Investing style is a religion

[Zaxon]

In medicine there's ample evidence that belief is stronger than almost all drugs, surgeries and other interventions. So the idea that expectation determines reality is quite possible in trading also.

So if I just believe hard enough, I can change the outcome of the market? I look forward to this new power

 

[Zaxon]

Value and growth are not actually separate things.

My understanding of the difference is that value investors insist on getting stocks cheap. Growth investors insist on growing earnings, but are willing to buy in at a higher price a value investor wouldn't.

 

[cynic]

Someone's success story is an anecdote. Whether if you tried to emulate their exact method you'd end up with the same success yourself, is hard to say. There's often a lot of luck and fortuitous timing involved.

That is your religion, not mine!

 

[Zaxon]

Seeing it's my thread, let me ask you all a follow up question. What do you think are the shared "truths" that are common to many different styles of investing? Perhaps if we look for where the investing styles agree, we'll find ideas that are more likely to be based on facts.

 

[Value Collector]

Someone's success story is an anecdote. Whether if you tried to emulate their exact method you'd end up with the same success yourself, is hard to say. There's often a lot of luck and fortuitous timing involved.

Did you see the example of financing the wind farm I broke down for you in your thread about "debt".

what you have to remember is that where when we buy and sell shares from each other, we are trading that share holders equity, If the $60 Million of the wind farm funded by share holders was listed as 60 Million shares at $1 each, and everything went well, the holders would do well earning the 20% return.

But if every now and then markets fluctuated and people thought the wind farm wasn't going to deliver its expected 9.5% output and might, that share price might drop to $0.50.

If a value investor in confident in the long run performance of the wind farm, and has a time frame that is longer than the average punter, he can pickup $1 of equity in the wind farm earning 20%, for only 50 cents, so his return will be 40% over time, in that case it makes a lot of sense to increase his stake as the price falls.

 

[cynic]

Seeing it's my thread, let me ask you all a follow up question. What do you think are the shared "truths" that are common to many different styles of investing? Perhaps if we look for where the investing styles agree, we'll find ideas that are more likely to be based on facts.

Or perhaps we will find popularised misconceptions.

Edit: In answer to your question:
Aim to buy for less and sell for more!

 

[Gringotts Bank]

So if I just believe hard enough, I can change the outcome of the market? I look forward to this new power

There is emprical evidence to show there's a link between mood and discretionary trading performance. So I think if trading is fun for you, that primes you by helping you access stored positive beliefs. Then the odds are tipped greatly in your favour. So yeh it is a kind of super power.

 

[Value Collector]

My understanding of the difference is that value investors insist on getting stocks cheap. Growth investors insist on growing earnings, but are willing to buy in at a higher price a value investor wouldn't.

A value investor will still buy growth businesses, they will just be trying to figure out how much a company would be worth 2 or 3 years from now after it grows, and figuring out how much is a fair price to pay today for that company.

Ideally, as a value investor, I want to by a growth company for a price that makes sense based on what the company looks like today, so all the future growth accrues to my benefit.

But I am also happy to pay for growth to if I am really confident about it, but yeah its all value investing, you are just putting a value on the growth potential.

 

[Zaxon]

If a value investor in confident in the long run performance of the wind farm, and has a time frame that is longer than the average punter, he can pickup $1 of equity in the wind farm earning 20%, for only 50 cents, so his return will be 40% over time, in that case it makes a lot of sense to increase his stake as the price falls.

Holding and waiting out the lull can be a good strategy. Hopefully you avoid the "value traps" which just sit there forever and never end up growing as you expect.

 

[Zaxon]

Or perhaps we will find popularised misconceptions.

ha ha! The areas we agree on could be a shared misconception.

Aim to buy for less and sell for more!

Buy low sell high. Very good! I guess a value investor wants it really low, whereas other styles are prepared to pay a higher price for quality. But that is the shared principle, I agree.

 

[luutzu]

My understanding of the difference is that value investors insist on getting stocks cheap. Growth investors insist on growing earnings, but are willing to buy in at a higher price a value investor wouldn't.

That's a misconception. Buffett, I think, said that growth is part of value. Graham is misunderstood to be all about "value"... ie. cheap stocks based on book values and hard assets etc.

From my reading of Graham, while he's very conservative in his investment decision, he know and taught about growth stocks. Just that he prefer to buy stocks on something more immediate and patted down rather than a future possibility.

As to paying more for growth. Another to look at it is that... a higher priced stock might implied a "growth" stock but could just be an expensive one rather than a growing one. A cheap/value stock might suggest it is a dinosaur, but it doesn't mean can't grow... could just mean it selling for cheap.

