Value Investing | Value Investing - Is There Still Room For It?

30th Jun '19 by Magicmerve

10 comments 1425 reads

Hi everyone, this is my first post on Stockopedia so thanks for taking the time to read it.

I've been investing, on and off, for around 10 years and the one technique that has appealed to me more than most has been Ben Graham's value investing. I discovered Graham's method via Warren Buffet after trying to understand how he sought to buy stocks. I know Bufett's wealth has come mainly in his later life and thanks to the float Geico produces, but his record still stands none the less.

I have recently started using Graham's method alongside my growth and momentum plans, mainly to appease my own curiosity, but also because I believe there are a lot of stocks that are being overlooked in the wake of the current AI / automation bubble / renewable energy surge. By this I mean more emphasis being put into looking at potential in the future rather than detailed research on fundamentals in the hear and now.

My question is do you think there is still a place for value investing as a main strategy, and has the market changed since the days of Graham and Buffett's early successes to reward the more forward thinking investor.

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dmjram

1st Jul '19

For some people value investing will be a great strategy, for others not. No strategy works all the time and not everyone can live with the strategy, whether that be growth, momentum, quality etc. For example value will often require you to sit through large falls in the share price before Mr Market recognises what you've already seen. That's hard for many people. Momentum means sitting out of the market for extended periods while value investors are seeing their bets come good.

What is important is finding what you are comfortable with and sticking to it - be that deep value investing or high momentum swing trading and everything in between. A huge amount will be determined by your own interests, knowledge and temperament.

The "greats" in their respective fields from Buffett to Minervini all stress this - otherwise people risk flip flopping, switching when one has done well and the market is going to rotate to favouring others.

Woodford is a fine example of the need to stick to what you know - he went from buying big cap quality dividend payers to thinking he could pick small growth stocks. He couldn't, totally different skill set he just doesn't have.

iwright7

I can't agree more with smjram, that it is a case of finding an investing style that suits your personality. The trouble is that you need to try different approaches and learn (and re-learn) from your mistakes using real money, to work out what your best strategy is. I personally like Quality and Momentum (QM) and could not tolerate the extended down period that Value has suffered.

Worth you listening to last week's Masters in Business with Andrew Ang, who leads Blackrock's $gigantic Factor strategies. It may be the turn of Value again soon.

My view is that company information is now so widely available electronically and because of the widespread use of Value Factors, that it has become increasingly difficult to beat the market using solely Value metrics . Good hunting though. Ian

Podcast... https://www.bloomberg.com/news/audio/2019-06-28/andrew-ang-discusses-asset-management-podcast

Gromley

My question is do you think there is still a place for value investing as a main strategy, and has the market changed since the days of Graham and Buffett's early successes to reward the more forward thinking investor.

I recall much the same questions arising in the late 90s and early noughties. Under the "new paradigm" it was all "different this time".

And as Ben Hobson observes in his retrospective on the StockRanks David Dreman was fired from his fund in 2009 (or there abouts) essentially for following the outdated value mantra. He went on to significantly out-peform over the next few years.

Personally I see no reason to believe that buying good quality companies cheaply should cease to be a winning strategy, but it canl have significant periods of underperformance.

Possibly the best time to buy 'value' is when people are strongly questioning whether it works any more?

aflash

has the market changed since the days of Graham............

Having recently re-visted Graham's writings this question has a clear answer. He talks about investor attitudes in the wake of the 1929 crash and during inflationary times up to the end of the sixties. From the view that only bonds could be considered by the prudent investor the move to shares was inevitable when the mathematics of fixed income against increasing profits and dividends was understood.

Extrapolating his study of general market movements shows that anyone buying in January 2019 would be richer today July 1 so value investing still works. It is not confined to individual stocks.

He looks at the advantages and drawbacks of all methods and one conclusion, mentionned here but worth underlining is that temperament is more important than knowledge. Of course you have to know what you are doing and why but if you cannot live with extended periods of under-preformance, forget it.

To my mind John Templeton's methods are closer to value investing than later-day Buffet's. Lauren C. Templeton's 'Investing the Templeton Way' details his exhaustive analysis. At the start of WWII when he put equal amounts of money into all the cheapest stocks, that included railroads close to bankruptcy because he had anticipated help from the war effort. They indeed did better than more established companies in the sector.

In the Tech bubble he calculated that after the lock-up period of IPOs the directors would be selling and shorted all the recent technology issues once they soared in their early months on the market.

Value investing works both ways.

Edward Croft

If you look at the StockRank Performance histories you will get some answers. Value has been seriously out of vogue in recent years. Since April 2013 (in the UK) the top 10% of ranked stocks by ValueRank have returned 60%, which is a fraction of any of the styles that incorporated Momentum (pure Momentum, VM, QM or QVM as below).

I have no doubt that Value will come bounding back at some point... but certainly I'd be very wary of using a pure Value strategy. You can see that QV (Quality + Value) and VM (Value and Momentum) did much better than pure Value (which is analogous to Ben Graham's Deep Value ) investing style.

Interestingly Richard Beddard of Interactive Investor has just thrown in the towel on a pure Quant Q+V strategy - as it wasn't outperforming his index benchmark. That might be a contrary signal ! Often investors do give up on styles when they've underperformed for a while - only to see them bounce back later.

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jjis

2nd Jul '19

This is quite interesting in this context - https://osam.com/Commentary/executive-summary-the-earnings-mirage

EssexBoy

4th Jul '19

dmjram at Post #1 gives an excellent detached view.

Value does not appeal to me; but I may be able to add one thing. You refer to Benjamin Graham who used measurements such as Price/ Book Value & Price/ Sales. I understand (from reading) that these do not work today; in part because investors became aware and exhausted the benefit.

Also I have read that some factors may work, but only spread over the top 20 (say) shares produced by the filter, with periodic sales & buys of replacements, Put differently, an ETF of 500 stocks does not work. OSAM publishes good work.

timarr

The "greats" in their respective fields from Buffett to Minervini all stress this

Off topic maybe, but Buffett's track record is in the public domain for all to see. I'm not aware that's true of Minervini?

Without the evidence, bracketing anyone with Buffett is hard to justify - although if you had to make a stab at it then you'd probably be looking at Ben Graham, Peter Lynch, Phil Fisher, Michael Steinhardt and John Templeton. All of them have public track records, built up over decades, and most of them leaned towards value approaches.

But as Munger says, it's important to understand your Circle of Competence. Stray too far outside of it and you will, as Woodford has discovered, come a cropper. The same was true of Anthony Bolton when he came out of retirement to set up Fidelity China Special Situations (LON:FCSS) - the skills he'd honed over the years just didn't work in a completely different environment.

From memory, Minervini's was verified as a condition for inclusion in Stock Market Wizards. To what extent/degree I don't know. His returns (and Paul Ryan's) were fully audited when they won the US investing championship.
Paul Tudor Jones would be an alternative on the non value side. Though like most, including Buffett, returns have fallen off as amounts under management has risen.

https://dealbook.nytimes.com/2014/03/05/after-a-dazzling-early-career-a-star-trader-settles-down/

We can add Terry Smith to those that came a cropper by straying in the same manner as Bolton, his FEET trust has been poor and he's now apologised and stepped aside. The approach that worked so well in the developed markets failed when applied in China, India and the like.

Magicmerve

5th Jul '19

Thanks for all your comments. Providing some food for thought for sure

Value investing - is there still room for it?

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Magicmerve

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