategy?

[Wildreamz]

@chialc88

Nice summary, covers lot's of points mentioned in this thread. Note that Value Investing being a "trading" strategy, was also brought up as well.

I'll put the original link here in case anyone wants to read more on the topic:
https://thetaoofwealth.wordpress.com/201...investing/

It's a good read.

Interesting point raised too:

WHY ARE GROWTH STOCKS BETTER THAN VALUE STOCKS

With value stocks, there is no growth in the company. The dividends you get, if they are reinvested in the same company will give a lesser yield if the price goes up and the long-term return will go down. So you have to keep looking out for new opportunities.

With a growth stock, there is no reinvestment risk. And the chance of dividend growth is also higher, which increases your return. And you do not need to trade often. You will profit because the intrinsic value of the company will continue to grow with time. And if you can find a number of these good companies, then you just need to buy and hold them for ever.

So, buying growth stocks is better because:

You need to make fewer decisions and fewer trades.
Time is your friend. You just need to stick with it for the long run.
Sometimes, a single big idea may make your day. This is possible only with growth stocks and not with value stocks.
You have a better chance of earning double-digit annual returns.

[chialc88]

link

[chialc88]

Yes, exactly the reason cited in your post.

I realised that recently and took a drastic decision to trim 15 value stocks,

(except BWL which is disposed due to direct selling biz in China)

and switch to 5 growth stocks.

The funny things about these growth stocks,
    *funny because I had yet internalised*

The funny things about these growth stocks 
is they are all of different shape and size.

Erh, what I meant is different sector, 
different industry,
different growth theory/potential,
different management style,
different dividend strategy.

So, different that I could not even believed myself.

Why don't I just buy one of them?

I attempt to answer my questions and 
it's not because of diversification.

it's because they are like my five fingers.

I looked at them and I really love them a lot.

The most versatile one which is MM.
This one, I can tell you...

It's love at first sight.

credits: Contrarian value of investnotes

(Sorry, I could not find the link in investnotes and can not quote the link.)

[Wildreamz]

I would like to reopen the discussion on "Classical" Value Investing (find stocks with low P/B and low P/E; buy when "cheap", sell when "fully valued") vs long-term investment in high quality businesses (high growth, high ROIC, strong moat, fast pace of innovation etc.); with the benefit of 5 years of hindsight. As well as for the benefit of newer buddies on this forum.

Have views changed?

[dreamybear]

I would like to reopen the discussion on "Classical" Value Investing (find stocks with low P/B and low P/E; buy when "cheap", sell when "fully valued") vs long-term investment in high quality businesses (high growth, high ROIC, strong moat, fast pace of innovation etc.); with the benefit of 5 years of hindsight. As well as for the benefit of newer buddies on this forum.

Have views changed?

Why not combine elements from both approaches ?

My most current evolved approach is to preferably buy companies with a good track record of financial metrics(e.g. stable earnings, gd ROIC) at fair valuations(preferably as low as possible) with a reasonable potential to at least 2x revenue and a corresponding x times increase in net profit/cash flow, based on my understanding of the business.

[Wildreamz]

Why not combine elements from both approaches ?

My most current evolved approach is to preferably buy companies with a good track record of financial metrics(e.g. stable earnings, gd ROIC) at fair valuations(preferably as low as possible) with a reasonable potential to at least 2x revenue and a corresponding x times increase in net profit/cash flow, based on my understanding of the business.

I think the main difference between the 2 approaches, is when you sell.

The first approach seeks to achieve outperformance (alpha) by capitalizing on the "reversion to the mean" which may or may not come in due time, to provide sufficient alpha, to justify the holding period (i.e., opportunity cost).

The second approach seeks to be a long term business owner, and such investor may not be too eager to sell immediately when the company becomes slightly overvalued (e.g. Munger holding Costco since the 90s, Buffett holding BYD since the late 2000s). Alpha comes from above average business performance (e.g. growth and profitability), and the ability to reinvest capital to the business at superior rate of returns.

The commonly cited Buffett quotes of "investing for the long term", "buy and hold" etc., was probably intended for the second approach. As you would want to have high turnover for the first approach to maximize profitability (hence, it's a "trading strategy").

