7 ms·

Value investing is struggling to remain relevant

38 points by prostoalex 6y ago

ketamine__ 6y ago
I've heard Charlie Munger say all investing is value investing. Or some variation of that. There are many great companies to invest in so I don't see an issue. Hell, putting all your money in FANG for the next 40 years is probably going to work out quite well.
- skybrian 6y ago
  It might work out, but how do you know? Are all prices good? How do you decide when the price is too high? Value investing was originally about valuing companies based on tangible assets. This doesn’t work very well for technology companies.
  - ketamine__ 6y ago
    If you're going by the advice of Charlie Munger you buy a small number of companies and never sell.
    - skybrian 6y ago
      In that case you don't need to decide when to sell, but you still need to decide whether the price is low enough to buy.
  - repsilat 6y ago
    One interesting interpretation: some folk say that if you make money in the market it's because you drove the market towards efficiency. If you bought low and sold high (control for inflation/rates/dividends/whatever) your purchase pulled up the price when you bought and pushed down the price when you sold, and the "time-traveller's arbitrage" was reduced. Say a company will live for 1 year, pay no dividend and perform no buybacks, but has some stock price. Say -X(X-1), so it starts at price=0 at t=0, ends at price=0 at t=1, and has positive but illogical/inefficient positive prices in between up to a maximum of p=0.25 at t=0.5. Now, someone who bought then sold on the up-slope -- with price impact -- would make money but increase the difference between the price curve and "true value" (which is the equation p=0.) But if you iterated those buying and selling operations with time-travelling argitrageurs, the realised value would eventually be the true value. The price curve would be p=0. So, in conclusion, maybe "all investing is value investing" is false under this interpretation, but true if there are time travellers involved. (There is almost certainly a more charitable phrasing.) Thank you for attending my TED Talk.
neonate 6y ago
https://archive.is/MmqvX https://archive.is/MmqvX
cjoelrun 6y ago
It usually does in a bubble.
dannyw 6y ago
Value investing is, by general definitions, shorting growth. You are investing in today while intentionally ignoring tomorrow. The value investors who have done well are those that recognise growth as a factor, and put money into Apple when they were comparatively cheaper. The value investors who have done poorly are those who buy low PE stocks, which are stocks of stagnant and declining companies.
- reducesuffering 6y ago
  This is incorrect. All of the 100 years of historical US market data show that the indices tracking “value” companies (of which one component is low P/E) have outperformed “growth” companies over the long term. There are several explanations for this, one that irrational investors periodically pay premiums for “lottery tickets”, like the “next FAANG or Tesla.” But while the explanations aren’t conclusive, the underperformance of growth is.
  - jl2718 6y ago
    I find this interesting because return variance (risk) and mean are supposed to correlate positively in the ‘efficient frontier’ theory that value investing is based on.
    - reducesuffering 6y ago
      That’s another of the possible explanations. That value companies are usually more debt-ridden and in declining industries and are thus higher risk. Although one way to measure risk is std. deviation (volatility), and while smaller cap stocks are considered “riskier” and they have higher std. deviation, value stocks don’t have meaningfully higher std. deviation.
- imtringued 6y ago
  > Value investing is, by general definitions, shorting growth. You are investing in today while intentionally ignoring tomorrow. Well, Wikipedia [0] seems to disagree. >Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. By this logic investing into stocks with verifiable growth is the way to go. Apple is basically the poster child of value investing. It's a company that is making lots of money and keeps growing because it releases new profitable products year by year. For some reason there is this belief that "value investing" = "boomer doesn't know stocks can grow". Yeah, one obviously has to think that those who engage in value investing are stupid, otherwise one would have to acknowledge that the stocks one is investing in have zero reason to grow as fast as they did, except that everyone else is also blindly buying them (which is dangerous circular reasoning and causes bubbles that pop once we run out of people who refuse to open their eyes). [0] https://en.wikipedia.org/wiki/Value_investing https://en.wikipedia.org/wiki/Value_investing
jonnybgood 6y ago
What I find more fascinating since the beginning of this year is the rise "meme investing" a la r/wallstreetbets. Huge speculative option plays among a huge swath of retailers on meme stocks. Self-proclaimed value investors like to call them "Robinhooders".
