I am in need of advice from someone who follows, practices or have in-depth knowledge around the methodologies of value investing. And if you happen to have experience working in a value-oriented shop or a fund I’m all ears - your advice would be the most ideal. I have a keen interest and knowledge around value investing with an ability to write research reports based on the value philosophy - all at an amateur level at this stage. Also, a career switch from consulting to IM is something I’m actively looking into currently. I took L2 this past weekend and I am contemplating whether I should continue with the program. My decision is mostly likely going to be based on the weight given to the CFA program by the value investing community at-large. I also have a quibble or two about the contents of the program. I can’t think of any well-known value investors other than Howard Marks and Irving Kahn who have the designation - although they received theirs many generations ago. The scarcity of the charter among value investors isn’t the only reason I’m having second thoughts - it’s also due to some of the contents within the CFA curriculum. To put it mildly and in all likelihood, I have no use for most of the contents other than FRA (the most enjoyable), Ethics and parts of Equity. The foundational underpinnings on the treatment of other areas may be important for breadth of knowledge for some, however to me the academically driven nature of the program is a turn off. Here are a few quibbles: 1. The program’s inundated focus on the theoretically correct CAPM and the whole Markowitz optimization scheme drives me to tears - how many times have the practitioners proven that beta is a measure of price variability and not risk - so I cringe every time CAPM shows up - and I think it’s by far the most used formula in the program! 2. And the same goes for many other academically driven concepts which I don’t really have much use for (more focus on strategy and less on quant would have been beneficial - eat your heart out you quants). I am certain that views from other value investors are bound to be similar on the theoretical aspects of the program. And trying to be pragmatic about this whole CFA experience, my circle of competence (as Buffett utters often times) beyond equities is very limited. I will never be a F/X trader or an equity swap arbitrageurs. However, I’m good at valuing non-financial related equities with a focus on small cap. Boring I know but THAT is all I really want to do. That said, here are a few queries that will be really helpful to get your views on: 1. How much weight is given to the CFA program from the value investing community at-large? (should help in assessing the program’s influence during transition) 2. Given my focus and energy is small cap equities with value focus, is CFA likely to further add *value* to my analytical tool? (should help to understand whether the program is going to provide long-term benefits once the full transition has been made)
Nowhere did I mention I was taking up CFA to learn value investing. But I will give you benefit of the doubt and just squeeze in this little statement from my post above: “I have a keen interest and knowledge around value investing with an ability to write research reports based on the value philosophy”.
CFA is valuable, but it’s also an overview of approaches. A more in-depth overview than you’ll get in most academic programs (which may provide more depth in certain areas but without the breadth). So you take out of it what you want. It’s useful to know some of the other bases for investing, if only so that you know who you are playing against in the active management field.
Everyone knows that CAPM is incomplete. CFA’s focus on CAPM isn’t out of dogma, it’s out of practicality. CAPM is just one way to estimate the amount of return that should be required for the level of risk, but it’s just overkill to teach each and every variation for generating an expected return value. There are many many other ways to estimate it, and quite frankly, a lot of value investors just say “forget about it, we’re going to use a discount rate of 15% for everything, no matter what it is.” Personally, I think that’s kind of a crude approach, but if you figure that hard-wiring 15% as your discount rate doesn’t miss the target on opportunities any more than CAPM does, it’s not necessarily unjustifiable. Personally, I think the higher you make that discount rate, the more likely you are to pick up value traps, so I prefer something more CAPM-y.
If you have a good due diligence process that can remove the value traps, then a constant and high hurdle rate isnt’ necessarily a bad thing, as long as you can find things that fit it.
I get that price variability isn’t the only kind of risk, and that in many cases it isn’t even the most important kind of risk, but I don’t accept that price variability is not risk at all. I think Beta is relevant, even if it’s not the whole story. It’s particularly relevant when you’re doing attribution, and trying to separate whether you did well because you’re an awesome stock picker from whether you did well because a rising tide lifts all boats.
At this point in your “career”, I think you should take a humble approach and accept any education… considering you havent worked a single day in Finance.
Secondly, nobody that has ever gone through this program uses the entire ciriculm… you just have to go through it, consider it a right of passage. If every candidate that felt the ciriculm was less than 75% relevant dropped out, their wouldnt have been anyone taking these test last saturday.
Wasn’t the program started by Ben Graham? If not this, what the hell find of education are you looking for then? If you want an excuse to dropout here, I dont think anyone is going to give it to you. Just go read Security Analysis and call it a day.
Also, regarding capm, guess what is in a price? All types of risks, so all these risks that you’re referring to that make value investing so special, they’re distilled into that little number with a dollar sign infront of it… that little thing is an aggregator of all information and types of risk.
