5 ms·

The Superinvestors of Graham-and-Doddsville (1984)

67 points by bryanwbh 8y ago

btian 8y ago
[1984]
- tlb 8y ago
  Edited, thanks.
acconrad 8y ago
I belong to a fair number of value investing forums and made money off of the strategy for a while. Here's why I think this no longer works in the traditional sense and what works now: The rise of quants, ETFs, and instant information has largely arbitraged away value mispricings. So if it looks like a bargain, it's probably a value trap. So where can you find value? Where the above things are not present. Quants work for big firms. Goldman Sachs can only make a dent if it does massive deals. As Buffett said, he could still do great things with $1mm AUM, but with billions, he can't make small plays anymore. So individuals can only find value where the big players (GC, ETFs) don't play. This means micro caps, foreign stocks (Japan comes to mind as a hot spot for value). The problem is two fold: 1. The above-mentioned pool is very small. 2. It's riskier. So you have to do a ton of research to avoid the value trap mistake, often with way less information since these stocks aren't subject to the same 10K/10Q auditing that American stocks are. Now you've researched something so much you're biased to believe it working since you've sunk so much time into it. And because you've sunk so much time you don't have the time to research the rest of the investment pool, so combined you see these value investors who are very concentrated in some highly-convicted bets. And thus, the ones that win, win big and can claim there is always value to be found even in a market dominated by momentum investing. The rest lose to value traps, and lose big. So what's the takeaway? It still works. The low numbers in terms of P/E and P/B that are in books like The Intelligent Investor don't work. You have to relax those constraints quite a bit. And you can't be looking in the S&P 500. I used to think I could do this as a hobby. And I did. But I think I got lucky based on the amount of time and research I did. To be demonstratively good at value investing time and time again requires robotic levels of dispassionate patience, and research that demands a full time job.
- mxschumacher 8y ago
  I'd still argue than metrics like EV/FCF give some indication of valuation / risk. Balance sheets become less meaningful going forward. Google's greatness is not to be found in its physical assets.
  - acconrad 8y ago
    Yes, I agree! Metrics are extremely important in screening out for value stocks. What I'm saying simply is that there is no singular magical metric that can wipe out hours and hours of research. To simply list all stocks by EV/FCF ordered by cheapness will not automatically create a winning portfolio.
    - aaavl2821 8y ago
      There's a sort of common strategy that uses EV / FCF (or something like that) as a metric for cheapness and ROIC as a metric for "good" businesses (to avoid value traps). I believe it has done pretty well
      - acconrad 8y ago
        It's the Magic Formula (EV/EBIT and ROIC) and it has not always performed well: https://seekingalpha.com/article/4116677-greenblatts-magic-wand-must-broken-year-magic-formula-large-midcap-update-2017-ytd https://seekingalpha.com/article/4116677-greenblatts-magic-w...
  - colossal 8y ago
    In my completely amateur opinion, that is the one major reason why value investing is so much harder today. When Graham and later Buffett were executing this strategy to enormous success, most of a companies valuation could be traced back to it's assets -- excluding intellectual property. Now that IP is such a large part of valuations, it's much harder to execute this strategy because IP is inherently harder to valuate than tangible assets. And consequently, it's much more difficult to accurately access the difference between price and value.
mxschumacher 8y ago
A good read in a time when the valuations of Netflix, Amazon, Tesla etc are extreme by conservative investing standards. Many famous value investors such as Bill Ackman, Bruce Berkowitz and David Einhorn have been getting absolutely killed in the market in the last several years. It is difficult for me to imagine that this pendulum will never swing back. The combination of oligopolistic technology firms (platforms!), Quantitative Easing, low interest rates and more globalisation than ever certainly make for exciting times.
- adventured 8y ago
  To be fair, Ackman got absolutely killed for going deep into VRX. The exact opposite of what a value investor should have done, as VRX was anything but a value play at the time. His big CMG position by contrast is well above water.
- imjk 8y ago
  I thought Bill Ackman was more of an activist investor than a value investor (not that they're mutually exclusive labels). I don't know about the other two.
tim333 8y ago
Buffett's thinking is nearly always a pleasure to read for its clarity. If you'd read that in 1984 and put your money into Berkshire on that basis you'd be up about 250x.
rubidium 8y ago