- repsilat 6y ago
  A few days ago there was a "passive income" AskHn[1], with links to similar threads from previous years, and this year there were a lot of "stock market" answers. My scientific ctrl-f survey has the string "stock" appearing 48 times in 166 comments this year, three times in 84 comments last year, once in 163 comments in 2018, and 6 times in 90 comments in 2017. And this year they were talking about leverage. 1: https://news.ycombinator.com/item?id=25316912 https://news.ycombinator.com/item?id=25316912
- vmception 6y ago
  As someone that's been in wallstreetbets for 7 years. The memes were always there, and that community has been glorifying losses for a long time. Mostly around options bets during earnings season. The only thing that has changed lately is that trading options become free. Options used to be prohibitively expensive. Oh yeah and a couple people killed themselves, the irony here being that people stop blaming the trader and blame the broker after the trader self harms? Convincing. But it definitely helped bring the attention from everyone that figured they had slightly better self preservation skills and could understand how settlement works. I'm glad undercapitalized people stopped gravitating towards penny stocks.
  - cstejerean 6y ago
    What also changed this year is that a lot of other things to do for fun became unavailable due to Covid. Betting on stocks is something you can do from the comfort of your own home.
    - vmception 6y ago
      That didn't hurt for sure, but everyone wanting to be a day trader always happens during asset bubbles.
mrich 6y ago
You can of course try to ride the next Tesla, but please realize that even Yahoo had a market cap of $120 billion 20 years ago at the peak of the dotcom bubble, and was sold for pocket change four years ago. So do exit at the top :)
- TooCreative 6y ago
  What would have been the RIO of a shareholder who held $100 in Yahoo shares in 2000? I think Yahoo had some assets that it sold (like ~$40B worth of Alibaba shares) later on. Did the cash go into YHOO or into the shareholders account in some other way?
  - toast0 6y ago
    I haven't been a YHOO shareholder since I left the company in 2011, but I saw a fair amount of discussion in former employee groups. IIRC, as part of the merger with Verizon, the Alibaba and Yahoo Japan holdings were spun out into a separate holding company (Altaba?) which was publically traded. A YHOO stockholder would get some amount of Altaba stock, and whatever the Verizon part was (I don't remember if that was Verizon stock, cash, a choice, whatever); probably no fractional shares. As the holdings were sold, there were large cash dividends, with holdbacks for taxes and contigencies. As the contigencies timed out, smaller dividends happened, and I think Altaba formally wound down with a final dividend earlier this year.
deleted 6y ago
[deleted]
OldHand2018 6y ago
Even 100 years ago, tangible assets have very little value without intangible assets to run them profitably. Worker knowledge, management, etc. I'm willing to agree that determining the value of intangible assets is harder than it used to be. But let's say you figure it out. Value investing is probably every bit as relevant as it was 50 years ago.
anm89 6y ago
I think this a bunch of words which are profound but don't look that way to many people. Value investing is another name for allocating your resources to things which are minimally speculative. To things which presently have value. There is somehting deeply wrong with a society which is no longer interested in this.
- paulmendoza 6y ago
  If the world is quickly changing then holding onto a bunch of sinking ships might not make a lot of sense. Look at a lot of the S&P 500 stocks. How many old world companies are potential targets for disrupting. Look at oil. It isn’t in a good spot. Some of the largest companies used to be oil companies. But not anymore by market cap. They are still paying dividends while losing money. How? They are taking loans out. At a certain point that stops and more investors wake up. But my time horizon in 5 to 10 years when picking investments.
  - imtringued 6y ago
    Dividends are paid out on a single day. Not getting a loan to spread the costs of dividends over the whole year is insane at current interest rates. What are you going to do with that money? Sit on it? Oil companies are unsurprisingly going down because their bread and butter business is currently not in demand. In a few years things will look differently. The real problem is that a lot of companies don't have an obvious "bread and butter" that actually brings in enough cash to justify their valuations. They are mostly selling the dream of a monopoly to investors even when those future monopolies have no moat other than money.
- lordnacho 6y ago