I am certainly not against the CFA contents for the sake of cherry picking on concepts which I don’t find useful - the statistical permutations that come out of some of the contents are probably going to be more invaluable for many. It just happens that value investing takes a very crude approach to looking at a piece of asset without ANY such statistical based analysis. There is some probability practicum involved, but that’s as far as stat goes.
During the past several years I’ve spent my time reading up on tons of materials related to what I practice now and those materials are sort of etched into my brain so much so that when I read something contradictory I feel it’s important for me to point them out, more so when it’s academic. Out of the readings, valuing a non-financial company has become such a passion that I’ve done it 100’s of times (more on specialized sectors than others). And I’ve gotten fairly decent feedbacks on them. I am also hoping that the overlap between my mgmt consulting background and value driven funds helps somewhat in the transition as there are lots of similarities in strategy formulation (extensive), stakeholder appraisal, shareholder value analysis, etc.
What I don’t know, apart from my few value-related firm contacts, is whether the designation is going to cause praise or ‘nice to have’ sort of view. THIS is the answer I am after. I think I am way too much into the investing style which I really enjoy and the CFA contents won’t be helping me much in that aspect other than to say that I belong to the club if I were to go through with the rest of the exam(s) and receive the charter. I am not trying to be facetious but if an MD at a value firm says to me that I need to get the charter to get in then I’ll do it. Thus far the responses I am getting haven’t been pointing me in that direction.
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I am happy to hear that you have managed to put CAPM to use Chad but my stance on the viability of CAPM or its variations is a solid ‘no go’. After extensive research I’ve found that the overwhelming empirical evidence of its fallacy is pretty cut and dry. And these evidence comes from real heavy hitters - W Buffett, B Graham, J Grantham, S Klarman, etc. What was really damaging was one of the backtests done by these men had an opposite effect - low beta stocks overwhelmingly outperformed the high beta ones over some 60 yr period. The reputation and the performance of these investors are second to none so I am in no position to question their concluding evidence. In academia, Fama & French also published a similar finding several years ago. To cap it off, there was an article written some time ago where Harry Markowitz himself said that he does NOT use the CAPM.
You need to do what you think is best. Sounds like you’ve already decided and are just looking for confirmatory evidence. Good luck on whatever you do.
As for CAPM, no one is saying that it works well. The question is: what do you replace it with? And does what you replace it with perform any better? You can use a fixed hurdle rate, but that has lots of errors in it too. Do you really believe all stocks should have the exact same expected return, regardless of volatility, capital structure, valuation, etc??? Because that’s what you’re saying when you use a fixed hurdle rate. And if you are going to scale your expected return relative to percieved risk, then what are you going to use?
There are possible answers to this. My use of CAPM is not because I think it is correct. I just think it is more correct than picking a hurdle rate out of the blue, and less complicated than some of the other approaches, which don’t appear to explain much more. Someone with decades of experience might be able to use subjective feel to say “companies this risky ought to deliver X,” but what are you going to do until you have those decades of experience?
The outperformance of low beta vs high beta is a known phenomenon and the best explanations I’ve seen have to do with investor contstraints on the use of leverage. Investors who want to lever but aren’t allowed to do so compensate by moving to higher beta. This creates an excess of demand for high beta relative to low beta stocks, which means that the price for high beta stocks gets pushed upwards. Higher prices correspond to lower returns over time.
By the way, if you use a high hurdle rate, your picks are going to be biased toward stocks with a high beta anyway, which - as you pointed out - gives you lower yields than lower beta stocks, which won’t have such hefty discounts for volatility and therefore will rarely deliver sufficient returns to pass the hurdle rate.
Yes, people in value investing or related fields value the CFA program. In fact, the incremental benefit is most significant for people with little formal investing work experience.
Trek, I dont think any really uses beta per say forming investment strategies (i certanly dont), it just has explanitory power that is useful. You have to remember, its a single factor model an it isn’t supposed to be flawless, it has an R Squared of about .70. Considering the explanitory power of the model, lots of strategies are going to show statistically signficant y-intercepts using it.
Low volatility strageties tend to have exposure to other factors not caputure by the single factor model ie Bchad’s notes, they’re also tilted towards Value.
I don’t see anything wrong with the model, you have to understand its use and limitations.
Anyways, what’s your resume look like w/o the charter? Tope School? We know you have consulting experience, anything else that makes you more value than a kid fresh out of Wharton? Because if you just tell someone that you want to work in IM and you’ve read lots of books they wont care.
(Sorry for the type-o’s, really busy @ work rt now)
I think Level 3 (or its content) its kinda crucial to be a good investor.
I mean, you can ultra-mega specialize in value stocks but, if stocks go bad for the next 30 years, your results will hardly shine. If you take Warren Buffet’s results since 98, he once again dominates the S&P 500, but a lot of alternatives (even passive ones) made a lot more money.
