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The age-old strategy of buying cheap shares is faltering
- throwaway5752 6y agoThis is the kind of headline you look back five years later and realize it marked the market top.
- diogenescynic 6y agoMaybe, but with infinite QE and near zero interest rates until 2023 at least, the market will likely continue to pay a premium for growth. If you picked low P/E stocks over the last 20 years, your portfolio would have done worse than a portfolio of high P/E stocks. For instance, Blockbuster and Netflix were trading during the same period and Blockbuster had a lower P/E, but obviously Netflix was the better investment. Same thing with Ford and Tesla.
- mandelbrotwurst 6y agoThere is no infinite QE. It is dependent on confidence in the value of the currency, which has been decreasing by a number of metrics, although we can certainly argue about the rate of decline. Not a rebuttal to your overall point, but worth paying attention to.
- howlgarnish 6y agoAs holders of Zimbabwean trillion-dollar notes will attest, governments can and will keep printing money even after complete loss of confidence, and in a hyperinflationary situation you're much better off holding shares than cash. (Of course, you're even better holding hard currency.) That said, by most measures the current crisis has to date been deflationary. I expect that to change at some point, but I'll also readily admit I did not foresee the current market rally, so who knows what the market will do tomorrow.
- neilwilson 6y ago"but I'll also readily admit I did not foresee the current market rally" Given you didn't see that, have you considered that your view of Zimbabwe might be wrong? Nothing to do with confidence and everything to do with a silly policy to redistribute land to people that can't farm. QE doesn't give money away for free does it. It is always an asset purchase. That is a qualitative difference. Similarly a bad pilot doesn't mean heavier than air flight is impossible. You just need a better pilot. More on what actually happened in Zimbabwe here: http://bilbo.economicoutlook.net/blog/?p=3773 http://bilbo.economicoutlook.net/blog/?p=3773
- mantap 6y agoThe fed can do what they are doing because the dollar has safe haven status. When things get bad globally, capital flows into the dollar not out of it. If any other country (except perhaps Japan) tried to do what the fed does they would probably end up like Zimbabwe no matter how good their pilot. Currencies have got in the shit for a lot less.
- RobertoG 6y agoSo, the fed can do it because is special. Japan can do it because is special, the Central European Bank can do it because it's special and the British can do it because they are special. Not only that, but they can do it all at the same time. At some point, a theory with more exceptions than the opposite should be considered useless. Specially when there is a clear alternative: inflation happens when the spending in the economy surpass the capacity of the economy. Than can happen because the government and the private sector spend too much (bubbles) or because the supply side collapse (hyperinflation in Zimbabwe).
- mantap 6y agoThe currencies you list are all considered major reserve currencies, USD, JPY, GBP, EUR. They have value outside of trade. There's over 100 currencies. Most central banks control currencies that are rather pedestrian like Thai Baht or South African Rand.
- neilwilson 6y ago"There is no infinite QE" There is. The central bank can offset all the excess saving in the economy from now until doomsday. As Japan has shown for decades. Once you close the mental model you'll see why. What does "confidence in the currency" mean in reality? It means that fewer people want to save in that denomination. When they don't save they have to spend (since that is the only alternative in aggregate), when they spend that generates asset inflation, production and, most importantly, more and more tax points - which reduces the need for bonds and "QE" in the first place. Always remember that an FX transaction is nothing more than a set of two contracts each of which transfer a currency to the other party no less than two days hence. Which means eventually somebody has to have the actual liquidity to settle the net flow. There is no liquidity provider of last resort.
- BoorishBears 6y agoThis is the kind of comment you find on this kind of headline from 5 years ago... and realize how many people have missed out on a good chunk of profit from the most determined bull run in history
- grey-area 6y agoQuite. When people start telling you there is a new normal, this is a new paradigm, you just don't understand these new companies, x style of investing is dead, you know a reset is coming.
- throwaway5752 6y agoThe phrase "Value investing is dead" is a decades-old inside joke. One can google it. Value & growth strategies oscillate. When then persist in one state too long people who haven't been around as long (or who are selling something) make grandiose proclamations. It's a fundamental reality related as much to the business cycle as it is to the human condition/psychological cycle of investment. An investment is worth the value of its future cash flows discounted by the risk free rate (plus terminal value). That's it, it's all that 90% of people need to know. There are many, many unknowns in that statement, which makes it a market.
- robjan 6y agoWhen random throwaway accounts are the two top comments predicting a crash...
- throwaway5752 6y agoIf you have a point, make it. Otherwise I am a more established member of this community than you are on every metric, and have just as much publicly identifiable information in my profile.
- paul_f 6y agoMaybe, but don't ever ever try to time the market.