  On that note, interest rates, even long ones, are really really low these days. One way to think about value and growth is to say that you need to discount speculative future incomes. Well it used to be that five or ten years out rates could be 8-15%, and then you had to compound. And that's just the cost of money, you need to think about how likely the income is in the first place. So it shouldn't surprise us that when rates collapse, companies with mostly future unknown income gain in value compared to those with current certain income. The big question is whether rates will ever come back to what we used to see.
syntaxing 6y ago
I can't read the whole article since it paywalled but hasn't his always been the case? Perceived value is the only thing that really matters in the stock market. Just look at Enron. I am really curious what will be the next Enron of our generation.
- philth_ 6y ago
  Perceived value is the only thing that matters short term in the stock market, but actual value is the only thing that matters long term in the market. Hence the rise of Warren Buffett
ajbonkoski 6y ago
Stopped reading at: "In the past week or so, fortunes have reversed. Technology stocks have sold off. Value stocks have rallied, as prospects for a coronavirus vaccine raise hopes of a quick return to a normal economy. This might be the start of a long-heralded rotation from overpriced tech to far cheaper cyclicals—stocks that do well in a strong economy. Perhaps value is back." Haha. No. It's not back. Over the past YTD, AAPL has returned 70%. The article's publish date is 11/14/2020. Around that timeframe, AAPL moved less than 5%. This is not evidence for collective change in investing philosophy. Perhaps tech is over-bought, but you have to argue better than this. It took me all of 2 minutes to check.
- MattyMc 6y ago
  Comparing the closing price of stocks today with one year ago: TSLA +900% AMD +250% ETSY +400% PTON +350% AAPL +200% Enormous gains. The article should really have more data to describe this pullback.
  - imtringued 6y ago
    That's insane. Of those stocks only the growth of AMD is justified because it was starting off from a small base anyway and it is in the process of replacing Intel entirely so creeping up to Intel's market cap is not surprising. Tesla makes absolutely no sense to me. Etsy is just an online shop and it sells a lot of crap. Pton is probably just a corona fad. AAPL is slightly encouraging because it obviously has some well justified growth left in it but it's not overhyped to the extreme extent as the other stocks. All stocks are still growing way too quickly in my opinion though.
- reducesuffering 6y ago
  And it took me all of 2 minutes to check that the last months US total market performance was +2.5% while the canonical US Value ETF, VTV, returned +4.4%. That is what they mean.
  - Tinyyy 6y ago
    Are we really looking at a months worth of returns and trying to draw any conclusions here?
prewett 6y ago
"This time it's different!" Sounds like we might be getting to peak bubble....
marcusverus 6y ago
I'm a value investor because I can estimate the price of BRK.B in 10 years with far more confidence than I can the price of TSLA in 6 months. Keynes said it best: "It is dangerous... To apply to the future inductive arguments based on past experience, unless one can distinguish the broad reasons why past experience was what it was."
ununoctium87 6y ago
While QE is around, banks and rich people will need somewhere to stash the ‘free’ money government is giving them. Bonds and cash have negative real rates nowadays so the only thing they can do is pump up equities, real estate and alternative investments.
jedberg 6y ago
My favorite stat that I just recently learned is that only 50% of the companies on the fortune 500 in 2000 are still there, and only 10% of the companies on the list from 1955 are still there. So even if you invest in some pretty "safe bets" even those aren't necessarily very safe in the long term.
- jldugger 6y ago
  What does not 'still there' mean though? You lost all your money? Not quite -- Dell was number 51 and went private. Then they bought EMC, and have since gone public again. I'm not sure that investors lost through these transactions, considering DELL easily has enough market cap to justify a slot on the SP500. That's just the one off the top of my head, and https://en.wikipedia.org/wiki/List_of_S&P_500_companies#Selected_changes_to_the_list_of_S&P_500_components https://en.wikipedia.org/wiki/List_of_S&P_500_companies#Sele... has a ton of acqusitions on the list. Also worth mentioning that market cap weighting means can be protective -- if a stock enters at the low end of the wighting spectrum, underperformance is less impactful. But also when a fraud like Enron comes along, it does commensurate damage to portfolios.
  - jedberg 6y ago
    That's the S&P 500, not the Fortune 500.
    - jldugger 6y ago
      Oh, right. Well, i don't think you can invest in the fortune 500 =)
      - jedberg 6y ago
        Sure you can. You can invest individually in the stocks, or in VOO. But the point was a lot of the companies on the Fortune 500 are considered good buys from a value investor perspective, yet chances are 1/2 of them won't be a good buy in 10 years by the same measure.