Knowing something about how to build a portfolio, and how different asset classes, countries and industries interact may help your results, and may even lead you into possible career moves that you wouldn’t expect.
Even if you intend to be a specialist, I believe it is a very good idea to get an overall knowledge of portfolio management. Even if you can’t build a true efficient frontier with actual future returns, the concepts behind diversification and its nuances can be pretty useful - even if you don’t want to quantify them.
At worst, you’ll know what a hundred thousand professionals learned doing the CFA, and may use that to explore their weaknesses.
I think Level 3 (or its content) its kinda crucial to be a good investor.
I mean, you can ultra-mega specialize in value stocks but, if stocks go bad for the next 30 years, your results will hardly shine. If you take Warren Buffet’s results since 98, he once again dominates the S&P 500, but a lot of alternatives (even passive ones) made a lot more money.
Knowing something about how to build a portfolio, and how different asset classes, countries and industries interact may help your results, and may even lead you into possible career moves that you wouldn’t expect.
Even if you intend to be a specialist, I believe it is a very good idea to get an overall knowledge of portfolio management. Even if you can’t build a true efficient frontier with actual future returns, the concepts behind diversification and its nuances can be pretty useful - even if you don’t want to quantify them.
At worst, you’ll know what a hundred thousand professionals learned doing the CFA, and may use that to explore their weaknesses.
My apologies for this super late response - been traveling and just plain busy.
The discount rate has to be, by far, one of the most debated subject . The rate used, I think, depends on two things: experience and investment philosophy - and this obviously means there is no single right answer.
CAPM seems all too confusing and complicated as I try and seek a precise rate based on invalid assumptions, i.e. historical price movements. If prices head deep south volatility goes up (and thus, the beta) rendering the stock MORE risky - albeit they may be now considerably LESS risky than before (given the core fundamentals have not changed). Add to that the cost of debt and calculate the WACC given some fancy forecasting for the target cap structure - and the rate becomes a blur.
I think there is danger when risk is inherently tied to the discount rate - assessment of risk is more sensical when performed at the strategic level, i.e. corporate strategy, management - and what price you end up paying. If that is my definition of risk then using a fixed rate allows me to level the playing field by comparing different set of investment ideas in terms of their value. Over time and with more experience, the margin of safety can then be adjusted - in other words, there is no need to alter the discount rate.
High beta does not necessarily equal high prices. High beta can also be a result of lower prices - and if so, lower prices and lower returns don’t correspond very well. As I recall, leverage was not a factor in the study.
Correct, this is what the study reveals. However, the Markowitz risk and return paradigm gives us an opposing view - i.e. high beta should be rewarded with high return. In contrast however, a high discount rate equates to lower valuation - and therefore less price, which can mean a greater chance of higher return.
A couple of the gazillion quotes from WB:
“If you’re an investor, you’re looking at what the asset – in our case, businesses – will do. If you’re a speculator, you’re primarily forecasting on what the price will do independent of the business.”
"I put a heavy weight on certainty. If you do that, the whole idea of a risk factor doesn’t make any sense to me. Risk comes from not knowing what you’re doing.”
Nothing really awesme to brag about. Undergraduate business degree - finance major from Top 3 (US News & World ranked) business school. About 9 yrs of exp in business brokerage (privately held micro caps), programming (technical), business development (includes 2 start-ups) and about 4 yrs of mgmt consulting (large Tier 1).
The majority will probably agree with you on this. However - I have a different take on it given the investing path I am following. I maybe wrong but I think you are hinting at a top MBA and/or CFA (without any pior IM exp, of course) - which is pretty cool to have - it will certainly increase the chances of getting a foot in the door. There is no argument with that at all. BUT what it won’t do is make you a BETTER investor. Neither of the qualifcation is practical enough to do that. Better yet, a person with a top MBA or the charter will tell you this. Yes, it will give you bragging rights and a vast pool of network BUT to be truly producing alpha you want to follow a certain type of investment philosophy (according to your myers briggs and guts to go with it) and learn them frontwards and backwards on your own or through a successful mentor.
As you may know, the IM shops all vary and have mandates that require certain pre-requiste skills. When someone new to IM with an MBA/CFA finally settles in with a role, the top mgrs at the firm may become their mentor - and these mentors may suggest *certain literatures* which they MUST fully digest in order to better understand the practices and the investment styles of the mentors or the firm. So, when I say *books* I am referring to these literatures which fit in or are specifics to a particular investing style. And if you fully read and understand the majority of literature out there and anything related to it that befits your investment strategy (which the mentors are going to throw at you later anyway) - then this gives you a far more better ammunition during interviews. The really good ones - I mean the ones which are slightly north of top notch performers - by the time of interview they’d have drilled holes in certain industries they are interested in specializing and have applied what they have learned and then learned from what they have applied 100 times over - add to that the actual evidence of company research reports followed by investment performance (albeit amateur at this stage) - the chance of being shortlisted would be quite high. Going after something you feel really passionate about is not a new concept.
