What is really challenging about value investing?

[ruzaini]

Investing in general comes with two challenges:

1. Uncertainty and unpredictability of the market
   
   
2. Human errors and misjudgments
   

You can try to minimize the second one by creating a systematic process, using technology, documenting your reasons to make an investment decision, but you can never eliminate the nature of the stock market. There is a big school of study called “behavourial economics” that looks into this exact same question.

There is also the challenge that is created due to the design of the stock market. By design, the stock market is full of people constantly making decisions. There are people with different incentives and motivations to participate in the market. There are also different incentive time-frames. The one stock that is a horrible choice for a short term trader, is a great opportunity for another. So, when something is unpredictable by design it is hard to stay disciplined and invest based on a specific discipline.

One of those disciplines is value investing. Value investors invest in the stock market based on the idea of finding high value stocks at a low price. They use this discipline to cope with the uncertain / unpredictable nature of the market. But then the challenge is how your would identify the value of a stock, so that you can buy it for cheap, which is complex for some and uncertain. 

Value investors look for what is called “margin of safety”. That is a percentage they add to their calculation of a share price in order to give them some safety from potential uncertainty of the market. And this is not an easy process. Multiple ways to calculate the fair value and multiple assumptions needed to get there. A DCF for example, consist of assumptions of the company's weighted average cost of capital (WACC) and forecasting a terminal value. These inputs require a great deal of good judgement in not only the business but industry level knowledge and macro landscape. Hence, the DCF can very easily result in varying outputs among value investors and can provide a wide range of intrinsic value if assumptions are wrong. 

So, to wrap up, investing is hard because market is unpredictable and as an investor you are prone to make mistakes. Even you eliminate your mistakes, markets nature makes it difficult to be an investors. And value investors have an additional difficulty. That is due to the difficulties that come with estimating the value of a company.

Let me know what are some challenges you face in value investing... I look forward to hear from you.


Happy investing! [Free Download] Guide to investing in deep value stocks for 2019

[karlmarx]

The greatest challenge of value investing is that there are (at least presently) no more obvious value.

The Singapore market has become very efficient in pricing. And it seems to be increasingly efficient as we move further from the last major market panic. Emerging Asian markets are also very efficient as most of the players are foreign investment managers with well-funded research teams and capital.

Apart from avoiding securities with an unfavourable price/value proposition -- and there are quite a handful of them on SGX, most of them discussed on VB -- there are very few (or perhaps none) obvious investment candidates, if one were to adhere to the price and quality criteria outlined by Graham/WB/etc. In other words, if we follow the principles of value investing, we can avoid major blows to our wealth by not buying the expensive but lousy stocks. But to make money is not so easy; cheap stocks are mostly no good, good stocks are mostly not cheap.

But some cheap stocks are actually good, and some good stocks are actually still cheap. Yet, how do we know whether a good stock can continue its present earnings growth into the future? How do we know whether a cheap stock will have its earnings turn around, or will unlock value, in the future? The answer to whether a cheap stock is good or not -- or whether a good stock whose high price can still be considered cheap -- is not found in any of the framework provided by Graham/WB/etc. And this is where the money (at least presently) is; in predicting the future!

This is a task many times more difficult than detecting financial malfeasance and avoiding disaster-to-be companies. Because of the difficulty of making accurate predictions, this means that the probability of a poor portfolio performance is higher if the portfolio is more concentrated. But diversifying also means no over-performance as the portfolio increasingly mirrors the performance of the market index.

The WB solution to this conundrum is to only place bets on predictions that you believe have a higher probability of being correct. This is the commonly-used adage of 'knowing your circle of competence,' and 'swinging only at the perfect pitch.' Both will require vast and deep knowledge of a variety of topics/disciplines and companies, and suitable temperament. All of which take a long time to acquire.

Given the challenging nature and tedious requirements, should 'everyone learn to invest?' Would the average individual be better-off if they focused their energies on their present careers?

[thinknotleft]

For me, the challenging thing about value investing or investing is 'myself':

1) Try to be less optimistic when the market is optimistic. That is, do not be overly optimistic and buy lousy companies or stocks that look reasonably valued but may turn out to be expensive later when the market turns pessimistic

2) Try to buy stocks gradually when you are feeling fearful during market downturns. When market turns pessimistic, I turn fearful to buy. But buying stocks during downturns is the way to profit.

