What is really challenging about value investing?

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#31
(08-02-2023, 09:01 PM)Wildreamz Wrote:
(08-02-2023, 06:14 PM)weijian Wrote: Hi Wildreamz,
There are no specific strategies or methods (sorry for disappointing).

So let me clarify. Again, it is about principles and I always like to quote an old (but inactive) VB KopiKat's signature:

Luck & Fortune Favours those who are Prepared & Decisive when Opportunity Knocks

Fortune favors the prepared. Always be on the lookout. Sounds like a sound strategy.

Most value investors are clever and can spot hidden value. It may be true that not all hidden value will be realized by the Market before some disruptive new ideas/ methods erode the hidden value. 
That is why some value investors consider the opportunity cost of waiting for the hidden value to be realized and selectively choose only those value stocks that are likely to be discovered by the Market in the near term.
I will not use the term Luck but rather Market Savvy. To be Market Savvy, one needs to understand cycles and disruptive new ideas/ methods well. 
We see this all the time as people change career from the hard disk industry to GPU (gaming and computation) industry. Even Japan Food boss realizes the short lifespan of his most popular brands and regularly refresh his brand portfolio with new food offerings.
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#32
I think what Karlmarx mentioned has come to pass. Nothing new under the sun when one looks at a 10-year cycle
(13-08-2022, 03:05 PM)karlmarx Wrote: After re-reading the thread and re-considering the question, and with the benefit of experience, I am now convinced that Specuvestor's response is the most correct answer.

The amazing gains by tech companies, Crypto, and NFT may have led some to abandon traditional asset classes and old economy stocks for the new and fancy. It is hard to not be distracted for a prolonged period of time! Probably some of the new and fancy assets will be really profitable in the long run, but probably not all old economy stocks are in terminal decline as well.

Thanks for the good sharing. What is unwritten is the huge opportunity cost (or we can frame it as tuition fee) and limited 10-years cycle in our life

Value needs catalysts. Catching absolute bottoms are for ego and cocktail talks Smile

(14-02-2023, 12:41 PM)Terry Wrote:
(08-02-2023, 01:05 PM)Big Toe Wrote: I held one stock. Which is a long term core holding. (not sharing, not local)
Fundamentally good business, very honest competent management.
Bought way undervalued 12-13 years ago and I know one day it will narrow the gap given time.
Was down perhaps 60-70% at its lowest from my purchase price. 12 years later, it is still underwater but my losses narrowed significantly. Its subsidiary is also publicly traded and is trading more than twice the value of the parent. And the parent/holding co. is profitable and have good assets but viewed as negative equity.
Think it will need another 5-10 years to see some light, may take longer or shorter, I wouldnt know.

To be fair this is one of the more extreme example and it takes a long time for value to be unlocked due to the nature of the business. Still in the red and still buying on dips at the moment. Need very strong conviction. One of my 3 core holdings. Most investment or businesses take time, and in the process of getting there, there will be a lot of pain.

Side track a bit, speaking of investment. On the residential property side of things, defied common business logic as it had been great for the past decade during the low interest rate era and boosted by the covid supply delays and pent up demand. Every property investor is now wealthy and every agent is now a wealth creation expert. Luck or knowledge? Did the property investors analyse as much as I did when making a investment decision, I would think 99.99% did not. And 99.99% did better than me, at least compared to one of my stock investment. I work a lot harder to earn a lot lesser.

Extreme example but very normal case of long period feedback loop.

What stock is it?

Lesson taught me to not average down unplanned.

I rather write it off and buy another idea which has another 50/50 chance of "average up the profit" in this unprofitable idea.
Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give. –William A. Ward

Think Asset-Business-Structure (ABS)
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#33
The backdrop of the interview seems to be about the 7th update of the famed book. Around 03:40 onwards of the video, Klarman clarifies the definition of value according to Graham/Dodd - earnings power & growth possibilities, not cheapest by the numbers which is the academic definition.

If value investing is all about understanding the economics of the business, I suppose that wld be one of the most challenging part.

This then probably leads to the question - has the net-net strategy been "misquoted" ?

----------------------

Legendary investor Seth Klarman on investing challenges: We've been in an 'everything bubble'
https://www.youtube.com/watch?v=KPS1rHNawLE

Security Analysis, Seventh Edition: Principles and Techniques (Published: May 31, 2023)
https://www.mheducation.com.sg/security-...32405-asia
"...An extensively updated Preface by Seth Klarman
Contributions by Howard Marks, James Grant, Roger Lowenstein, and 10 other contributors including a number of the most important emerging voices in value investing..."
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#34
All investors buy stocks expecting that future prices will be higher. To them the current price is “undervalued”. Nobody buy stocks thinking that it is currently overvalued.

