Author Topic: Value Investors  (Read 1982 times)

zoro

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Value Investors
« on: November 10, 2020, 06:13:55 AM »
I know the orthodoxy here is indexing everything, but I'm wired as a value guy, always have been, and I thought you might like this post I put on my blog in August. I think its very relevant today.

No one seems to talk about value anymore, I mostly hear people talk about the future growth potential of companies. Then again, those who have cared about valuations have spent the last year having their nut sack nailed to a wall, so I cannot fault value nerds for abandoning the true religion to now pay 40 times revenue for unprofitable growth. There’s a powerful incentive to ignore facts and go with what’s working and value investing clearly hasn't been working.
I don't disagree that some of these asset light companies are great businesses - almost always superior to a capital-intensive industrial business and for that matter, a branded industrial business is still preferable to a capital-intensive commodity business with volatile pricing. I think most intuitively understand this. However there is a price for everything and as more and more capital concentrates on the “best businesses,” amplified by indexing the rest of the market has collapsed to valuations that are insane.
In the thirty years I’ve been reading investor letters, I would argue that the valuation gap has never been this large.  Even in 2000 when there was a massive gap, it was not 2020 big. During the growth correction that followed growth collapsed 3000 basis points relative to value.
I don’t know when, but there will be a massive re-allocation at some point and capital will flee from the high flyers and into the more mundane businesses that I obsess about. This process will be fast, sudden and violent.  Like the Spanish inquisition no one ever expects the mean-reversion. When the smartest value managers I know write investor letters where they talk about business quality and ignore valuation, who else is left to buy at these crazy levels. “growth” stocks have never been as crowded. Many people are openly joking about the alpha frauds create, as they throw in the towel on common sense and succumb to performance pressures. This is how tops are made.
In order to exploit this when it happens I have started putting on mean reversion trades keeping market neutral by shorting QLD (a proxy for 2x QQQ) i.e shorting growth, and buying IWN - the Russell Value index. 

cool7hand

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Re: Value Investors
« Reply #1 on: November 10, 2020, 06:49:12 AM »
I think that the indexing folks like me read this and see market timing. If you are right that there will be some seismic shift to value investing, the indexers are minimally insulated against it because they hold both growth and value companies. But because the shift might never occur or because of the lost opportunity to benefit from growth stocks pending the shift, why not just index?  Then I don't need a crystal ball to see the future. That's how I think about it.

zoro

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Re: Value Investors
« Reply #2 on: November 10, 2020, 08:20:52 AM »
Yes i can see why indexers could view it as timing. My philosophy is a bit different - maybe you could call it 'value timing'. I aim to sell things that are insanely expensive, and buy things that are good value based on the DCF of their earnings. I think both approaches are consistent with being MMM.
I also think it applies to all asset classes. For example - my first rental building I bought in 2001 for $81k it was a good deal. $1000 in rent/month. Prices went - crazy rents didn't. The DCF didnt make sense I sold it for $240k in August 2005. After the guy who bought it went bankrupt, I bought the same house back in 2015 for $66k at the foreclosure auction.  (Now im getting $1575/month in rent)
Its the exact same process I follow for my stock portfolio.

MustacheAndaHalf

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Re: Value Investors
« Reply #3 on: November 10, 2020, 09:34:06 AM »
I think you're about 2 days too late to say growth has never been as crowded.  Covid-19 news has dominated the market for months, and Monday was no exception.

Movie theaters shut, so people flocked to Netflix.  Malls and retail shut, so people relied on Amazon heavily.  Cloud services became in demand, benefitting numerous tech companies.  All of those are growth stocks, which have benefitted from a lack of competition.

Banks are tend to be some of the bigger value companies in the market, and they've had to deal with much lower interest rates.  Lots of other value companies are brick and mortar businesses which have been closed or unable to return to full capacity.  So value has been hurt by Covid-19, while growth has benefitted.

Monday's vaccine news began a shift towards value, away from growth.  Bank stocks went up over 10%, while the tech-heavy Nasdaq is down 2 days in a row.  With more vaccine news, I think you'll see more of the same.

It looks like Covid vaccines could end outbreaks by the middle of 2021, so I plan to stay value tilted until then.  I guess I'm a "bad weather" value investor, since I plan to drop my value tilt before summer.

ChpBstrd

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Re: Value Investors
« Reply #4 on: November 10, 2020, 07:18:22 PM »
A tilt toward value (and small caps) might make sense from the perspective of someone trying to preserve their portfolio from a 2000-2003 size bear market (the parallels are compelling). However I don’t think I’d be doing any shorting based on such a theory because the market can stay irrational for many years, and already has. 2019 probably demolished a lot of shorts. What has changed about the rationale for value in the past 10 years?