3) Try to be more comfortable in taking lossess. Often, if I hesitate to sell the stock that is showing a small loss, the loss may turn out bigger sometime later.

[Kaimin]

The greatest challenge of value investing is that there are (at least presently) no more obvious value.

The Singapore market has become very efficient in pricing. And it seems to be increasingly efficient as we move further from the last major market panic. Emerging Asian markets are also very efficient as most of the players are foreign investment managers with well-funded research teams and capital.

I really disagree that the Singapore stock market is very efficient. Remember AEM Holdings? It was ferociously covered by both analysts and amateurs two years ago. Some people were hailing it as the next big thing - in March 2018, CIMB set it a target price of $8.19! It trades at $0.92 now, and the same analyst cut the target price to $0.69 four months later. No one on VB has talked about it in months. Why? Because the incredible boost in earnings was for a very specific product it made for Intel, a chip testing module called a HDMT. Everyone was so happy its earnings exploded that no one - even the banks and their funds - asked how many HDMT could actually be sold. It turns out, not a lot. Because it was funded by Intel and they had an agreement that AEM would manufacture and sell only to them. If you just Googled it, you'd find a page saying that HDMT was available only to Intel Foundry. And Intel's appetite for it dried up after 2 years. You don't have to be a technical expert on the subject to know that testing equipment is not a consumable, and such a sudden ramp up in sales was going to be followed by a sharp drop once Intel's needs had been met.

Another one is Japfa. In 2017 Feb, its price crashed from a peak of $1.02 in December 2016 to 53c in May 2017. Why? Because its profit collapsed 90% on an oversupply of chickens and day old chicks, and to a smaller extent pork, lowering the ASPs to below and around breakeven. The warning signs were there - the Indo government had a page of average broiler prices, it was in some news, and even a cursory search would reveal that the chicken industry is highly cyclical and the 2016 prices were exceptional. In 2016 year end it was trading at around 20P/E, for a debt laden cyclical. The funny thing is the same thing happened just a year before in 2015 - ASPs crashed and so did Japfa's profits. But if you'd realised this - unlike the supposedly efficient Singapore market - it would have made an exceptional buying opportunity because the Vietnamese pork and Indonesian chicken industry were emerging markets where the livestocks industries were trending towards consolidation, like in every developed market. If corporations with huge economies of scale and far better funding terms were losing money, the smaller players must be getting crushed. So not only would the ASPs recover, but this would speed up consolidation. Two years later, profits have surged, output has increased by approx 7% CGAR and its stock is trading at 81c. Not just that, but for an entire year prices remained at the 50c. The sharp drop wasn't just an overreaction, the market didn't see it until ASPs rose and was reflected in the first quarter report. To the institutions' credit, a few of them did see it. DBS and UOBKayHian published reports about it. But no one put their money where their mouth was. 

Then you get a lot of funny ones. Like BreadTalk, which has outlets in every other mall and trading at 22P/E. Its income has been on a downtrend since 2014, its best year, but the market is expecting it to grow like Facebook. Or Sunpower, trading at 32 P/E. Its an industrial with typical industrial returns of ~5% ROA, ostensibly its incredible earnings growth has been funded by capital raised from placements of large swaths of options and convertibles, which if converted could dilute as much as 40% of Sunpower's EPS. There are two possible reasons I can think of for these valuations. One is the Singapore market has an incredible foresight to see a coming and long lasting 20%, 30% growth in earnings in this companies. The second is that they're extrapolating past year earnings growth with a ruler and a pencil.

Its quite obvious that most of the institutions and their money flows are guided by target prices based on cookie cutter formulas analysts punch into Excel sheets in lockstep with the mainstream. Analyst reports are full of words like "SOTP valuation" or "foward P/E". Personally, I think that while Singapore is a unique place to invest in because of its small size and high trade to GDP, an intelligent investor can do quite well here.

And personally I think conservative investment is also not difficult here. You could put your money into stalwarts growing at 6-7% per annum including dividends like the banks, or REITs yielding 5% dividends and small DPU growth. These are well capitalised, well run corporations with a history of consistent profits and dividends (our Singaporean banks in particular did very well in the 2008 recession. They had little exposure to risky MBS derivatives and needed no bailout).

[karlmarx]

1) The point I was making is that there are no more obviously cheap and good stocks, and therefore, the market is efficient. This is of course, and oversimplified argument for market efficiency, but not what my post was about. If there are (more) 'obviously cheap and good stocks,' I believe VB will be alive with more discussion on them. If this is what you disagree with -- which means you believe that there are 'obviously cheap and good stocks' -- please share because I'm all ears for stock ideas. 