So value is value... whether a higher priced be paid for "growth" or not depends on what's that expected rate of growth. Is that rate too optimistic or pessimistic... based on the company's historical performance, its assets, its products etc.

For example... WOW or WES are established, they have a track record of performance. Aren't investing in anything that's game-changing... or maybe they are and it's going to blow up in their face... But if you study those established ones and see that its "growth" over the past decade had been about 2%p.a., for example... then you priced it on that basis. Doesn't make sense to priced them at, say 5% growth.

If some upstart is rising fast in the world, its performance has been decent but as far as you can understand iti... the future looks very bright. Then you plug in a higher, but still modest, growth expectation.

Graham said that in general any stocks selling above 22 [28?] times earnings is probably over priced. Its growth expectation are too high. That doesn't mean it wouldn't hit it, just it'd be quite a miracle if it were to. So probably best to stay away from it.

On the other hand, a business/stock can just not grow at all but could still be a good investment. As long as it manages to keep its earnings at the current level, won't deteriorate and the return to investor at their price is pretty decent.

 

[Zaxon]

That's a misconception. Buffett, I think, said that growth is part of value. Graham is misunderstood to be all about "value"... ie. cheap stocks based on book values and hard assets etc.

You've made good points. I'm wondering if your view is a little more of a hybrid definition than most people use.

Growth investing is a style of investment strategy focused on capital appreciation. Those who follow this style, known as growth investors, invest in companies that exhibit signs of above-average growth, even if the share price appears expensive in terms of metrics such as price-to-earnings or price-to-book ratios.

https://en.wikipedia.org/wiki/Growth_investing

Value investing is an investment paradigm which generally involves buying securities that appear underpriced by some form of fundamental analysis

https://en.wikipedia.org/wiki/Value_investing

 

[Value Collector]

That's a misconception. Buffett, I think, said that growth is part of value. Graham is misunderstood to be all about "value"... ie. cheap stocks based on book values and hard assets etc.

From my reading of Graham, while he's very conservative in his investment decision, he know and taught about growth stocks. Just that he prefer to buy stocks on something more immediate and patted down rather than a future possibility.

Yes, Buffett said "Growth and value are joined at the hip"

it is a misconception to think 'Value investing" is only about investing in low book value stock and ignoring companies with growth potential.

 

[Gringotts Bank]

In terms of ASX systems, mean reversion buyers would be loading up today on oversold stock and exiting positions over the next 2-3 days. These are good conditions for reversion. fwiw.

 

[Value Collector]

I guess a value investor wants it really low, whereas other styles are prepared to pay a higher price for quality. But that is the shared principle, I agree.

Quality is part of value,

Value investing is about gauging the quality and quantity you are getting for your $1, and deciding whether it’s worth parting with the $1 to take the share based on the quality and quantity of the company that share represents.

 

[Zaxon]

Yes, Buffett said "Growth and value are joined at the hip"

it is a misconception to think 'Value investing" is only about investing in low book value stock and ignoring companies with growth potential.

There's another way of looking at this:

There is a type of investing that's definitely value only. Munger called it "cigar butt investing", where you're buying terrible companies because they're dirty cheap. Buy them cheap, then sell them as soon as they've returned to value, because they're not going to fare well long term. So that would be a good example of where value and growth aren't joined at the hip.

Secondly, the ASX average P/E is about 16. I would argue that if you're paying more than that (or perhaps anywhere even close to that), you're not a value investor. You're a growth investor.

That isn't to say that a blend of value and growth investing isn't superior. It probably is. But given that Wikipedia defines value and growth differently, you'd have to conclude that they can be practised, if you so chose, as two distinctly separate styles of investing.

 

[Value Collector]

There's another way of looking at this:

There is a type of investing that's definitely value only. Munger called it "cigar butt investing", where you're buying terrible companies because they're dirty cheap. Buy them cheap, then sell them as soon as they've returned to value, because they're not going to fare well long term. So that would be a good example of where value and growth aren't joined at the hip.

What you are talking about is just one subset of value investing.

As I said above Value investing is about judge both the "Quantity" and "Quality" of something, and then deciding what its true "Value" is.

Cigar Butt investing is like walking around trying to find cars selling for less than their value as scrap metal, that is just one way to make money valuing cars, and cigar butt investing is just one method of value investing.

Secondly, the ASX average P/E is about 16. I would argue that if you're paying more than that (or perhaps anywhere even close to that), you're not a value investor. You're a growth investor.