- dls2016 6y agoHaha why? I'd much rather be wrong and miss out on some gains for a year than loose a bunch like I did in 2008 with this mentality. Pandemic damage is certainly not priced in.
- staticman2 6y agoBecause if there is a bubble it can go on for a decade, you'll eventually lose faith in your strategy and go all in at even worse valuations.
- throwaway5752 6y agoI agree completely.
- zeroonetwothree 6y agoIt’s because there’s one of these every week so it’s easy to cherry pick retroactively.
- jeffreyrogers 6y agoYeah, I've been hearing the market is overvalued and due for a correction since at least 2013. That's going to be correct one of these days.
- klipt 6y agoShouldn't any well known strategy stop working over time as more people use it? There's only a finite amount of alpha.
- im3w1l 6y agoI've heard people say that the higher returns are compensation for the higher risk.
- skohan 6y agoTheoretically if the risk is actually higher, there should also be a more substantial downside at some point.
- lotsofpulp 6y agoBut practically, you can socialize the risk by devaluing the currency.
- im3w1l 6y agoNevermind, I thought it was talking about penny stocks. Should have read more carefully.
- deleted 6y ago[deleted]
- david-gpu 6y agoRight, but that's not what's happening. Value spreads, the difference in price between the most expensive stocks and the cheapest stocks, are at all-time highs. So the opposite is true: very few people are value investors these days. Possibly in part because value has under-performed over the last 10-15 years. Will the trend reverse? Who knows.
- mullingitover 6y agoThis is when you switch to the other age-old strategy: selling ovepriced shares.
- ComputerGuru 6y agoYes, that’s the easy and obvious answer. The hard question: where do you park that money? People are investing in tech stocks because everything else is so uncertain right now.
- alltakendamned 6y agoI've been selling off tech funds partially and investing the proceeds in total market funds (which are still ~20% tech), just as a way to rebalance. It's hard to predict the next "winner", maybe it remains tech, maybe it becomes something else.
- oh_sigh 6y agoI paid off my 25 years remaining mortgage after selling some long-held TSLA, because I really didn't know where else to put it, especially with the election uncertainty coming up. I feel a little bit cowardly doing this, but I'm in tech and aapl/amzn/goog is a fair chunk of my portfolio and don't want to put even more of my eggs in one basket.
- ComputerGuru 6y agoBetter cowardly than broke and homeless.
- marketgod 6y agoI really recommend rethinking that. TSLA is the future of the market. Hold it forever.
- robjan 6y agoYou first have to define "overpriced".
- viburnum 6y agoIt's been a long time but I remember one explanation of the value premium was value stocks are more likely to get wiped out in a crisis (no free lunch). Another was that high commission costs would have eaten up all the gains in actually maintaining a value portfolio. Apparently there's a lot of churn in and out of value.
- throwaway189262 6y agoBy many measures tech stocks have not been this overvalued since 1999. Similar situation. COVID + staying at home + government stimulus means there's a lot of money sloshing around. Tech companies are relatively unaffected by pandemic so all this money ends up there. Lots of general public getting in on the market just like 99. Senseless valuations on companies without a dollar of revenue. A historic year for tech stocks right after a historically long bull run, just like 99. Many allegations of fraud since money is so easy to get. Tech stocks make up something crazy like 30% of value in market, again just like 99. If tech isn't in a bubble, I don't know what's going on. How does virtually every tech company become twice as valuable in 6 months? They don't. Unlike last time, most of these companies won't crash to zero. But they could easily lose 2/3 of the value as soon as life goes back to normal and everyone sees how much damage corona has done. The relatively fast early recovery has the markets in a state of euphoria. I moved all my money to "value" stocks last week. These tech valuations defy all logic. Remember when Buffet said to be fearful when others are greedy? Well right now he's investing out in Japan
- 88840-8855 6y agovery speculative opinion.
- throwaway189262 6y agoLook at PE ratios, percent of non-professional investors in the market, average valuation of tech companies at age X, percent of stock market value in tech, length of current bull market, stock performance vs economic growth. There's so many metrics pointing towards a bubble, and not many that don't. Of course not everyone believes it, which is why market is so high. And I'm an admitted skeptic that's shorting this market so take that how you will. You will find some mainstream investors calling the market a bubble which is not really normal. All bubbles are obvious in retrospect, and even many investors that think we're in a bubble will join the frenzy assuming they won't be left holding the cards.
- rvn1045 6y ago
- sd_mikey 6y agoBetween the Feds quantitative easing during the Great Recession and now their buying of corporate bonds (sometimes junk), it’s difficult to discern the true value of companies. Easy and cheap money can make balance sheet appear pretty good at first glance.