2) The point you made is that the stocks you cited -- AEM, Japfa, Breadtalk, Sunpower -- were, for reasons you have provided, priced higher than they should be, and therefore, inefficient. I do not disagree with how these stocks may be over-priced. In fact, I have on numerous occasions shared my analysis and opinion on how some stocks may be over-priced. 

But can you say that the market is inefficient because its opinion of a stock differs from yours? This is a difficult question, but thankfully it is also unnecessary for the investor to have an answer. I shall leave it to the finance academic/scholar to wrestle with it. 

But since this is brought up, my thoughts on this matter is that having your own reasons to believe that a particular stock may be over (or under) priced does not mean that the market is inefficient. Your reason may have been priced in, or not, we cannot know for sure. In fact, nobody can say with absolute certainty that their thesis is correct and the market is wrong. Time will eventually tell who is correct. But at that point in time, an overwhelming majority of the market participants believes its reasons to be correct, and therefore prices them at that particular level. 

Breadtalk had a growing number of stores and the market believed that this may translate into higher earnings; that Breadtalk could become a MacDonald's of China. It is not as though Breadtalk's high P/E is not without any merit. Or that Breadtalk was trading at price that is a few standard deviations away from its market/historical average. 

The fact that Japfa's share price did drop (rise) after reporting poor (good) earnings means that the market is taking new information into repricing Japfa. Your point about consolidation and increasing economies of scale in Vietnamese pork and Indonesian chicken industries are not invalid, but neither can you say with absolute certainty that it will result in Japfa having increased profits. It is an opinion on the future, based on your analysis of present circumstances. Some market participants may share your opinion, but obviously, not a lot of them do

If Japfa increases its profits and dividends but share price falls, ceteris paribus, then yes, the market is inefficient (and irrational).


3) I am more reticent towards the belief that there is an easy/conservative/not difficult approach to make 5% to 7% returns from investing in equity or debt securities. Investing based on a simplified thesis and without examining and appreciating the risks is what have gotten people into (catastrophic) trouble. And all for only above-inflation returns. There are so many of such value destruction cases in the local market just in the past few years. And many of them big names.

Indeed, REITs and banks have performed well, but you know what they say about hindsight. It is not beyond the realm of possibilities that an event which leads to a 30% reduction in real estate values could have occurred. And that could have wiped out investors, either from selling during the ensuing panic or from their REITs eventually going bust. I think it would be a big mistake for an investor to let their guard down at any time.

[VincentWong]

Generally Singapore market is less efficient than US market. There were few opportunities for investors to invest in mis-priced stock in pass few years (Best world, Delong for me). They are not often. The most difficult aspect of value investing is having a real knowledge in the industry that you invest in. In order to know a business it require a massive afford not to mention you are also require good knowledge in accounting and finance. You can't be good in investing just by reading "intelligent investor", instead you probably need to read thousands of books. There are never passive income in value investing; it couldn't be more active. value is a rare thing in equity and you really shouldn't diversify. You should lower your risk through expand your circle of competence. diversify is to protect you from your ignorance as said by Buffet and Munger. Most people listen to them but they rarely practice what they taught.

[corydorus]

I wouldn't say Singapore is less efficient. I think Singapore market is much safer to be manipulated. You just look at S-Chips. Many fraudulent folks get away with it. Syndicates would certainly work ferociously with any small SME management or interested parties to manipulate the market price. This manipulation can be through analysts, reports, magazine or even management. The local SME culture is also not so open about sharing profits with retailers and opening up to professional managers which can grow them to world class. They prefer to play in the pond than growing into the sea.

.

[holymage]

I would agree with Kaimin that markets around the world are generally inefficient, though I disagree regarding AEM and conservative investing in banks and REITs. As the infamous saying of Benjamin Graham goes: in the short-term the stock market is a voting machine, in the long-term it is a weighing machine.

If markets are efficient in pricing, there will not be huge swings in stock prices as all news/information will be anticipated and priced in. Does it make sense that the fundamentals of a company would deteriorate drastically over a few days/months while the stock price sinks. The disconnect between the stock price and the underlying company fundamentals is due to analytical and emotional difference between market participants, and this is not efficient. To say that a market is efficient is saying that it is reflective of all the company fundamentals all the time.