Timely, as I am just finishing a study of Buffett. Some additional recommended reading about/by Buffett: Buffett's bio by Lowenstein, "Buffett: Making of an American Capitalist". A collection of Buffett's writings in: http://www.monitorinvestimentos.com.br/download/The%20Essays%20Of%20Warren%20Buffett%20-%20Lessons%20For%20Corporate%20America.pdf http://www.monitorinvestimentos.com.br/download/The%20Essays...
aaavl2821 8y ago
I went to columbia business school, where buffet is revered and the value investing program is the most exclusive and sought after program in the curriculum (and arguably one of the few that actually teaches useful skills). they publish a letter called graham and doddsville with articles and stock pitches from modern day value investors. i didnt do value investing but took some classes and attended some talks, so i am not an expert, but from what i saw, things have changed a lot. it is harder to be a value investor today just because everything is so expensive. just like 50 years ago opportunities to buy businesses for less than book value became harder and harder to find, in today's market it is much harder to find value investments as defined by traditional valuation metrics like EV / EBITDA, ROIC, FCF / earnings yield, etc Value oriented funds, and long / short equity funds in general, have been having a tough time. Too many funds popped up in the last 20 years and they are all competing for a few good investments. People are changing the definition of "value", though i am not sure if anyone has found a good one. Many people pitched FB and Google as value stocks, even though by traditional metrics they could not qualify as value investments Bill Ackman, a prominent investor and sponsor of an investing contest that is a major part of the value investing curriculum, said if he was starting today he wouldnt be an investor, but would start a tech company. He wasn't the only HF manager who expressed that sentiment
- pmart123 8y ago
  You know, I think the thing that is interesting is Buffett never really was as resolute in Dodd's philosophy as many of the famous long/short investors who have struggled recently seem to be. Buffet evolved as an investor: 1. He recognized the multiplicative power of combining the insurance float alongside his stellar investment ability. 2. He recognized the power of moat and brand value vs. Graham and Doddsville. 3. He saw the value in return on capital over purely P/E for a growing business from Sees Candy. As an aside, one reason long/shorts have had a tough time is that low rates make it harder to generate an automatic 6% return on your short book. But, I believe many value investors have failed to understand how technology and network-based platforms work. P/S works better for AMZN than P/E when the CEO is trying to minimize E. NFLX could have lower its P/E to 20 if it charged $15/month last December. FB just had to monetize its platform by something like a couple dollars per user right after it IPO'd. I think many traditional value investors did not understand or adapt their thinking regarding stickiness, revenue per user expansion, fixed costs for platform-based businesses, and redefining what tangible and intangible asset value is. There's an almost stubbornness to many of these investors versus a curiosity to listen to an alternative viewpoint.
finfun234 8y ago
There is a case to say that research and valuation is better than following a trend. I’m working on a project to make the research project friction less. I would love feedback on it. A frustration of mine was reading boilerplate text when I read the company risk section. So I applied some machine learning & Natural language processing to extract the unique risks. The way to access it is to visit https://shareseer.com https://shareseer.com then search for a company name or ticker. You will get the 10k/10 q along with important risks. The other features available are a real time insider transaction feed and a company filings feed: http://shareseer.com/today/insiders http://shareseer.com/today/insiders http://shareseer.com/today/filings http://shareseer.com/today/filings I’m trying to learn what are your pain points with your investment research process ? Is this useful? And feature requests?
devdimi 8y ago
I have been doing on and off value investing as a hobby investor for 8-9 years now and can share some of the mistakes to avoid. Company valuation is just as important as before. It is just the way it is done has changed quite a lot since Graham. 1. Company Growth (past and future) has to be incorporated in the valuation. Company with P/E 15 growing at 2% per year is more expensive than company with P/E 30 growing at 40%. This is the reason FB and GOOG are actually a value plays nowadays. 2. As already said the value of Intellectual Property, Software and Human Capital can't be easily read from the balance sheet alone. Yet these are the most valuable assets that yield highest returns. 3. If the founder of the company is CEO and large shareholder the company is worth a lot more than if not. 4. Doing all this research on your own is hard and very time consuming. There are some excellent paid stock newsletters with great track record that can do this for you for 300$ per year or less. Do yourself a favor and use them. Your family will thank you.