38 points by prostoalex 6y ago

I've heard Charlie Munger say all investing is value investing. Or some variation of that. There are many great companies to invest in so I don't see an issue. Hell, putting all your money in FANG for the next 40 years is probably going to work out quite well.

skybrian 6y ago
It might work out, but how do you know? Are all prices good? How do you decide when the price is too high? Value investing was originally about valuing companies based on tangible assets. This doesn’t work very well for technology companies.
- ketamine__ 6y ago
  If you're going by the advice of Charlie Munger you buy a small number of companies and never sell.
  - skybrian 6y ago
    In that case you don't need to decide when to sell, but you still need to decide whether the price is low enough to buy.
- repsilat 6y ago
  One interesting interpretation: some folk say that if you make money in the market it's because you drove the market towards efficiency. If you bought low and sold high (control for inflation/rates/dividends/whatever) your purchase pulled up the price when you bought and pushed down the price when you sold, and the "time-traveller's arbitrage" was reduced. Say a company will live for 1 year, pay no dividend and perform no buybacks, but has some stock price. Say -X(X-1), so it starts at price=0 at t=0, ends at price=0 at t=1, and has positive but illogical/inefficient positive prices in between up to a maximum of p=0.25 at t=0.5. Now, someone who bought then sold on the up-slope -- with price impact -- would make money but increase the difference between the price curve and "true value" (which is the equation p=0.) But if you iterated those buying and selling operations with time-travelling argitrageurs, the realised value would eventually be the true value. The price curve would be p=0. So, in conclusion, maybe "all investing is value investing" is false under this interpretation, but true if there are time travellers involved. (There is almost certainly a more charitable phrasing.) Thank you for attending my TED Talk.

neonate 6y ago

https://archive.is/MmqvX https://archive.is/MmqvX

cjoelrun 6y ago

It usually does in a bubble.

dannyw 6y ago

Value investing is, by general definitions, shorting growth. You are investing in today while intentionally ignoring tomorrow. The value investors who have done well are those that recognise growth as a factor, and put money into Apple when they were comparatively cheaper. The value investors who have done poorly are those who buy low PE stocks, which are stocks of stagnant and declining companies.

reducesuffering 6y ago
This is incorrect. All of the 100 years of historical US market data show that the indices tracking “value” companies (of which one component is low P/E) have outperformed “growth” companies over the long term. There are several explanations for this, one that irrational investors periodically pay premiums for “lottery tickets”, like the “next FAANG or Tesla.” But while the explanations aren’t conclusive, the underperformance of growth is.
- jl2718 6y ago
  I find this interesting because return variance (risk) and mean are supposed to correlate positively in the ‘efficient frontier’ theory that value investing is based on.
  - reducesuffering 6y ago
    That’s another of the possible explanations. That value companies are usually more debt-ridden and in declining industries and are thus higher risk. Although one way to measure risk is std. deviation (volatility), and while smaller cap stocks are considered “riskier” and they have higher std. deviation, value stocks don’t have meaningfully higher std. deviation.
imtringued 6y ago
> Value investing is, by general definitions, shorting growth. You are investing in today while intentionally ignoring tomorrow. Well, Wikipedia [0] seems to disagree. >Value investing is an investment paradigm that involves buying securities that appear underpriced by some form of fundamental analysis. By this logic investing into stocks with verifiable growth is the way to go. Apple is basically the poster child of value investing. It's a company that is making lots of money and keeps growing because it releases new profitable products year by year. For some reason there is this belief that "value investing" = "boomer doesn't know stocks can grow". Yeah, one obviously has to think that those who engage in value investing are stupid, otherwise one would have to acknowledge that the stocks one is investing in have zero reason to grow as fast as they did, except that everyone else is also blindly buying them (which is dangerous circular reasoning and causes bubbles that pop once we run out of people who refuse to open their eyes). [0] https://en.wikipedia.org/wiki/Value_investing https://en.wikipedia.org/wiki/Value_investing

jonnybgood 6y ago

What I find more fascinating since the beginning of this year is the rise "meme investing" a la r/wallstreetbets. Huge speculative option plays among a huge swath of retailers on meme stocks. Self-proclaimed value investors like to call them "Robinhooders".

