Okay, there has been an extensive empirical testing of the value effect. Value stocks tend to outperform growth stocks. Does this mean/imply that value funds outperform growth funds ? Anyone has an opinion ? Yes/No and why/why not ?
There are two types of Value investors. The academic type and the Buffett type. The academic type believes that you “get paid” for taking excess credit risk and thus buys low p/e, p/b, p/s stocks without regard for qualitative analysis. These tend to be cylical, mature companies, with higher debt than average. The academics have been correct historically as the economy always gets bailed out in the US and the US has been an amazing wealth creator as well. But, taking excess credit risk is not working out very well right now. The Buffett type believes that growth and value investing are not different things. All investing is value investing. Growth is a component of value. Thus the Buffett type buys companies that are trading at value levels but have growth in the business. The Buffett type does qualitative analysis looking for companies with durable competitive advantage. The Buffett type is also not working out very well right now, but is not as bad as the academic type. This is because the Buffett type’s first concern is avoiding catastrophic risk which there is quite a bit of going around right now.
Well said.
The excess return is not from “credit risk.” Its from increased systematic risk. The cyclical earnings and higher leverage impact systematic risk as well as credit risk. STill, I got the Warren Buffet Way in my car cd player now, and that was a pretty damn good synopsis.
lig, the buffet approach to value investing seems too unquantifiable to me. I doubt that even Buffet can understand himself. Growth used in combination with funds would imply funds that invest in low b/m stocks. Competitive advantage although relevant is not a characteristic that you can use to determine if a fund is a growth or value. How would you measure the degree of investment in stocks ranking high on this “dimension of value” ?
His purchases of Coke, Washington Post and General RE would not be considered truee “value” plays. Buffet has strayed pretty far from Graham and Dodd.
Any long-term trend line will show that a purchase of a quality stock for a extended period of time will out-yield any other investment. Buffets a smart man, but I don’t think this style of investing should be given any special attention.
2x2equals4 Wrote: ------------------------------------------------------- > lig, the buffet approach to value investing seems > too unquantifiable to me. I doubt that even Buffet > can understand himself. Growth used in combination > with funds would imply funds that invest in low > b/m stocks. Competitive advantage although > relevant is not a characteristic that you can use > to determine if a fund is a growth or value. How > would you measure the degree of investment in > stocks ranking high on this “dimension of value” ? You’re making it much more difficult than it needs to be. Value investors seek to invest in situations in which the cost of doing so is substantially less than the present value of future cash flows. This can be achieved by investing in: 1. crappy, cyclical companies with low P/E ratios, or 2. investing in companies continuing to grow and generating excess returns on invested capital. Buffett, and most legit value investors today prefer the latter over the former. Their reason for this is the fact that the value recognition of investing in low MV/BV (i.e., bad) companies can take an extremely long time to occur. Buffett learned this towards the end of his Partnership days. He invested in poor companies trading near liquidation value. While he had a margin of safety (liquidation), it sometimes took years for any of this value to be recognized. While they’ll produce above-average returns over longer periods of time, they won’t be spectacular. Buffett realized this and began investing in companies generating substantial returns on invested capital while sporting attractive valuations. While these companies are also cheap on an absolute basis, they have the catalyst of recognizing this value by continuing to grow and expanding their valuation multiples. It’s all about finding a catalyst to help publicize the value of your investment. If you can find good companies with no catalyst, you’ll generate above-average returns. However, if you can find good companies trading at cheap valuations with a near-term catalyst, you will produce great returns. This is the key to investing and anyone who tells you otherwise doesn’t know what he/she is doing.
cfacowtown Wrote: ------------------------------------------------------- > Any long-term trend line will show that a purchase > of a quality stock for a extended period of time > will out-yield any other investment. Buffets a > smart man, but I don’t think this style of > investing should be given any special attention. It was given special attention by Greenblatt, Einhorn and Klarman. Seems to have been a good decision by them…
Yea, I’ve read most of Buffets stuff, don’t get me wrong, he’s made a lot of money. Hard to argue with success. Hard to argue with Einhorn for that manner. The theory behind value invest is not revolutionary, but it does succeed in producing capital gains. I’m just skeptical that this is the “ultimate investing strategy”, as some make it out to be. As with any investing strategy it has its supporters and its critics. Just look at the dispute over technical analysis…although I swear Tim Sykes single handedly destroyed any reputable aspect of TA just by being associated with it.
I agree with the concept of catalysts. But how to recognize one when you see one. Can someone help with a list of most common catalysts to look for in an analysis?
bchadwick Wrote: ------------------------------------------------------- > I agree with the concept of catalysts. But how to > recognize one when you see one. > > Can someone help with a list of most common > catalysts to look for in an analysis? Share Repurchase Cash Dividend Spin-off Initiation of sell-side coverage Restructuring Strong Insider Buying Underestimated Growth (huge catalyst)
bchadwick Wrote: ------------------------------------------------------- > I agree with the concept of catalysts. But how to > recognize one when you see one. > > Can someone help with a list of most common > catalysts to look for in an analysis? Share Repurchase Cash Dividend Spin-off Initiation of sell-side coverage Restructuring Strong Insider Buying Underestimated Growth (huge catalyst) New business line
bchadwick Wrote: ------------------------------------------------------- > I agree with the concept of catalysts. But how to > recognize one when you see one. > > Can someone help with a list of most common > catalysts to look for in an analysis? Form 8-k.(spin-off, merger, restructure, recapitalization, right offering, de-indexing, privatization, distressed debt, bankruptcy, post-bankruptcy, share repurchase, proxy fight, sale of asset, liquidation…)
Cheap stocks generating substantial ROI seems to me like a major contradiction of the EMH. But even if you consider this as a stock that seems undervalued in the context of the high ROI, its again simple value investing and the market may take years to revert to fundamentals. Could be that the market perceives the reversion as as occurring in the very long run which makes the stock more or less risky. So again reward commensurate with risk.
Thanks for the catalyst list. It seems that the key feature of a catalyst is that it is some kind action that brings the company into the spotlight, and perhaps makes other analysts take a closer look at the stock value. The hypothesis here is that market value can drift from various estimates of intrinsic value while people aren’t watching, and then some event focuses attention on the company and other investors say “hey, this is undervalued, let’s jump in.” If you’re already there, you then benefit from the convergence to value. If you can see catalysts coming down the pike, you can then position yourself more effectively, since while you have your position open, you are also exposed to “fundamental risk” (risk that the company fundamentals will change in some unpredicted way while you’re waiting for convergence to value). Does that sound right, or is there something major I’m missing here?
I don’t disagree with anything you said. The ability to spot catalysts before others is a huge edge. With every investment you make, you must make sure you have an edge because 9/10 times you will be wrong. For instance, don’t tell me that you think investing in Sears is a good investment because “it’s trading at a low P/E ratio.” The market is quite efficient, so odds are it’s going to take more than that to generate excess returns.