I might consider buying call options to get more leverage on value right now.

Now that the end of the pandemic is within sight, what should we expect compared to 2020? Growth, right? I expect travel and restaurant consumption to match 2019 levels by end of summer. But of course, these are “money losing” industries. I think value investors should use 2019 as their reference year and pretend 2020 didn’t happen.

vand

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Re: Value Investors
« Reply #5 on: November 13, 2020, 12:29:38 AM »
This is a pairs trade and frankly has very little to do with value investing.

Will it work? No idea, but I do know that bull markets tend to end on euphoria and it doesn’t feel to me that we have got there yet.. it has the potential to go very wrong very quickly if markets are entering a euphoric bubble phase because it’s going to be the growth stocks and the market darlings that are going to continue to lead the market, not banks and oils stocks.

A core tenet of value investing is the concept of "margin of safety" and the importance it places on return of capital, ahead of return on capital. This OP has no margin of safety. If your investment thesis is wrong there is no gaurantee of any return of capital.
« Last Edit: November 13, 2020, 01:24:40 AM by vand »

vand

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Re: Value Investors
« Reply #6 on: November 18, 2020, 02:58:21 AM »
Well , we just seen the biggest ever rotation from growth to value..

https://www.mauldineconomics.com/the-10th-man/death-by-style-box?fbclid=IwAR0GQtscxvDvOf35aR4nypb6dXknsmUBy0_qXZfUM3GYyKioG78aEBf3qEI

That said, QQQ still went up, so the arbitrage strategy didn't work as well as the outright value strategy.

zoro

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Re: Value Investors
« Reply #7 on: November 18, 2020, 06:22:06 AM »
yes that is kind of correct Vand but remember owning iwn has full market exposure. the short qqq / short value pair doesnt have the same exposure, so the fact it has been printing money without full market exposure is good.

MustacheAndaHalf

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Re: Value Investors
« Reply #8 on: November 19, 2020, 07:35:42 AM »
Growth and value aren't the only available choices - there's deep value stocks, like these two stocks I've invested in:

Macy's is -45% YTD... after going up +45% in the past month.
Carnival is down -64% YTD, despite having a +40% jump the day vaccines were announced.

I'm buying distressed stocks and waiting for them to recover.  Over time, I expect stocks that are down -50% to recover, which means doubling.  For all I know, tech stocks will double in that same time frame - but the deep value stocks seem more certain to do so.

Another example is Invesco S&P SmallCap 600 Pure Value ETF (RZV), which according to morningstar is up 11.5% in the past 30 days, while QQQ is up 0.6% in that time frame.  With the vaccine news, I think that makes sense.  But in another month, I actually expect their roles to reverse: tech should rise with Covid cases, while Covid impacted stocks lose more business.

vand

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Re: Value Investors
« Reply #9 on: November 21, 2020, 02:18:39 AM »
A tilt toward value (and small caps) might make sense from the perspective of someone trying to preserve their portfolio from a 2000-2003 size bear market (the parallels are compelling). However I don’t think I’d be doing any shorting based on such a theory because the market can stay irrational for many years, and already has. 2019 probably demolished a lot of shorts. What has changed about the rationale for value in the past 10 years?

I might consider buying call options to get more leverage on value right now.

Now that the end of the pandemic is within sight, what should we expect compared to 2020? Growth, right? I expect travel and restaurant consumption to match 2019 levels by end of summer. But of course, these are “money losing” industries. I think value investors should use 2019 as their reference year and pretend 2020 didn’t happen.

I remember reading about the Anthony Bolton whose very successful career was built upon investing in small cap value, but it came with the warning that small caps are definitely not the place to be if you want to preserve capital during a bear market. The small caps get hit harder than most other sectors as there is always a flight the percieved safety of bluechip stocks.

hodedofome

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Re: Value Investors
« Reply #10 on: November 22, 2020, 11:17:47 AM »
Agree with the comment bull markets end with euphoria. I’m not seeing euphoria yet, therefore I remain invested 100% of my net worth in tech growth stocks. Software, to be exact. Up about 70% YTD, so no complaints here.

Rob_bob

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Re: Value Investors
« Reply #11 on: November 22, 2020, 02:27:16 PM »
Since I don't know which will do better, growth or value, my three largest holdings are VV, VO and VB.  Vanguard Large, Mid and Small cap value/growth blend funds :)

 

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