repsilat 6y ago
A few days ago there was a "passive income" AskHn[1], with links to similar threads from previous years, and this year there were a lot of "stock market" answers. My scientific ctrl-f survey has the string "stock" appearing 48 times in 166 comments this year, three times in 84 comments last year, once in 163 comments in 2018, and 6 times in 90 comments in 2017. And this year they were talking about leverage. 1: https://news.ycombinator.com/item?id=25316912 https://news.ycombinator.com/item?id=25316912
vmception 6y ago
As someone that's been in wallstreetbets for 7 years. The memes were always there, and that community has been glorifying losses for a long time. Mostly around options bets during earnings season. The only thing that has changed lately is that trading options become free. Options used to be prohibitively expensive. Oh yeah and a couple people killed themselves, the irony here being that people stop blaming the trader and blame the broker after the trader self harms? Convincing. But it definitely helped bring the attention from everyone that figured they had slightly better self preservation skills and could understand how settlement works. I'm glad undercapitalized people stopped gravitating towards penny stocks.
- cstejerean 6y ago
  What also changed this year is that a lot of other things to do for fun became unavailable due to Covid. Betting on stocks is something you can do from the comfort of your own home.
  - vmception 6y ago
    That didn't hurt for sure, but everyone wanting to be a day trader always happens during asset bubbles.

mrich 6y ago

You can of course try to ride the next Tesla, but please realize that even Yahoo had a market cap of $120 billion 20 years ago at the peak of the dotcom bubble, and was sold for pocket change four years ago. So do exit at the top :)

TooCreative 6y ago
What would have been the RIO of a shareholder who held $100 in Yahoo shares in 2000? I think Yahoo had some assets that it sold (like ~$40B worth of Alibaba shares) later on. Did the cash go into YHOO or into the shareholders account in some other way?
- toast0 6y ago
  I haven't been a YHOO shareholder since I left the company in 2011, but I saw a fair amount of discussion in former employee groups. IIRC, as part of the merger with Verizon, the Alibaba and Yahoo Japan holdings were spun out into a separate holding company (Altaba?) which was publically traded. A YHOO stockholder would get some amount of Altaba stock, and whatever the Verizon part was (I don't remember if that was Verizon stock, cash, a choice, whatever); probably no fractional shares. As the holdings were sold, there were large cash dividends, with holdbacks for taxes and contigencies. As the contigencies timed out, smaller dividends happened, and I think Altaba formally wound down with a final dividend earlier this year.

deleted 6y ago

[deleted]

OldHand2018 6y ago

Even 100 years ago, tangible assets have very little value without intangible assets to run them profitably. Worker knowledge, management, etc. I'm willing to agree that determining the value of intangible assets is harder than it used to be. But let's say you figure it out. Value investing is probably every bit as relevant as it was 50 years ago.

anm89 6y ago

I think this a bunch of words which are profound but don't look that way to many people. Value investing is another name for allocating your resources to things which are minimally speculative. To things which presently have value. There is somehting deeply wrong with a society which is no longer interested in this.

paulmendoza 6y ago
If the world is quickly changing then holding onto a bunch of sinking ships might not make a lot of sense. Look at a lot of the S&P 500 stocks. How many old world companies are potential targets for disrupting. Look at oil. It isn’t in a good spot. Some of the largest companies used to be oil companies. But not anymore by market cap. They are still paying dividends while losing money. How? They are taking loans out. At a certain point that stops and more investors wake up. But my time horizon in 5 to 10 years when picking investments.
- imtringued 6y ago
  Dividends are paid out on a single day. Not getting a loan to spread the costs of dividends over the whole year is insane at current interest rates. What are you going to do with that money? Sit on it? Oil companies are unsurprisingly going down because their bread and butter business is currently not in demand. In a few years things will look differently. The real problem is that a lot of companies don't have an obvious "bread and butter" that actually brings in enough cash to justify their valuations. They are mostly selling the dream of a monopoly to investors even when those future monopolies have no moat other than money.
lordnacho 6y ago
On that note, interest rates, even long ones, are really really low these days. One way to think about value and growth is to say that you need to discount speculative future incomes. Well it used to be that five or ten years out rates could be 8-15%, and then you had to compound. And that's just the cost of money, you need to think about how likely the income is in the first place. So it shouldn't surprise us that when rates collapse, companies with mostly future unknown income gain in value compared to those with current certain income. The big question is whether rates will ever come back to what we used to see.

