Value Investing

[Complete_newbie]

Since I have gotten deep into RE investing, I am now rounding into understanding alot about financial statements. Based on that I have started reading a bit about Value investing, margin of safety, etc etc. I know this may not be the best forum for it, but are there value investors on this board and how successful is this "strategy"? On surface it all makes sense, but can investors pick an undervalued stock in today's market and hope to profit from it after fundamental analysis.

Thanks for inputs.

[Matas]

Read this:

https://www.amazon.com/Quest-Alpha-Holy-Grail-Investing/dp/0470926546

[CM]

Complete_newbie wrote:

Since I have gotten deep into RE investing, I am now rounding into understanding alot about financial statements. Based on that I have started reading a bit about Value investing, margin of safety, etc etc. I know this may not be the best forum for it, but are there value investors on this board and how successful is this “strategy”? On surface it all makes sense, but can investors pick an undervalued stock in today’s market and hope to profit from it after fundamental analysis.

Thanks for inputs.

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[Complete_newbie]

CM wrote:

Complete_newbie wrote:

Since I have gotten deep into RE investing, I am now rounding into understanding alot about financial statements. Based on that I have started reading a bit about Value investing, margin of safety, etc etc. I know this may not be the best forum for it, but are there value investors on this board and how successful is this “strategy”? On surface it all makes sense, but can investors pick an undervalued stock in today’s market and hope to profit from it after fundamental analysis.

Thanks for inputs.

Click to expand…

I am a dormant value investor. Dormant because I don’t have very much time and energy after work.

Value investing is simply assessing the value of an asset (e.g., by discounted cash flow projections) and attempting to purchase it for less than it is worth. One might hope to achieve this by assessing value more accurately than the seller, or by being less desperate than a distressed seller, or by investing with a longer time horizon than the seller, etc.

Holding all else equal, value investors will be more successful if they work in markets with unsophisticated sellers, or with asymmetric information, or distressed sellers.

The stock market is highly competitive and so it may not be the best pond for fishing. The same principles can be applied on a small scale in your local real estate market, or in the market for small businesses in your area. Those markets may be less competitive.

However, if you’re like me, you don’t want to screen tenants or unplug toilets, but you do enjoy quiet study (e.g., SEC filings, conference call transcripts, etc.), so perhaps you might want to invest in individual stocks even if there are more fish in the real estate pond.

If so, find your edge. As a small investor you can look at illiquid stocks that large, sophisticated investors can’t use. As a physician, you have an advantage looking at healthcare stocks. As a value investor, you have the advantage of a long investing horizon. As an individual investor, you don’t have to answer to impatient clients (as professional managers do).

If you decide to go this route, make sure you understand accounting and financial statement analysis and how to value assets. Start small. Learn from your mistakes with small sums. You’ll make some.

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Thanks CM. Your example of RE is perfect, I have taken advantage of that in RE in the past 3-4 months. However, RE is not as complicated and you need to have a "feel" for your area + the numbers ofcourse. Market and evaluating company reading 10-K and conference call is another beast.

To me learning this is the goal not necessarily profits but I feel like really to be able to read 10-K's etc makes me a better businessman.

Speaking of healthcare stock, that is precisely I am starting, infact a radiology based company, whose stock I think is underpriced from fear of Amazon unnecessarily and I think its a great buy. But will do DCF to see whats going on.

Thanks CM and Appreciate advice.

[VagabondMD]

I was going to also suggest a Swedroe book.

I do not talk about it here, but I have always been attracted to value investing. In the 90’s, I seeked value stocks and purchased value mutual funds run by legendary investors (at that time). Later, by the mid-00’s, an advisor placed me in value tilted DFA funds. I no longer have an advisor, but I still have a value titled portfolio with these funds, and I add additional small value exposure with the ishares ETF IJS.

The thing about value is that you must be in it for the long haul. There will be periods of underperformance, like the mid-late 90’s that will test your resolve. Everyone around you will be killing it investing in Cisco, MSFT, and EMC (back in those days), and your value investments will be lagging. If you jump in and out of the strategy, like most, you have a good chance of buying/selling at the worst times.