I would say, how can you be a growth investor without being able to value the company to begin with and estimate what its value will be after its grown?

So yes, valuing businesses is still a key part of intelligent "growth" investing, Intact I would say they are one in the same.

If you aren't using a value approach when it comes to deciding on your growth shares you are speculating, not investing.

That isn't to say that a blend of value and growth investing isn't superior. It probably is. But given that Wikipedia defines value and growth differently, you'd have to conclude that they can be practised, if you so chose, as two distinctly separate styles of investing.

Wikipedia isn't the authority on the topic,

what you are saying is a popular misconception I know, it is popularly thought that Value investing is all about finding low PE stocks or High Book Value stocks etc, while that can be part of it, it is not the full story.

Charlie and Warren take a company's quality and growth prospects into consideration when valuing it, They don't just sit around looking for cigar butts.

Listen to their 4 filters, you will see he mentions price as number 4, So thats where the value comes into it, But it's price in relation to the quality of the 3 other filters, not simply price ignoring everything else, cigar butt investing is just 1 value strategy, its not the be all and end all.

 

[Zaxon]

What you are talking about is just one subset of value investing.

Correct. I chose that deliberately as something that couldn't be seen as both growth and value.

Wikipedia isn't the authority on the topic

I would never presume to think I was better than Wikipedia

what you are saying is a popular misconception I know, it is popularly thought that Value investing is all about finding low PE stocks or High Book Value stocks etc, while that can be part of it, it is not the full story.

I'll give you an example where, in my mind, growth and value investing is distinct.

Imagine a company ABC that has great earnings growth. You do your value calculation, and you decide it's worth $30. Guess what! It's trading exactly at exactly $30 today!

A Growth Investor would say, "Buy!". He's paying a fair price for a good asset. A Value Investor would say, "I demand a 30% discount below the $30 calculated fair value". He wants a discounted price.

 

[luutzu]

You've made good points. I'm wondering if your view is a little more of a hybrid definition than most people use.

https://en.wikipedia.org/wiki/Growth_investing

https://en.wikipedia.org/wiki/Value_investing

I don't think it is a hybrid. Don't want to say it's what Graham and Buffett taught 'cause they might be offended by it... But I reckon I pick it up from them, Graham particularly.

The way I value a stock is making a few estimates under various scenarios. Depends on the company, I lean more towards its book value or its earnings/growth prospects.

I think Graham also discusses assets or earnings based pricing model somewhere. That often, when a company's sales growth and earnings are dismal, "Wall St" tend to put the stock in the bargains bin... ie. they see no value in the assets, real hard earned, on the book assets.

Correct. I chose that deliberately as something that couldn't be seen as both growth and value.



I would never presume to think I was better than Wikipedia



I'll give you an example where, in my mind, growth and value investing is distinct.

Imagine a company ABC that has great earnings growth. You do your value calculation, and you decide it's worth $30. Guess what! It's trading exactly at exactly $30 today!

A Growth Investor would say, "Buy!". He's paying a fair price for a good asset. A Value Investor would say, "I demand a 30% discount below the $30 calculated fair value". He wants a discounted price.

The one demanding a discount on fair value is not a value investor, just an intelligent one

Serious. A value investor working out that ABC is worth $30 and it's selling at $30... he'd buy it at $30 because that's a fair value.

But you, or that value investor, have to had made the assumptions that ABC is worth/valued at, at least $30. i.e. under the worst case scenario it's $30 so it's fair enough. The margin of safety is already built into that $30 value estimate.


To want a discount on top... that's just bottom feeding. Something you'd want to do when you can't be asked to pay for fair price.

Sometime it work out and you get to pick up a good, fair valued stock at an even better deal. Often you get to watch it sky rocket above what you could have gotten it for and scream dam it!

 

[Zaxon]

Serious. A value investor working out that ABC is worth $30 and it's selling at $30... he'd buy it at $30 because that's a fair value.

But you, or that value investor, have to had made the assumptions that ABC is worth/valued at, at least $30. i.e. under the worst case scenario it's $30 so it's fair enough. The margin of safety is already built into that $30 value estimate.

It seems you've interpreted "fair value" as already including a discount.

But paying a high price for growth isn't always a great idea. If there is no margin of safety (in other words, a discount to the stock's fair value estimate) built in to the share price, everything has to go smoothly in the company’s growth path in order to justify the premium valuations. https://www.morningstar.com/articles/853989/10-growth-stocks-at-value-prices.html

Morningstar and I use "fair value" to mean what the company is worth. You then take your discount after that - your margin of safety.