syntaxing 6y ago

I can't read the whole article since it paywalled but hasn't his always been the case? Perceived value is the only thing that really matters in the stock market. Just look at Enron. I am really curious what will be the next Enron of our generation.

philth_ 6y ago
Perceived value is the only thing that matters short term in the stock market, but actual value is the only thing that matters long term in the market. Hence the rise of Warren Buffett

ajbonkoski 6y ago

Stopped reading at: "In the past week or so, fortunes have reversed. Technology stocks have sold off. Value stocks have rallied, as prospects for a coronavirus vaccine raise hopes of a quick return to a normal economy. This might be the start of a long-heralded rotation from overpriced tech to far cheaper cyclicals—stocks that do well in a strong economy. Perhaps value is back." Haha. No. It's not back. Over the past YTD, AAPL has returned 70%. The article's publish date is 11/14/2020. Around that timeframe, AAPL moved less than 5%. This is not evidence for collective change in investing philosophy. Perhaps tech is over-bought, but you have to argue better than this. It took me all of 2 minutes to check.

MattyMc 6y ago
Comparing the closing price of stocks today with one year ago: TSLA +900% AMD +250% ETSY +400% PTON +350% AAPL +200% Enormous gains. The article should really have more data to describe this pullback.
- imtringued 6y ago
  That's insane. Of those stocks only the growth of AMD is justified because it was starting off from a small base anyway and it is in the process of replacing Intel entirely so creeping up to Intel's market cap is not surprising. Tesla makes absolutely no sense to me. Etsy is just an online shop and it sells a lot of crap. Pton is probably just a corona fad. AAPL is slightly encouraging because it obviously has some well justified growth left in it but it's not overhyped to the extreme extent as the other stocks. All stocks are still growing way too quickly in my opinion though.
reducesuffering 6y ago
And it took me all of 2 minutes to check that the last months US total market performance was +2.5% while the canonical US Value ETF, VTV, returned +4.4%. That is what they mean.
- Tinyyy 6y ago
  Are we really looking at a months worth of returns and trying to draw any conclusions here?

prewett 6y ago

"This time it's different!" Sounds like we might be getting to peak bubble....

marcusverus 6y ago

I'm a value investor because I can estimate the price of BRK.B in 10 years with far more confidence than I can the price of TSLA in 6 months. Keynes said it best: "It is dangerous... To apply to the future inductive arguments based on past experience, unless one can distinguish the broad reasons why past experience was what it was."

ununoctium87 6y ago

While QE is around, banks and rich people will need somewhere to stash the ‘free’ money government is giving them. Bonds and cash have negative real rates nowadays so the only thing they can do is pump up equities, real estate and alternative investments.

jedberg 6y ago

My favorite stat that I just recently learned is that only 50% of the companies on the fortune 500 in 2000 are still there, and only 10% of the companies on the list from 1955 are still there. So even if you invest in some pretty "safe bets" even those aren't necessarily very safe in the long term.

jldugger 6y ago
What does not 'still there' mean though? You lost all your money? Not quite -- Dell was number 51 and went private. Then they bought EMC, and have since gone public again. I'm not sure that investors lost through these transactions, considering DELL easily has enough market cap to justify a slot on the SP500. That's just the one off the top of my head, and https://en.wikipedia.org/wiki/List_of_S&P_500_companies#Selected_changes_to_the_list_of_S&P_500_components https://en.wikipedia.org/wiki/List_of_S&P_500_companies#Sele... has a ton of acqusitions on the list. Also worth mentioning that market cap weighting means can be protective -- if a stock enters at the low end of the wighting spectrum, underperformance is less impactful. But also when a fraud like Enron comes along, it does commensurate damage to portfolios.
- jedberg 6y ago
  That's the S&P 500, not the Fortune 500.
  - jldugger 6y ago
    Oh, right. Well, i don't think you can invest in the fortune 500 =)
    - jedberg 6y ago
      Sure you can. You can invest individually in the stocks, or in VOO. But the point was a lot of the companies on the Fortune 500 are considered good buys from a value investor perspective, yet chances are 1/2 of them won't be a good buy in 10 years by the same measure.