[CM]

Matas wrote:

Read this:

https://www.amazon.com/Quest-Alpha-Holy-Grail-Investing/dp/0470926546

Click to expand...

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[Complete_newbie]

CM wrote:

Matas wrote:

Read this:

https://www.amazon.com/Quest-Alpha-Holy-Grail-Investing/dp/0470926546

Click to expand…

No, read this: https://www8.gsb.columbia.edu/articles/columbia-business/superinvestors

If you invest in actively managed mutual funds, you’re starting a 100 yard dash 10 yards behind everyone else. If you are the value investor you can invest in small, illiquid, (relatively) unknown and under-followed opportunities. You don’t have to hold a cash buffer in your fund to handle redemptions. You don’t have to post impressive numbers every quarter in order to keep your clients from bolting. You have many advantages over active managers at commercial mutual funds.

To do this, you have to learn the craft (just like a physician, lawyer, or engineer learns a craft) and work diligently. Based on my anecdotal experience, very few individual investors actually do this.

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Thanks for the link CM. Yea I see it more as a business assessing businesses. It will take real work, but all small businesses take work.

@vagabond - thanks!

[Complete_newbie]

thevaluedoc wrote:

If looking at U.S., easiest to look at undervalued companies that are publically listed but not included on indexes. Other options are to look at businesses that are not publically listed. Outside U.S., monsoon region has been suggested by others. But overall, not easy to find undervalued companies right now imho.

But I would be careful learning too much about value investing right now, you may come to realize how whacked, rigged and fake these times really are. You will have wished you just had taken the blue pill.

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I am sure I would. For example, https://www.wsj.com/articles/bitcoin-hits-10-000-as-sharp-rise-drowns-out-skeptics-1511919295

What? Incredible. Tulip mania.

[The White Coat Investor]

CM wrote:

Complete_newbie wrote:

Since I have gotten deep into RE investing, I am now rounding into understanding alot about financial statements. Based on that I have started reading a bit about Value investing, margin of safety, etc etc. I know this may not be the best forum for it, but are there value investors on this board and how successful is this “strategy”? On surface it all makes sense, but can investors pick an undervalued stock in today’s market and hope to profit from it after fundamental analysis.

Thanks for inputs.

Click to expand…

 

Value investing is simply assessing the value of an asset (e.g., by discounted cash flow projections) and attempting to purchase it for less than it is worth. One might hope to achieve this by assessing value more accurately than the seller, or by being less desperate than a distressed seller, or by investing with a longer time horizon than the seller, etc.

Holding all else equal, value investors will be more successful if they work in markets with unsophisticated sellers, or with asymmetric information, or distressed sellers.

 

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Or if they have the ability to add value themselves. For example, if you are a general contractor and can add a room onto a rental house very easily, you can buy it for the price of a 1 bedroom and then make it a two bedroom. Or if you're Warren Buffett and you can get on the board of the company whose stock you own. Or if you have website traffic and advertisers you can add to another website, making it more valuable than it was without you. Hard to do that with a publicly traded stock if you're not Warren Buffett, but it's all value investing.

[Hatton]

I have held two positions for years...The Vanguard Value ETF and Vanguard Small Cap Value.  When I was still trading individual stocks I bought into Citigroup at around $1 in 2008 and exited in the low 20s.  I only invested $20k so not a large absolute gain but a huge percentile gain.  Opportunities like 2008 do not happen often but that is when value investors wipe up the bloody streets.

[Zaphod]

For the record when I say "value investors" I usually mean the loud ones on twitter and other such investing websites that either manage funds, an office or just are prolific pundits.

Value investing is tough. Especially in this age of knowledge everywhere. What you tend to see a lot is people falling in love with the idea of value investor or some type of iteration of it and endlessly dumping their money into dying businesses and models. Lots close their minds to anything except some form of value and everything else is a scam, which is of course nonsense.