67 points by bryanwbh 8y ago

btian 8y ago

[1984]

tlb 8y ago
Edited, thanks.

acconrad 8y ago

I belong to a fair number of value investing forums and made money off of the strategy for a while. Here's why I think this no longer works in the traditional sense and what works now: The rise of quants, ETFs, and instant information has largely arbitraged away value mispricings. So if it looks like a bargain, it's probably a value trap. So where can you find value? Where the above things are not present. Quants work for big firms. Goldman Sachs can only make a dent if it does massive deals. As Buffett said, he could still do great things with $1mm AUM, but with billions, he can't make small plays anymore. So individuals can only find value where the big players (GC, ETFs) don't play. This means micro caps, foreign stocks (Japan comes to mind as a hot spot for value). The problem is two fold: 1. The above-mentioned pool is very small. 2. It's riskier. So you have to do a ton of research to avoid the value trap mistake, often with way less information since these stocks aren't subject to the same 10K/10Q auditing that American stocks are. Now you've researched something so much you're biased to believe it working since you've sunk so much time into it. And because you've sunk so much time you don't have the time to research the rest of the investment pool, so combined you see these value investors who are very concentrated in some highly-convicted bets. And thus, the ones that win, win big and can claim there is always value to be found even in a market dominated by momentum investing. The rest lose to value traps, and lose big. So what's the takeaway? It still works. The low numbers in terms of P/E and P/B that are in books like The Intelligent Investor don't work. You have to relax those constraints quite a bit. And you can't be looking in the S&P 500. I used to think I could do this as a hobby. And I did. But I think I got lucky based on the amount of time and research I did. To be demonstratively good at value investing time and time again requires robotic levels of dispassionate patience, and research that demands a full time job.

mxschumacher 8y ago
I'd still argue than metrics like EV/FCF give some indication of valuation / risk. Balance sheets become less meaningful going forward. Google's greatness is not to be found in its physical assets.
- acconrad 8y ago
  Yes, I agree! Metrics are extremely important in screening out for value stocks. What I'm saying simply is that there is no singular magical metric that can wipe out hours and hours of research. To simply list all stocks by EV/FCF ordered by cheapness will not automatically create a winning portfolio.
  - aaavl2821 8y ago
    There's a sort of common strategy that uses EV / FCF (or something like that) as a metric for cheapness and ROIC as a metric for "good" businesses (to avoid value traps). I believe it has done pretty well
    - acconrad 8y ago
      It's the Magic Formula (EV/EBIT and ROIC) and it has not always performed well: https://seekingalpha.com/article/4116677-greenblatts-magic-wand-must-broken-year-magic-formula-large-midcap-update-2017-ytd https://seekingalpha.com/article/4116677-greenblatts-magic-w...
- colossal 8y ago
  In my completely amateur opinion, that is the one major reason why value investing is so much harder today. When Graham and later Buffett were executing this strategy to enormous success, most of a companies valuation could be traced back to it's assets -- excluding intellectual property. Now that IP is such a large part of valuations, it's much harder to execute this strategy because IP is inherently harder to valuate than tangible assets. And consequently, it's much more difficult to accurately access the difference between price and value.

mxschumacher 8y ago

A good read in a time when the valuations of Netflix, Amazon, Tesla etc are extreme by conservative investing standards. Many famous value investors such as Bill Ackman, Bruce Berkowitz and David Einhorn have been getting absolutely killed in the market in the last several years. It is difficult for me to imagine that this pendulum will never swing back. The combination of oligopolistic technology firms (platforms!), Quantitative Easing, low interest rates and more globalisation than ever certainly make for exciting times.

adventured 8y ago
To be fair, Ackman got absolutely killed for going deep into VRX. The exact opposite of what a value investor should have done, as VRX was anything but a value play at the time. His big CMG position by contrast is well above water.
imjk 8y ago
I thought Bill Ackman was more of an activist investor than a value investor (not that they're mutually exclusive labels). I don't know about the other two.

tim333 8y ago

Buffett's thinking is nearly always a pleasure to read for its clarity. If you'd read that in 1984 and put your money into Berkshire on that basis you'd be up about 250x.