To land an interview I am hoping that the networks through my consulting, almuni and the investment community contacts are going to be *somewhat* resourceful in pointing me towards some target IM firms, let’s see how that goes. In the mean time, I am happy generating new investment ideas and supporting my investment thesis through writing research reports on my own.
I suppose you’re a fan of Bill Gross - but recession for the next 30 years a bit extreme, no? Even if so, short value plays do exist - READ: David Einhorn. WB’s success is to be blamed, really, for his lag in performance in recent years - I mean are you likely to outperform the index by 20% given you’ve got AUM of $1m or $50b? Buffett’s AUM was $1m around 1960. As you can imagine it takes a lot of skill (even with WB’s calibre) to put huge sums of money to work and get a similar return as you would with $1m.
Agreed on your last sentence - but not much on the portfolio construction bit (none of that is very useful for me). Having said that though I’ve yet to decide whether to continue with the CFA program.
I think many areas in finance respect the designation. Another value investor apart from Gross and Kahn who has it is Charles Brandes.
I don’t think it will ever hurt you. CFA is only there to give you the tools, not to pollute your mind with EMH, and it is a strawman to think that way. I did not major in finance, so I dramatically benefited from the program.
I didn’t mean a 30 year recession, but comparatively worse investments. Let’s say stocks are growing 5% a year with little volatility for a long time. You’ll need to work hard for good longs or shorts, while you may miss the next MBS, LBO, Emerging Market or whatever is gonna get the big easy money in the next few decades.
Of course, if you are completely certain all you ever wanna work with is nonfinancial stocks, then that’s a moot point. However, once you learn more about some other topics, you may decide they interest you as well - that’s how it works for me, at least.
Portfolio Management - may be better than you think. Once you understand how to hedge and properly diversify risks, you can take much more risk in your biggest opportunities. It’s also good to better understand the weakness of some indicators that may mislead you (Sharpe, Treynor, IR, etc…). You must learn how to make money, and also how to keep it from disappearing (LTCM style).
Relevant knowledge - Of course the program can add to your knowledge. How relevant it will be for what you do is somewhat harder to evaluate - some parts of the curriculum may not apply to you today, but in a year or so you may find an opportunity where something previously overlooked will be valuable.
I think you should at least take a look at L3 curriculum (books, not Schweser, since the details might matter to you) - hidden in there are hundreds or thousands of little interesting gems that you may not know, and some of them pass very quickly - like the statistical advantage of selling puts because people like insurance, or how analysts suck at forecasting stocks, but are kinda good at predicting which countries will do better… It also teaches in some depth how you can do synthetic stuff with derivatives (let’s say you want to sell an index and buy it back in 6 months - easier and cheaper with derivatives) or some ways to play with your long shorts, alpha and betas.
When you take notes of all the little things that might be useful, you may generate a bunch of ideas. You can then search for the original articles that explore all that depth.
You can see I like the curriculum. And, obviously, the CFA program is just one tool.you may also buy a bunch of good books and learn a lot from them.
That said, if you just want pure stock valuation, maybe it’s better to start reading most of Damodaran’s collection and you’ll have a lot of stuff more directly related to what you want. I suggest Damodaran because his work is a little more structured, but as you know there are a lot of books from great investors and slightly different value strategies out there.
Value investors valuing the charter - I think it’s getting more and more value compared to a few decades ago. It’s basically an implementation of a Graham’s idea, so you can’t get any certification closer to value. Most charterholders got the charter in the last 10 or 20 years, so it’s likely that in the future some top value guys will be charterholders - there’s no point in guys like Gabelli or Greenblatt to go back for the charter today.
And if you ever want to use it to get a job/promotion (not sure why would you care if value investors care for it?) it’s probably better to have finished CFA than to have dropped it middle way (it will look like you gave up).
Beta - On another note, CAPM and Markowitz can be labeled as pretty stupid as mathematical tools to arrive at precise answers. However, they are tools that can get you thinking.
For instance, there may be no point in fearing volatiity, but if you fear permanent loss of capital, it’s a pretty good idea to have your portfolio in things that won’t all lose your capital at the same time (risk diversification anyway). And even though L2 valuation may seem unrealistic to some extent, it’s not that different to what many value investors do - try to have some idea of future earnings, make some adjustments to book value and what not - a lot of them will also pay a lot of attention for some kind of competitive strategy idea, which is also on L2 - but you can and should go deeper with Porter books or whatever.
If you like small cap value, read bromion’s posts in here - he’s in that field and seems pretty knowledgeable.
Also, for professional development, most experienced people say that having a good mentor is very useful. If possible, you may try that as well.
Wrote too much already. Good luck with whatever you decide!
Edited because: my original post was all over the place (even more than this one)