- nemo44x 6y agoThe USD losing value relative to peers is helping the market as well. Most companies generate significant revenue overseas but report in USD. As the dollar falls in value they end up with more dollars when converting. If the dollar continues to weaken then I’d hedge towards the markets continuing an upwards trajectory.
- ericmay 6y agoIs the dollar weakening? I think right now the Fed is trying to prevent deflation because of the demand for dollars. But if the dollar weakens, it doesn’t weaken with no benefits, America starts selling and exporting more as products and services become cheaper.
- nkurz 6y agoOne common way of measuring the strength of the dollar is to compare it to a "basket of currencies": https://www.investopedia.com/terms/u/usdx.asp https://www.investopedia.com/terms/u/usdx.asp By this standard, the US dollar is down about 10% from its post-COVID crash high (103 -> 93). But over a longer time scale, it's up about 10% from where it spent most of the 2000's: https://www.marketwatch.com/investing/index/dxy/charts https://www.marketwatch.com/investing/index/dxy/charts. So I think the answer both "yes, the dollar is signicantly weakening" and "the dollar is still slightly stronger than its recent historical norm".
- ericmay 6y agoYea great info to share. Thanks for that! I’m wondering if that describes this scenario: there aren’t enough dollars, there is high demand for them, but as they get printed they go into securities. What do you think?
- valuearb 6y agoThe terms “growth” and “value” nowadays are silly mechanical definitions that bear little relationship to any intelligent investing strategy. The worlds premier “value” investor Warren Buffett was buying Pepsi and Coke stock 50 years ago, and owns more Apple now than anyone. Buffett will tell anyone who will listen that value investing is purchasing investments at discount offering a good margin of safety to a reasonable estimate of intrinsic value. Low price to book value or low price to earnings don’t remotely comprise the universe of good value investments.
- adthomsen 6y agoI have only recently started reading about investment and the concept of value investing and your comment doesn't seem to encapsulate what I've understood. There are also things like the company's management and how they run the company. It's about looking for "wonderful companies" at a good price. I'm not saying which investment strategy is better or worse, just that I believe there is a lot more to Buffet's idea of value investment than you imply.
- divbzero 6y agoYou and GP are both right but simply referring to different definitions of value investing. GP is using “value” in the traditional Benjamin Graham sense of companies that are quantitatively undervalued based on current financial statements. This is the definition used on Wall Street for “value” ETFs or mutual funds. You’re referring to Warren Buffett’s expanded definition of “value” as any company priced below intrinsic value, which can include qualitative judgment of future growth. You both make the point that Buffett’s approach deviates from the traditional Wall Street definition of “value”.
- valuearb 6y agoThe definition of intrinsic value comprises everything you mention and more, such as strength of companies moats. I didn’t want to write a dissertation. And the least important factor for long term value is strength of management. GE was renowned as the greatest managed company in the world before Immelt. You want a business any idiot can run, because eventually one will.
- deleted 6y ago[deleted]
- DennisP 6y agoValue stocks have always faltered when growth stocks did well. If value stocks always worked then they would lose their advantage. The fact that people give up on them is one theory academics have used to explain the persistent long-term edge value stocks have had over growth, for at least the past century.
- OGWhales 6y agoAnyone have a non pay walled version?
- david-gpu 6y agohttps://outline.com/5Rps3M https://outline.com/5Rps3M
- jariel 6y agoMassive inflation in stocks and real-state. It's ridiculous. They should have started raising interest rates years ago - we had record low levels of unemployment, what was the Fed doing but protecting the top 10%? And for failing to make the right moves ... we get hit with COVID.
- deleted 6y ago[deleted]
- BMSmnqXAE4yfe1 6y agoLow interest rates are dictated by market forces, not by "them". Too much money, accumulated by older people, chase too few investments, that young people must pay interest for. There are fewer and fewer young people relative to old people, that's the fundamental problem.
- jariel 6y agoInterest rates are very effectively controlled by the Fed and if they want to raise them, they can, anytime.
- BMSmnqXAE4yfe1 6y agoThe fed rate always closely follows treasury rates, and the latter are set by the markets.
- mcguire 6y agoThis is unsurprising, given how disconnected the market has been from the economy. "Growth" stocks have naturally taken the greater share of incoming money. It won't last. There will be a correction, of one kind or another, more or less violent. That is how the "efficient market" works.
- inthewoods 6y agoUsually when I see an article like this, I start looking at the strategy because it usually means it's about to start working again. I remember an article saying "buy and hold was dead" in 2009. Marked the exact time to do buy and hold.