Value investors is a special group whose idea of value is the value of the underlying business. They buy if the price is significantly lower than the business value as determined by the business fundamentals.

This what differentiate value investors from other types of investing such as those that think the current price is cheap relative to historical prices. There are also those that think current prices are cheap relative to what they think the market will think in the future.

Value investors idea of cheapness is relative the the business value.

The challenge then is how to estimate the business value. Some focus on the Assets of the company as the store of value. Some focus on the earnings power ignoring growth. Others focus on the growth prospects. The common thread is that they all believe that there is a business value and that it is possible to estimate it.

Of course all valuation is based on certain assumptions about the future. As such they look for some margin of safety when determining the value as a risk mitigation process.

The other thing that all value investor believe is that the market does not always reflect the business value. So if the market is very fearful, prices may drop below the business value and vice versa.

So if you are a value investor, you buy when the stock price provides a sufficient margin of safety. Nobody knows where the bottom is going to be. So the entry is more about the margin of safety than some bottom price.

So what is the benefits of value investing? It is a conservative approach. It is based on what a stock is - a real business. There is an economic logic to why prices can go higher than your purchased price

So what are the challenges?
a) you have to understand businesses and learn how to value them
b) you do not follow the crowd so that when prices go up, you don't buy. This is a tough one from a behavioral perspective
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#35
(01-07-2023, 09:57 AM)i4value Wrote: So what are the challenges?
a) you have to understand businesses and learn how to value them
b) you do not follow the crowd so that when prices go up, you don't buy. This is a tough one from a behavioral perspective

After doing this thing for some time, I come to realize that the greatest challenge for "value investing" is actually differentiating between undervalued gems and overvalued value traps.

With regards to "value traps", what is your opinion on them?
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#36
I see bargains and value traps as 2 sides of the value investing coin. There are 2 key concepts for a value trap:
- It is about being cheap relative to some measure.
- It is about being wrong about the “cheapness”

So to avoid value traps, you need a good analysis and valuation approach so that you are not wrong about the cheapness. In other words, when you say that a stock is cheap it is because your analysis showed that it is fundamentally sound (over the long term) and that it the intrinsic value is very much higher than the market price ie you are not wrong about the "cheapness".

I have an old blog post that talks about this value trap question. Go to https://www.i4value.asia/2020/06/an-effe....html#more
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#37
Superstar Stocks Are Getting Rarer in the Winner-Take-All Market
https://www.bloomberg.com/news/articles/...ing-richer
"...His new study raises the possibility the situation is becoming more entrenched: While five stocks were responsible for 10% of the wealth expansion through 2016, the number shrank to four in 2019 and is just three today...."

Shareholder Wealth Enhancement, 1926 to 2022
https://papers.ssrn.com/sol3/papers.cfm?...id=4448099
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#38
(09-07-2023, 04:02 PM)dreamybear Wrote: Superstar Stocks Are Getting Rarer in the Winner-Take-All Market
https://www.bloomberg.com/news/articles/...ing-richer
"...His new study raises the possibility the situation is becoming more entrenched: While five stocks were responsible for 10% of the wealth expansion through 2016, the number shrank to four in 2019 and is just three today...."

Shareholder Wealth Enhancement, 1926 to 2022
https://papers.ssrn.com/sol3/papers.cfm?...id=4448099

I find this a little misleading. SPY is a market cap weighted index. Of course the largest market cap companies is going to represent most of the returns, especially because (1) they also returned decently, and (2) many of them rise to the trop because they grew so much in the last few years.

There are still many companies with returns comparable or better than some of the largest market companies. They just don't move the SPY (or even featured in the SPY, Tesla was only added in Dec 2020) because they are not large enough.
“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
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#39
I see value investing as an investment approach where you buy "cheap" stocks by comparing market with your estimate of intrinsic value. In the traditional Graham approach, the Net Net is his measure of intrinsic value. Buffett used this in his early days but has since found a different "formula" which he described as the discounted owners earnings over the life of the business. But Buffett never defined his discount rate and his margin of safety so we mere mortals are left guessing what he meant by "great companies at fair prices".

At the end of the day, it is about having an approach that you can sleep peacefully at night yet generates returns greater than the index over decades of investing. If you cannot beat the index, why stock-pick? If you cannot sleep peacefully with the investments, why torture yourself?
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