And while there are no or less obviously cheap and good stocks, this could mean that stocks are fairly valued or overvalued. In my opinion, markets are overvalued, especially in the US. Using CAPE ratio as an example, the current CAPE ratio for the US market is only exceeded by the 2000 peak. Does overvalued market indicate an efficient market?

[specuvestor]

If the question is "What is really challenging about value investing", then I think it is 1) patience and 2) conviction

1) You can have the mind of Buffett but does not have his patience then it is not going to work. Even Elliot's Argentina bonds reap full benefit only after more than 10 years. What is your timeline? Different timeline will give very different results even if the analysis of the same stock is the same

2) Conviction comes from how much one knows or study the company. If it is just by hearsay even in VB forum, which is already miles ahead in terms of noise filtering, then conviction level is low when noises comes in. Conviction does not mean stubborness though. Like Keynes said" When the facts change, I change my mind. What do you do, sir?" Conviction based on facts will change when facts changed, but one has to know the facts first.

[ruzaini]

The greatest challenge of value investing is that there are (at least presently) no more obvious value.

The Singapore market has become very efficient in pricing. And it seems to be increasingly efficient as we move further from the last major market panic. Emerging Asian markets are also very efficient as most of the players are foreign investment managers with well-funded research teams and capital.

Apart from avoiding securities with an unfavourable price/value proposition -- and there are quite a handful of them on SGX, most of them discussed on VB -- there are very few (or perhaps none) obvious investment candidates, if one were to adhere to the price and quality criteria outlined by Graham/WB/etc. In other words, if we follow the principles of value investing, we can avoid major blows to our wealth by not buying the expensive but lousy stocks. But to make money is not so easy; cheap stocks are mostly no good, good stocks are mostly not cheap.

But some cheap stocks are actually good, and some good stocks are actually still cheap. Yet, how do we know whether a good stock can continue its present earnings growth into the future? How do we know whether a cheap stock will have its earnings turn around, or will unlock value, in the future? The answer to whether a cheap stock is good or not -- or whether a good stock whose high price can still be considered cheap -- is not found in any of the framework provided by Graham/WB/etc. And this is where the money (at least presently) is; in predicting the future!

This is a task many times more difficult than detecting financial malfeasance and avoiding disaster-to-be companies. Because of the difficulty of making accurate predictions, this means that the probability of a poor portfolio performance is higher if the portfolio is more concentrated. But diversifying also means no over-performance as the portfolio increasingly mirrors the performance of the market index.

The WB solution to this conundrum is to only place bets on predictions that you believe have a higher probability of being correct. This is the commonly-used adage of 'knowing your circle of competence,' and 'swinging only at the perfect pitch.' Both will require vast and deep knowledge of a variety of topics/disciplines and companies, and suitable temperament. All of which take a long time to acquire.

Given the challenging nature and tedious requirements, should 'everyone learn to invest?' Would the average individual be better-off if they focused their energies on their present careers?

Interesting views. But I have to disagree that SG market is very efficient.

IMHO, cheap stocks in SG don't always present good value because of poor corporate governance, lack of shareholder activism and minority shareholder representation. Which is the reason why SGX-listed companies can get away with murder such as paying themselves high-salaries despite consecutive years of poor performance. There is no accountability for poor performance and losses. 

What's worse is when minority shareholders voice out opinions against the poor management of the company, only to get sued by its own board and management team.

In the US, corporate managers are actually afraid to go up against big activist investors like Carl Icahn. Hence, they will find ways to deal with problems to avoid being targeted by big activist investors.

However, this trend in Singapore is slowly changing. In recent years, institutional investors are on the prowl for deep value stocks in Singapore and Asia.


Shareholder activism is on the rise as investors seek to unlock value in companies that are poorly managed. Investors are challenging a clubby, consensus-driven corporate culture where shareholder interests have traditionally taken a back seat. In doing so, they’re shining the light on small companies that are undervalued, cash-rich and often ignored by analysts.
 
In 2016, Quarz Capital Management urged retailer Metro Holdings Ltd to return excess cash to investors and Dektos Investment Corp pushed Geo Energy Resources Ltd to change its debt structure, saying the coal miner’s shares are undervalued by as much as 60 percent.

Another recent examples would be Mano Sabnani vs St******, you can read the full article here: https://www.todayonline.com/singapore/mi...-land-were