I'll just come right out and say it, you're not a value investor, you have a growth and upside mentality that doesnt quite mesh with those that end up doing it for a while. Often times "value investors" have long proclaimed AMZN, etc...as bubbles, etc... while failing to see the obvious case for them and that its a lot of upside before value starts to matter. Finding grossly over valued companies doesnt mean they are for certain going down immediately (say tsla), and failing to understand the madness of the crowds and how long these things take is very expensive.

Its better to learn about value investing, if it works, where it does, how, etc...and just have that as part of your arsenal of knowledge. Dont buy into the ideology, same for any other method. Better to be flexible and find value, growth, risk, leverage, carry, and bubble riding (bitcoin) in your arsenal. Take them for what they are and try your hardest not to delude yourself which is what a great many of those hyper focused end up doing.

For some reason, maybe its intellectual side and feeling like you've figured something out that no one else has, a lot of people who claim to be value investors have romanticized the role, and forget to pay attention to the point of it all. They love being contrarian. Overall, value investing is very hard at its core as any of the financial analysis and modeling is dead simple and there isnt much for hidden gems out there. Most failing, 'undervalued' businesses have very good reasons to be so and are likely to stay that way. It can be done but its very hard and has several pitfalls that seem to mess people up.

Agree with others here that its best applied outside the standard market as this is so analyzed you're unlikely to break new ground.

[Complete_newbie]

Thanks @zaphod appreciate the reply - was almost gonna PM you before posting in public forum. You are right, but learning about this forces me to look at balance sheet, cash flow, ratios and is helping me increase my knowledge. Not married to one particular investing philosophy to be honest (including index investing)

[Craigy]

 

Complete_newbie wrote:

Since I have gotten deep into RE investing, I am now rounding into understanding alot about financial statements. Based on that I have started reading a bit about Value investing, margin of safety, etc etc. I know this may not be the best forum for it, but are there value investors on this board and how successful is this “strategy”? On surface it all makes sense, but can investors pick an undervalued stock in today’s market and hope to profit from it after fundamental analysis.

Thanks for inputs.

Click to expand...

Be careful with financial statements.  They can make you feel like you know more about a company than you actually do.

You don't need it, but it definitely helps tremendously to have a pretty deep finance and accounting background to really understand a financial statement.  And also, a financial statement just paints a picture of what happened in the past, and a lot of it has to do with the values, sometimes arbitrary, assigned to the PP&E/goodwill, etc.

Also, more important than an understanding of the financial statements, is an understanding of a particular industry and present and future market factors impacting that industry.

One example that pops into mind was the bulk shipping industry during the recession.  Business was down, but looking at the statements, they posted a profit in all recent quarters, historically paid a good dividend, and had huge assets on the books (literally hundreds of millions, billions of dollars of vessels). I even put a couple grand into a few individual stocks, thinking it was a smart move, not much to lose, and I knew the market was eventually going to turn around.

Even as the economy came back, the market for these businesses didn't.  Chinese politics changed, their cheap iron ore was no longer cheap and nobody needed to ship it.  All of these hundred million dollar ships were idle in port.  Demand for bulk shipping, and thus bulk shipping prices, stayed super depressed, and there was no market for these huge unused vessels.  Half of these companies went bankrupt and the other half bought each other out for pennies on the dollar.  I didn't lose all my money, but on one stock I got the bankruptcy notice in the mail and literally had to pay fees to get rid of my shares.

That's not to say you can't do it.  But when you investigate you need to dig deeper than the surface, and remember that the market usually knows more than you do.

I still own some individual stocks but most of my value investing is done though vanguard value funds.      Which aren't doing so hot this year...  :cry:   :lol:

[Complete_newbie]

Thanks craigy. Yea mostly to learn - heck won't be beating warren buffet here but this develops my skill in looking at businesses which is fun to do.

[Matas]

Complete_newbie wrote:

Thanks craigy. Yea mostly to learn – heck won’t be beating warren buffet here but this develops my skill in looking at businesses which is fun to do.

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While learning and having fun, you can match WB by getting you some BRK-B.