rubidium 8y ago

Timely, as I am just finishing a study of Buffett. Some additional recommended reading about/by Buffett: Buffett's bio by Lowenstein, "Buffett: Making of an American Capitalist". A collection of Buffett's writings in: http://www.monitorinvestimentos.com.br/download/The%20Essays%20Of%20Warren%20Buffett%20-%20Lessons%20For%20Corporate%20America.pdf http://www.monitorinvestimentos.com.br/download/The%20Essays...

aaavl2821 8y ago

I went to columbia business school, where buffet is revered and the value investing program is the most exclusive and sought after program in the curriculum (and arguably one of the few that actually teaches useful skills). they publish a letter called graham and doddsville with articles and stock pitches from modern day value investors. i didnt do value investing but took some classes and attended some talks, so i am not an expert, but from what i saw, things have changed a lot. it is harder to be a value investor today just because everything is so expensive. just like 50 years ago opportunities to buy businesses for less than book value became harder and harder to find, in today's market it is much harder to find value investments as defined by traditional valuation metrics like EV / EBITDA, ROIC, FCF / earnings yield, etc Value oriented funds, and long / short equity funds in general, have been having a tough time. Too many funds popped up in the last 20 years and they are all competing for a few good investments. People are changing the definition of "value", though i am not sure if anyone has found a good one. Many people pitched FB and Google as value stocks, even though by traditional metrics they could not qualify as value investments Bill Ackman, a prominent investor and sponsor of an investing contest that is a major part of the value investing curriculum, said if he was starting today he wouldnt be an investor, but would start a tech company. He wasn't the only HF manager who expressed that sentiment

pmart123 8y ago
You know, I think the thing that is interesting is Buffett never really was as resolute in Dodd's philosophy as many of the famous long/short investors who have struggled recently seem to be. Buffet evolved as an investor: 1. He recognized the multiplicative power of combining the insurance float alongside his stellar investment ability. 2. He recognized the power of moat and brand value vs. Graham and Doddsville. 3. He saw the value in return on capital over purely P/E for a growing business from Sees Candy. As an aside, one reason long/shorts have had a tough time is that low rates make it harder to generate an automatic 6% return on your short book. But, I believe many value investors have failed to understand how technology and network-based platforms work. P/S works better for AMZN than P/E when the CEO is trying to minimize E. NFLX could have lower its P/E to 20 if it charged $15/month last December. FB just had to monetize its platform by something like a couple dollars per user right after it IPO'd. I think many traditional value investors did not understand or adapt their thinking regarding stickiness, revenue per user expansion, fixed costs for platform-based businesses, and redefining what tangible and intangible asset value is. There's an almost stubbornness to many of these investors versus a curiosity to listen to an alternative viewpoint.

finfun234 8y ago

There is a case to say that research and valuation is better than following a trend. I’m working on a project to make the research project friction less. I would love feedback on it. A frustration of mine was reading boilerplate text when I read the company risk section. So I applied some machine learning & Natural language processing to extract the unique risks. The way to access it is to visit https://shareseer.com https://shareseer.com then search for a company name or ticker. You will get the 10k/10 q along with important risks. The other features available are a real time insider transaction feed and a company filings feed: http://shareseer.com/today/insiders http://shareseer.com/today/insiders http://shareseer.com/today/filings http://shareseer.com/today/filings I’m trying to learn what are your pain points with your investment research process ? Is this useful? And feature requests?

devdimi 8y ago

I have been doing on and off value investing as a hobby investor for 8-9 years now and can share some of the mistakes to avoid. Company valuation is just as important as before. It is just the way it is done has changed quite a lot since Graham. 1. Company Growth (past and future) has to be incorporated in the valuation. Company with P/E 15 growing at 2% per year is more expensive than company with P/E 30 growing at 40%. This is the reason FB and GOOG are actually a value plays nowadays. 2. As already said the value of Intellectual Property, Software and Human Capital can't be easily read from the balance sheet alone. Yet these are the most valuable assets that yield highest returns. 3. If the founder of the company is CEO and large shareholder the company is worth a lot more than if not. 4. Doing all this research on your own is hard and very time consuming. There are some excellent paid stock newsletters with great track record that can do this for you for 300$ per year or less. Do yourself a favor and use them. Your family will thank you.