- themodelplumber 6y agoI'm not using the strategy myself, but if I had to buy and hold anything right now just to test your idea, the market seems full of reasonably intuitive options. I could think of a lot more worrying securities than e.g. AAPL at $106. They've split many times before, and the odds are it'll happen many times again in the future. (This is not investing advice, yada yada)
- letstryagain2 6y ago"You can gauge just how pricey a stock is by looking at its price-to-book ratio," "Since 2010 the Russell 1000 value index, which tracks American stocks with low price-to-book ratios and low expected earnings growth, has risen by just 87%, compared with 171% for the market overall." This reminds me of what Blow-up artist Niederhoffer told me before his second blow up: Price-Earnings ratios have no meaning for long term stock performance :-)
- snird 6y agoThis is an over simplistic view. Simplify the terms so much and you get garbage in, so obviously garbage out. The russell 1000 value index is quantitative only and tries hard to define "cheap" stocks by different measures. Value investing in the real world, especially when talking about Buffet, is heavily reliant on qualitative analysis. How else would Apple, Buffet's biggest holding, will be considered a value investment? The title therefore is completely wrong. A good title would be: "Russell 1000 value index performed worse then their growth index recently"
- throwaway5752 6y agoFirst, Berkshire Hathaway holds AAPL. Ted or Todd probably initiated the position, not Warren Buffett. Second, they are up about 300% on the stake. That equates to a P/E of 10x based on ttm earnings on AAPL and their basis. At the time, I think AAPL had a pretty modest valuation, also. The theory is that phones were cyclical and that service income would not offset the loss of income from devices. AAPL was widely discussed as a value investment around that time (as was Facebook).
- MrPowers 6y agoYou're right. In September 2016, Apple's market cap was around 500 billion with 45 billion of profit. Apple is currently at 1.83 trillion with 58 billion of profit. The stock price has tripled, but the profit has not. Apple's fundamental value metrics were significantly different a few years ago.
- divbzero 6y agoTodd or Ted was the first to buy Apple shares for Berkshire, but Warren Buffett made the decision for the bulk of Berkshire’s current stake in Apple. The $35 billion Apple investment (worth more now) [1] is larger than what Todd or Ted manage (about $13 billion each as of last year) [2]. Buffett has also commented publicly on the rationale behind his decision to own Apple. [1]: https://www.cnbc.com/2020/07/16/warren-buffett-reaps-40-billion-from-giant-apple-stake-since-march-bottom.html https://www.cnbc.com/2020/07/16/warren-buffett-reaps-40-bill... [2]: https://www.cnbc.com/2019/02/25/warren-buffett-says-berkshire-stock-managers-weschler-and-combs-have-trailed-the-sp-500.html https://www.cnbc.com/2019/02/25/warren-buffett-says-berkshir...
- opportune 6y ago"Cheap shares" are only cheap because investors are pricing in less growth compared to other countries with similar revenue. Common mistake new investors make is to invest only in companies with low P/E because they're "underpriced". But the pricing is the market saying they have little faith in their abilities to improve their business. The obvious explanation is that the market is getting better at assessing growth. Of course there are companies like Tesla, Nikola, Snowflake with insane valuations relative to their actual business (and two of them are solid companies with real products and growth). It might be possible that people are pricing in too much growth. But when yields outside of equities are so low you kind of have to chase growth, which incentivizes investors to pile onto growth opportunities.
- inshadows 6y agoWhere do the authors of the article get the chart data? It turns out that index details and data are kind of treasured secrets. I could only find Russel 3000 on Bloomberg and MarketWatch[3][4]. On official FTSE Russell page there are no current values[1]. On Googling "Russel 3000 Growth" I get a chart from Google, but when going to MorningStar, which according Google's disclaimer is their source of data for "INDEXRUSSELL", I could only find Russel 3000[2] and it has bogus quote compared to Bloomberg and MarketWatch. I'm new to all this and since I've been reading a lot about ETFs latey I was hyped about the transparency. But it seems that if you're not Authorized Participant and the ETF tracks index such as Russell 3000 Growth, you know as much about your portfolio as if you had money in managed mutual fund. [1] https://www.ftserussell.com/products/indices/russell-us-style https://www.ftserussell.com/products/indices/russell-us-styl... [2] https://www.morningstar.com/indexes/ixus/rut/quote https://www.morningstar.com/indexes/ixus/rut/quote [3] https://www.marketwatch.com/investing/index/rua https://www.marketwatch.com/investing/index/rua [4] https://www.bloomberg.com/quote/RAY:IND https://www.bloomberg.com/quote/RAY:IND
- anonu 6y agoETFs have to publish their fund holdings daily. Go to the issuer website and you'll be able to download it. In addition you can go to edgar and download the NPORT files monthly. You're right that index positions are expensive to obtain. But the ETF holdings are a pretty good proxy