For your personal approach, how do you determine when to sell?

[dzwm87]

There are different styles and not necessarily one wins the other. I think investors generally underestimate reinvestment risks. It's not that simple to find home runs after home runs and at the right timing. In addition, biases are amplified. When investments work out well, there is lax and they are more acceptable to the next idea. When the opposite happens, there is excess paralysis and they fail to act when they should. There is a lot less stress when you find a business that compounds. The problem for this is that investors tend to get in at an expensive price as they overweigh qualitative traits over getting it at the right price.

[weijian]

For some of us who got addicted by this game of investing "early", we are going to be investing for a few decades (only if we are lucky lah). So over this few decades timeframe, I reckon there is a lot of learning and hence evolution.

Both approaches work, because they do not work all the time. Ed Thorp, of beat the dealer fame is in his 90s. While he invested in different assets and styles over the decades, one of his consistent principle was to look for mispricing. Mispricing appears because something was neglected. Mispricing disappears because competition arrived. Ed Thorp was always looking and evolving, and I use him because he is a less celebrated great investor but in principle, very similar to Buffet's practice evolution.

So trying to compare "the 2 approaches" between 2017 and 2022, might be missing the main point. But I do see the value of comparing them - Because it allows us to critically think through the issues ourselves rather parroting/mimic-ing what is been taught. We filter through them and adopt what fits based on our own temperament and how the Market is.

[dreamybear]

Excellent pts raised by both Wildreamz & dzwm87. Hope more buddies can join in the discussion.

@Wildreamz : Now that I think abt it, I suppose what I am doing can also be considered a "trading" strategy albeit a longer term. Ideally(if I am wealthy), for a good business, I would prefer to take a controlling stake in the business and thus gelling with what WB says about holding it forever. In reality, I wld think the furthest a regular retail investor can achieve is Top 20 shareholders, and without control/influence over the business, there cld be a variety of reasons to sell, e.g. making a mistake in the original thesis, chg in company plans, etc. But assuming everything is fine, I wld sell when in my view, the business growth has peaked and there is a better investment. So there is a definite time to sell.

@dzwm87 : I totally agree - it's definitely not simple. Imho, if one benchmarks his/her returns against the US index, trying to be successful in stock picking/investing as a retail investor is akin to winning the loser's game. Even if there are a few multi-baggers here and there, sometimes it also depends on luck, and not to mention losses in other stocks, the opportunity costs, etc. I seriously think the way to go is to buy the whole business as there are just too many unknown, uncontrollable variables (and not to mention the pace of change/disruption in our society) if one is just a regular shareholder.

[¯|_(ツ)_/¯]

<Just what I did>

Valuebuddies are fond of buying undervalue stocks aka buying stock with a MOS.  Of course, different valuebuddies would be using different yardstick and matrices as their own MOS.  Which one is better? I doubt there is (or would be) a conclusion, simply because what works in the past might not work now and what work now might not be working in the future.  However, I believed (and also believed that I had been doing diligently) is only fire away when there are sufficient MOS.

Valuebuddies are also fond of buying-and-holding forever.  This is an exceptionally great strategy because that's exactly how a valuebuddies bagged a multi-bagger.  I mean, put it simply, if a stock goes up 2 times and you sold it (because for example, it's no longer undervalue based on your calculations), then how on earth are you able to catch a 10 baggers?

Going by my standard, catching (a few) 10 baggers is rather trivial in a lifetime of any of our valuebuddies.  

It's almost guaranteed.  

The question is: What is in it that allow you to keep on holding to the stocks despite it (share price) grow double, triple, 4x, 5x, 6x, 7x?

The answers varies and by selling (or trading) when it's intrinsic value is reached means that you had just missed reaping the benefits of 10 baggers. 

This is no laughing matters. Imagine you had spend so much time, analysing and buying such a fantastic company which you sold out over and above the calculated intrinsic value turns out to be a 10 baggers.

Don't get me wrong, selling when a stock reaching or above it's value is definitely a good strategy because you brought at a lower price (with MOS) and now, the MOS is gone and buy selling, you had met your strategic objective with a handsome profit.

It's a great achievement...really!

Enjoy:

Gratitude!